US embassy cable - 02ANKARA8379

UNCLAS SECTION 01 OF 02 ANKARA 008379 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE ALSO FOR E, EB, AND EUR/SE 
TREASURY FOR OASIA - MILLS 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, EINV, TU 
SUBJECT: INCOMING GOVERNMENT'S ECONOMIC ACTION PLAN 
 
 
1.  (SBU)  Summary:  The economic elements of the incoming 
government's action plan, announced by Party leader Tayyip 
Erdogan on November 16, reflect AK's efforts to balance its 
desire to boost the "real economy" and help the poor with its 
need to reassure markets and maintain fiscal discipline. 
Erdogan pledged that the new government would cut unnecessary 
government spending, accelerate privatization and energy 
sector liberalization, implement tax reform, provide 
incentives to small and medium-size enterprises, and sell the 
assets of failed banks.  He said the government would engage 
quickly with the IMF but would seek to address "deficiencies" 
in the current program in supporting the real sector, 
agriculture, and social problems.  The action plan contains a 
number of positive things but also raises questions, 
particularly on the budgetary impact of some AK proposals. 
Analysts are generally withholding judgment until they see 
the details.  End Summary. 
 
 
2.  (SBU)  On November 16, AK Party leader Tayyip Erdogan 
announced the incoming government's "Emergency Action Plan," 
with measures to be implemented in its first month, first 
three months, first six months, and first year.  The plan 
gives a sense of AK's priorities, but is short on details. 
Highlights include: 
 
 
First Month 
----------- 
 
 
-- establish a strong Economy Ministry to oversee 
macroeconomic/financial policy. 
 
 
-- Rapidly complete an interim budget and expedite 
preparations for the 2003 budget and program. 
 
 
-- While maintaining the overall framework of the IMF 
program, work to address "deficiencies" in the current 
program regarding the real sector, social policy, and 
agriculture. 
 
 
-- Begin work on tax reform and abolish the Financial Year 
Zero law (which would have required people/corporations to 
explain, beginning in January 2003, the source of their 
money). 
 
 
First Three Months 
------------------ 
 
 
-- Simplify and reform the tax structure with the aim of 
broadening the tax base, and establish a "tax truce" (which, 
as we understand it, would be designed to facilitate 
long-term payment of overdue taxes). 
 
 
-- Expedite privatization by grouping state enterprises and 
developing privatization strategies for each group. 
 
 
-- Promote the "real sector" by creating a better investment 
environment, providing free land to investors, and 
"reformulating" incentive measures. 
 
 
-- Promote exports by strengthening the Export-Import Bank, 
working with the private sector on a strategic plan to boost 
exports, and lowering input costs to exporters. 
 
 
-- Open the energy market to competition, and eliminate the 
Turkish Radio and Television Administration part of 
electricity prices. 
 
 
First Six Months 
---------------- 
 
 
-- Begin construction on a 15,000 kilometer dual highway 
system. 
 
 
-- Pass a new law on public finance administration that 
introduces internal financial controls, enhances the 
efficiency of budget preparation, and increases financial 
transparency. 
 
 
-- Accelerate collection of debts owed to the SDIF and the 
sale of assets of failed banks. 
 
 
-- Enact unspecified measures to support small and 
medium-size enterprises and to facilitate the recovery of 
those companies hardest hit by the crisis. 
 
 
-- To support farmers, reduce taxes on fuel oil and eliminate 
deficiencies in the direct income support program (to direct 
it more toward poorest farmers). 
 
 
-- Ease restrictions on foreign investment in the tourism 
sector. 
 
 
First Twelve Months 
------------------- 
 
 
-- Complete Transfer of Operating Rights energy projects, and 
reduce electricity waste and theft. 
 
 
-- Bring the public tender law fully in line with EU 
standards. 
 
 
3.  (SBU)  Incoming Prime Minister Abdullah Gul supplemented 
Erdogan's announcement in an interview November 17.  He said 
the new government would shrink the state, strengthen 
independent regulatory boards, improve the environment for 
foreign direct investment, and maintain the Central Bank's 
independence (no printing of money). 
 
 
4.  (SBU)  Analysts have welcomed AK's efforts to lay out an 
ambitious agenda, but generally are withholding judgment due 
to the lack of details in the action plan.  Lehman Brothers, 
for example, welcomed AK's emphasis on privatization and 
improving the foreign direct investment environment, but 
wondered about the budgetary impact of other proposals, 
including possible tax cuts.  Lehman also noted that the plan 
does not address many of the outstanding conditions for the 
fourth IMF review, such as laying off of state enterprise 
workers.  IMF ResRep expressed similar views, and noted that 
his staff was preparing written comments on the plan. 
 
 
5.  (SBU) Comment:  This plan reflects AK's efforts to 
balance strong pressure to help small-medium size business 
and the poor with the need to reassure financial markets and 
maintain fiscal discipline.  The emphasis on privatization 
and improving the investment environment is good news.  More 
troubling are the various proposals to cut taxes and/or 
provide additional "incentives" for the real economy.  AK 
appears overly optimistic that it will be able to fund these 
out of savings gained by squeezing waste and fraud out of 
government spending.  A key question will be whether it 
delays any new spending or tax cuts until it demonstrates its 
ability to achieve such savings.  Abdullah Gul, pressed on 
this question in a Sunday interview, said AK would start off 
with a primary surplus target of 6.5 percent of GNP, but 
might renegotiate that if interest rates declined 
sufficiently to ease Turkey's fiscal constraint. 
PEARSON