US embassy cable - 02ANKARA9075

UNCLAS SECTION 01 OF 03 ANKARA 009075 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKEY'S ECONOMY: CONCERN WITH GOT INDECISIVENESS 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
1.  (SBU) Summary: IMF resident rep briefed us on the results 
of the ten-day IMF mission which finished December 20.  The 
IMF is concerned with the new GOT's slowness in taking 
decisions - it has not yet committed to the 6.5 percent of 
GNP primary budget surplus for 2003 (and the first quarter 
2003 budget came in over $1 billion short of that target); 
different ministers have issued contradictory statements on 
implementing a key piece of reform legislation (the public 
procurement law); there has been no progress on outstanding 
banking sector measures.  The IMF Mission will return in 
early January to finalize the Fourth Review and push for 
meeting these and other outstanding conditions.  A big part 
of this slowness on the economic reform front is owing to the 
new government's overwhelming agenda of urgent issues, rather 
than to ill intentions.  But sharp market declines this week 
may serve to energize the new GOT on the IMF program agenda. 
End Summary. 
 
 
"Lots of Work to Be Done" 
------------------------- 
 
 
2.  (SBU) An IMF mission was in Ankara December 10-20 to 
review progress on meeting outstanding conditions under the 
Fourth Review, and to work with the GOT on the 2003 budget. 
IMF resrep gave us a brief readout December 20 as he was 
heading into the wrap-up sessions with GOT.  He concluded 
that there's lots of work to be done, especially  on budget 
and several structural issues.  Monetary policy is not a 
major problem for the moment. 
 
 
Fiscal Policy 
------------- 
 
 
3.  (SBU) Provisional Budget.  The parliament must pass a 
budget before year-end to keep the GOT functioning, and the 
government submitted to parliament on December 19 an interim 
budget to cover the first quarter (in January it will submit 
a full-year 2003 budget).   IMF resrep said this first 
quarter budget falls short of meeting the 6.5 percent of GNP 
primary surplus target:  it targets a TL 3.2 quadrillion 
primary surplus, versus the TL 5 quadrillion that the IMF 
would prefer. 
 
 
4.  (SBU)  Resrep said the IMF understood the GOT was under 
time pressure to pass a budget but that the result was not 
good.  The GOT was looking at taking some measures in the 
first quarter (increasing employers' social security 
premiums, cutting health spending) to make up some of the 
shortfall. 
 
 
--  Comment:  The first quarter primary surplus shortfall 
(over $1 billion) is a problem for two reasons.  First, the 
primary surplus is used to help meet immediate debt service 
payments, so the shortfall could become a financing issue. 
At the minimum, it involves borrowing more in the first 
quarter than initially anticipated.  Second, this first 
quarter shortfall, together with the approximately $1.5 
billion shortfall in the 2002 primary surplus, puts the GOT 
further behind in meeting year-end 2003 budgetary goals - 
again this has GOT financing implications. 
 
 
5.  (SBU) Primary Surplus.  Resrep said the GOT has yet to 
commit to a 6.5 percent of GNP primary surplus for 2003. 
Deputy PM Sener said in private meetings, and again on 
December 18 to the press, that the GOT would support a 6.5 
percent target, but in a subsequent meeting, PM Gul told the 
IMF Mission Chief that the GOT had not yet decided. 
 
 
6.  (SBU) Tax and Public Sector Reforms. Resrep said the IMF 
can live with the tax package passed by parliament December 
19. It included cancellation of the Financial Year Zero Law 
(ref a), extension of a temporary earthquake tax, extension 
of the tax exemption for income from T-bills (a Dervis 
initiative), and a lump sum transfer of income from the 
independent regulatory boards o the central government 
budget. Resrep commented that canceling the Financial Year 
Zero law (a law intended to boost tax compliance) would make 
meeting tax revenue goals more difficult, but by itself was 
not a deal-breaker. 
 
 
--  The new government's second tax measure - a tax amnesty 
on unpaid back taxes - was, per IMF resrep, a deal-breaker. 
The problem was that this amnesty was part of AK's election 
platform and the party was committed to it.  The IMF is 
working with the Finance Ministry to come up with some form 
of amnesty that meets the ruling party's need, while not 
damaging the GOT's ability to collect taxes (perhaps 
re-scheduling back tax payments, or lessening some of the 
accrued penalties for late payments). 
 
 
--  There has been no progress on meeting other Public Sector 
reform conditions. The IMF has not yet seen a draft of the 
proposed direct tax reform legislation.  The end October 
condition of reducing redundant public sector jobs by 30,500 
is still about 10,000 jobs short. 
 
