US embassy cable - 05ANKARA2261

UNCLAS SECTION 01 OF 02 ANKARA 002261 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, KTFN, TU 
SUBJECT: MEETING WITH DEPUTY IMF RESREP 
 
REF: A. ANKARA 2161 
 
     B. ANKARA 2070 
     C. ANKARA 1559 
     D. ANKARA 1318 
     E. ANKARA 1093 
     F. ANKARA 812 
 
1. (SBU) Summary: IMF Deputy Resrep confirmed press reports 
that all three prior actions are now completed and reiterated 
the expected timing for finalizing the new IMF program: 
signed Letter of Intent by end of April, board meeting 
mid-May.  IMF staff expects the final version of the Regional 
Investment Incentives Law to be substantially scaled down in 
cost from earlier versions, and claims to have the Prime 
Minister's agreement on this.  The Deputy Resrep said Turkey 
has become less financially vulnerable in recent years and 
said IMF staff will conduct a Financial Sector Assessment 
later this year, including looking at terrorism finance 
issues.  End Summary. 
 
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Prior Actions Completed: 
----------------------- 
 
2. (SBU) In a April 19 meeting, IMF Deputy Resrep confirmed 
that April 14 passage of the Tax Administration Reform Law 
meant that all three prior actions for the IMF program had 
been completed.  Though the President has not yet signed the 
bill into law, this was not a requirement under the program 
and the President is expected to sign.  The other two prior 
actions--submission to parliament of the Banking Reform Law 
and the Social Security Reform Law--took place earlier. 
Actual passage of these two laws will not be required until 
the Second Review under the Program later this year. 
 
3. (SBU) In terms of timing, the program is now going through 
the IMF's internal approval process and the Letter of Intent 
(LOI) should be ready for signature in time for Managing 
Director Rato's visit to Istanbul for the April 29 Investors 
Advisory Council.  Though Minister Babacan has publicly 
stated there will be a board vote May 12, the Deputy Resrep 
said a date could not be fixed until the program document is 
ready. Nevertheless, he expects a board vote around May 12. 
 
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Regional Investment Incentives: 
------------------------------ 
 
4. (SBU) On the contentious issue of expanded Regional 
Investment Incentives, the Deputy Resrep said that Fund staff 
expected the final version to be substantially scaled back in 
cost, such that the additional cost over what was budgeted 
for 2005 would only be between 100 and 200 million YTL 
($73-$146 million).  He claimed that the Prime Minister 
himself had agreed to this.  Given the sensitivity of the 
Prime Minister appearing to have climbed down under IMF 
pressure, and parliamentary sensitivities, required GOT 
action on the Regional Investment Incentives will not be 
mentioned in the LOI, which is made public.  On the other 
hand, the continual resurrection on the Turkish side of the 
idea of cutting VAT tax rates for the textile sector, has 
induced the IMF to put an explicit prohibition of such a move 
in the LOI.  Last week, Minister Unakitan re-floated this 
idea, only to have the Resrep state publicly that this would 
be contrary to the GOT's commitments to the Fund. 
 
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Compensating Measures: 
--------------------- 
 
5. (SBU) The Deputy Resrep explained that the GOT does need 
to take compensating fiscal measures because of a combination 
of the additional costs of the Regional Investment Incentives 
and some other items.  Pensions were increased more than 
assumed in the program, costing an additional 400 MM YTL 
($291 million).  Also, since electricity prices have not been 
increased (despite higher fuel prices) there has been less 
VAT collected than assumed in the program.  These three items 
add up to about 1.2 or 1.3% of GDP--hence the need for 
compensating measures.  The GOT has opted to find this money 
by cutting the revolving funds that state hospitals use to 
pay bonuses to doctors and nurses. 
--------------------------------- 
Reduced Financial Vulnerabilities: 
--------------------------------- 
 
6. (SBU) The Deputy Resrep said that Turkey had significantly 
reduced its vulnerability to a financial crisis over the past 
two years.  He focused in particular on the fall in real 
interest rates : from 38.2 percent in 2002, to 34.8 percent 
in 2003 to 16.6 percent in 2004 and currently around 9 
percent.  On the risk that corporates were taking on 
excessive foreign exchange risk he pointed out that Turkish 
corporates tended to have low leverage, thereby increasing 
the likelihood they could withstand the shock of a sharp fall 
in the exchange rate.  Treasury continues to have large 
rollover needs in the domestic market but the Deputy Resrep 
considered Treasury reserves to be adequate. 
 
------------------------------------------ 
Financial Sector Assessment/Terror Finance: 
------------------------------------------ 
 
7. (SBU) The Deputy Resrep said that the IMF had been 
awaiting passage of the new Banking Law before conducting a 
Financial Sector Assessment, one component of which was to 
look at controls on financial crime, including terrorism 
finance.  He was not aware of Turkey's deficiencies on 
terrorism finance.  The Financial Sector Assessment is now 
expected to take place later this year. 
 
 
 
EDELMAN