US embassy cable - 03ANKARA301

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000301 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 01/13/2008 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: EMBASSY PRESSES AK ON ECONOMIC POLICY 
 
 
REF: SECSTATE 7987 
 
 
Classified by DCM Robert Deutsch.  Reasons: 1.5 (b,d). 
 
 
1.  (C) Summary:  Ambassador delivered reftel points to Prime 
Minister Gul January 9, emphasizing that any possible U.S. 
financial assistance was conditional on continued 
implementation of the economic reform program.  Embassy 
delivered the same message January 9 and 13 to Treasury U/S 
Oztrak and two influential AK parliamentarians.  PM Gul 
assured the Ambassador that he understood the need for 
reform, and that the government was not "populist."  Treasury 
U/S Oztrak told us he had raised the need for "actions, not 
promises" in his January 7 meeting with PM Gul, who 
"completely understands."  Oztrak admitted, however, that 
others in AK, including Party leader Erdogan, still needed 
convincing.  Reflecting that, parliamentarians Reha Denemec 
and Nazim Ekren agreed on the need to commit to a 6.5 percent 
primary surplus now, but also said they hope to find 
opportunities to reduce the surplus in the near future, 
albeit "in consultation with the IMF."  They pointed to 
Deputy PM Sener's January 11 statement of support for bank 
reform as a positive step, but at the same time defended 
amendments to the Public Procurement Law aimed at gutting the 
authority of the procurement regulatory body. We, the IMF, 
and the markets will need to maintain steady pressure on AK 
to implement sound policies.  End Summary. 
 
 
2.  (C) Ambassador delivered reftel points to Prime Minister 
Gul on January 10, noting that the U.S. -- as a friend of 
Turkey -- was concerned about economic policy slippage. 
Ambassador reiterated that any potential U.S. financial 
assistance would also require Turkish implementation of the 
economic reform program.  The Prime Minister said his 
government was committed to reform, would not succumb to 
populism, and wanted to put Turkey's "house in order." 
 
 
3.  (C) On January 10, we presented reftel points to Treasury 
Undersecretary Faik Oztrak, who said he agreed fully with 
them. "This is the message I gave to PM Gul.  The PM called a 
meeting with economic ministers and agency heads on January 7 
after the disappointing Treasury auctions.  It was my first 
meeting with him; I said the time for promises is over, we 
need to show actions.  On the budget, we need to decide now 
what to cut, and which taxes to raise in order to pay for the 
increased social spending already announced and to reach the 
6.5 primary surplus target.  " 
 
 
3.  (C) Oztrak continued that PM Gul understood right away, 
and pushed for the fiscal savings measures announced January 
8 (ref b). "The PM's decision marks a decisive move towards 
implementing the program.  He is concerned about the economy 
as I am."   However, Oztrak noted that this message still 
needed to go to others in the Party, including Chairman 
Erdogan and AKP parliamentarians. 
 
 
4.  (C) Oztrak's other key points: 
 
 
--  Following Oztrak's January 7 meeting with the PM, Gul had 
 telephoned the Danistay (administrative court) to urge 
acceleration of deliberations on the pending Pamukbank case; 
 
 
-- On the IMF Fourth Review, "we have a ways to go both on 
finalizing the Letter of Intent for the 2003 program, and on 
completing the outstanding conditions.  It will not be an 
easy IMF review, but we have to finish the Review in 
February."  Oztrak said he had told the GOT he need the 
Fourth Review tranche ($1.7 billion) in February. 
 
 
--The Treasury had drawn down its cash balance to meet the 
January 8 debt redemptions to its domestic market.  Treasury 
had then raised the cash balance through the $750 million 
dollar-denominated external bond offering.  "if we proceed to 
meet the outstanding Fourth Review conditions, and deliver a 
credible LOI to the IMF, then we should have no problem in 
our next big T-bill auctions on January 22.  Then our cash 
balance should be restored to the TL 2.5 quadrillion level 
(about $1.8 billion)." 
 
 
5.  (C) We also delivered the same message to AK 
Parliamentarians Nazim Ekren and Reha Denemec, both of whom 
are close to AK Party Chairman Erdogan, in January 9 and 
January 13 meetings.   (Both are accompanying Erdogan on his 
trip to China this week.)  On fiscal policy, Ekren said AK 
wanted to fulfill its pre-election promises to the 
electorate, but now the Party understands that some of its 
promises will have to be delayed.  Denemec said that State 
Minister Babacan had over the weekend fully confirmed the 
GOT's adherence to the 6.5 percent of GNP primary surplus. He 
added, however, that this figure was not "the word of God," 
and that it might be reduced in the near future, in 
consultation with the IMF.  We stressed that announcing the 
6.5 percent target, while progress, was insufficient; the GOT 
also needed to announce further credible measures to achieve 
it.  Denemec said much of the savings would be achieved by 
reducing the outstanding public investment projects from 
4,400 to 2,000. 
 
 
6.  (C) On banking reform, Ekren said former bank owners were 
lobbying Chairman Erdogan.  "Halis Toprak calls the Chairman 
every week, trying to get permission to start a new bank.  We 
listen only because he is important to the real sector" 
(note:  Toprak formerly owned Toprak Bank and still owns 
several factories, including a paper factor in SE Turkey.) 
But Ekren also said he understood the importance of cleaning 
up the banking sector and not giving new banking licenses to 
persons who not only bankrupted their institutions at public 
expense, but also owed the banking board substantial sums of 
money.  Denemec called attention to Deputy PM Sener's January 
11 statement calling on the Cukurova Group (former owner of 
Pamukbank and majority owner of Yapi Kredi Bank) to pay its 
debt to the banks in full.  Sener said the banking board's 
actions were fair and legal. 
 
 
7.  (C) Denemec defended AK's plan to amend the public 
procurement law, saying the law as originally passed was 
unworkable.  He agreed that there is a damaging public 
perception that the changes are intended to benefit AK-relate 
firms, but he blamed this perception on media misinformation. 
He also added that "laws themselves cannot change peoples' 
behavior" (implying that the construction firms lobbying for 
GOT contracts would not be deterred by legal changes.) 
Comment:  The IMF and World Bank say the proposed amendments 
would reduce the law's scope from nearly 100 percent of GOT 
procurement to about one-third, and would limit the Public 
Procurement Agency's independence 
 
 
8.  (C) Separately, the Central Bank issued a statement (not 
yet available in English) stressing the necessity of 
implementing all aspects of the GOT's economic reform 
program.  The statement notes that reduction of political 
uncertainty in 2003 (compared with 2002) as a positive 
factor.  It also notes negative factors: an Iraq operation 
which could depreciate the lira and drive up oil prices; and 
increases in domestic demand, stimulated by fiscal spending. 
The statement concludes that, despite the negative factors, 
"it is not impossible to attain the targeted 2003 inflation 
rate, if the GOT establishes fiscal discipline and implements 
structural reforms in line with the program."  Note: IMF 
resrep (protect) told us January 10 that State Minister 
Babacan had called Central Bank Governor Serdengecti to 
complain about this statement, per Serdengecti.  End Note. 
 
 
9.  (C)  Comment:  Although market developments have served 
as a useful wake-up call, AK as a whole remains 
less-than-fully-committed to sound economic policy. In the 
weeks and months ahead, we, the IMF, and the markets will 
need to maintain constant pressure. 
PEARSON