 
Structural Reforms 
------------------ 
 
 
7.  (SBU) Public Procurement Law implementation.  The GOT has 
issued conflicting statements on this issue, as on the 
primary surplus issue.  Deputy PM Sener announced after the 
December 18 Council of Ministers meeting that it would be 
implemented on schedule January 1.  However, shortly 
thereafter the Public Works Minister Zeki Ergezen said there 
needed to be at least a six-month delay for technical 
reasons.  The IMF still didn't know where this issue stood, 
though the IMF, World Bank and EU Commission were united that 
this law needed to be implemented on time. 
 
 
--  Comment:  There may be technical reasons for delaying 
implementation of the law - and we heard from the 
Privatization Administration that they don't want their 
consultancy contracts to be subject to the law - but the IMF, 
World Bank and EU are not convinced.   Nor are we.  Local 
construction firms are lobbying the GOT for the delay (just 
as they lobbied against passage of the law last January), 
because they don't like new rules that allow more 
transparency and foreign competition in public procurement. 
End Comment. 
 
 
8.  (SBU) Banking Sector.  There has been no progress on two 
outstanding Fourth Review conditions:  (i) BRSA resolution of 
PamukBank and control of Yapi Kredi Bank (ref b); (ii) sale 
of an initial $250 million in assets from bankrupt banks now 
owned by BRSA.  IMF resrep said IMF staff would not take the 
Fourth Review to the IMF Board before the Pamuk, Yapi Kredi 
issues were resolved.  He said BRSA staff were balking at 
selling bankrupt bank assets, because they knew they would 
only get 7-8 percent of face value of these assets (mainly 
non-performing loans) and were afraid of public criticism for 
selling on the cheap. 
 
 
--  Comment: There is some urgency on the Yapi Kredi problem, 
since the bank's equity is deteriorating rapidly.  IMF resrep 
confirmed that this large bank is now under the 8 percent 
capital adequacy ratio.  BRSA Chairman Akcakoca separately 
told us he is continuing to negotiate over Pamuk with former 
owner Mr. Karamehment of the Cukurova Group; they haven't 
gotten close on the larger Yapi Kredi issues.  Karamehmet 
wants BRSA to return Pamuk to him with the $2 billion 
injected by the BRSA.  BRSA cannot do that legally.  Akcakoca 
said he would appreciate a strong statement of support from 
the Government, which has not yet been forthcoming. 
 
 
9.  Privatization.  Resrep said the government "hasn't yet 
come to grips with privatization."  The IMF had approved the 
draft privatization plan for alcohol and tobacco monopoly 
TEKEL; the ministerial level Higher Privatization Council 
must adopt this plan as part of the Fourth Review. 
 
 
--  Privatization Administration Chairman Bozkurt separately 
confirmed to us this lack of attention to date on 
privatization.  Bozkurt said he is ready to proceed with 
privatizing TEKEL, state petrochemical giant PETKIM and 
several other major projects, but needs political level 
approval.  Furthermore, in October and early November he 
auctioned off a series of smaller state companies, and is 
sitting on successful bids amounting to about $200 million. 
He is awaiting GOT approval to announce these sales. 
Bozkurt's agency comes under Deputy PM Sener, who has asked 
Bozkurt for the names of the members of state company boards 
of directors under the PA (there are 257 positions).  Bozkurt 
understands Sener is under some pressure to give jobs to AK 
supporters, but "first let him do approve some 
privatization." 
 
 
Comment on Market Reaction 
-------------------------- 
10.  (SBU) The new government's honeymoon in the financial 
markets has ended, though not solely or even mainly because 
of the economic reform issues discussed above.  Local markets 
dropped sharply this week - the lira depreciated about 7 
percent; the stock market lost 14 percent; rates on 
lira-denominated Treasury bills rose by 5 percentage points. 
But analysts tell us this was mostly driven by concerns over 
Iraq.  News on lack of progress on economic reforms will 
further depress the markets here; conversely, good news on 
this front would help offset the Iraq concerns in the 
markets. 
 
 
11.  (SBU) The IMF Mission plans to return in early January 
to continue the Fourth Review and focus on the full year 
budget.  A major part of the new GOT's slowness on economic 
reforms appears related to its overwhelming agenda rather 
than ill intentions.  But this week's market reactions may 
serve as a wake-up call.  The AK party leadership may have 
grown a bit complacent on the econ front after the big 
rallies following their election in November. 
PEARSON