US embassy cable - 03ANKARA1131

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001131 
 
SIPDIS 
 
 
STATE FOR E, P, EUR AND EB 
TREASURY FOR U/S TAYLOR 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: ECON, PREL, TU 
SUBJECT: TURKEY'S ECONOMY: BUDGET IMPASSE WITH IMF 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
1. (C) Summary:  Market analysts predict the market's current 
positive sentiment will reverse quickly by Monday, in the 
absence of news of a deal on U.S. troop deployments. 
Meanwhile, the GOT has reached an impasse with the IMF staff 
over the 2003 primary budget surplus - the IMF staff see a 
$3.4 billion shortfall towards the 6.5 percent of GNP target. 
 The GOT is not offering to undertake any new fiscal measures 
in their talks with the IMF, per resrep.  One senior 
MinFinance contact told us he is concerned that the GOT will 
submit the budget to the parliament without IMF approval. 
Deputy PM Sener's surprise announcement February 19 of a new 
draft bill - to guarantee government jobs to all workers in 
privatized enterprises - sparked another IMF protest letter. 
End Summary. 
 
 
Markets Positive for Now 
------------------------ 
 
 
2.  (U)  On February 20 Turkish financial markets remained 
positive, believing in a scenario of several more days of 
tough bargaining between the U.S. and Turkey before the two 
sides strike a deal on a U.S. troop deployment.  However, 
market analysts such as Cem Akyurek, chief economist for 
Global Securities (Turkey's largest stock brokerage) tell us 
markets expect positive news by Monday. 
 
 
--   The lira depreciated slightly to TL 1,633,000 to the 
dollar (from TL 1,626,000); T-bills were stable at 56.5 
percent compounded; the Istanbul Stock Exchange closed up 0.5 
percent in continued heaving trading. 
 
 
2003 Budget Impasse 
------------------- 
 
 
3.  (SBU) Both Ministry of Finance and IMF staff sources tell 
us the two sides have reached an impasse on the primary 
surplus target:  the GOT believes their draft 2003 budget 
exceeds 6.5 percent of GNP; while IMF staff calculate the 
measures in the draft budget which are acceptable to them as 
yielding only about 4.8 percent of GNP.  This 1.67 percent of 
GNP difference amounts to TL 5.9 quadrillion or $3.4 billion. 
 Ahmet Kesik, MinFinance Deputy DG for the budget, told us 
the gap could largely be closed if IMF accepted two GOT 
positions. 
 
 
--  First, the GOT has proposed postponing the 2003 "Direct 
Income Support" payments for poor farmers into 2004 (nearly 
$1 billion).  IMF staff, bolstered by the World Bank, cannot 
accept what they see as reversing a key agricultural reform, 
while the GOT engages in new agricultural spending under the 
price support system (e.g., on hazelnuts and tobacco). 
 
 
--  Second, the GOT wants to exclude from the definition of 
primary surplus "foreign in-kind contributions" (amounting to 
$1.5 billion, these are goods - including military equipment 
- imported by the line ministries using long-term foreign 
export agency credits rather than cash).  IMF staff want 
these purchases included as primary spending (and in fact 
Kesik agrees that this would be an effective way of limiting 
ministries' ability to import such goods). 
 
 
--  IMF staff see the $3.4 billion primary surplus gap as 
largely related to their more realistic assessment of the 
GOT's fiscal measures.  For instance, the GOT claims its tax 
amnesty will result in TL 2.4 quadrillion ($1.4 billion) in 
revenue, based on a 75 percent participation rate by 
delinquent taxpayers.  But IMF experience indicates a much 
lower participation rate, resulting in likely revenue closer 
to TL 0.7 quad ($400 million).  IMF staff have asked MinState 
Babacan and MinFinance Unakitan to adopt more of the fiscal 
measures proposed by IMF staff in order to close the gap, 
which they have refused to do. 
 
 
4.  (C) Kesik, the GOT's main budget expenditure expert, told 
us in confidence he is concerned that the GOT may decide to 
submit the 2003 budget to the parliament without IMF 
approval.  Kesik said his contacts with Finance Minister 
Unakitan "scare" him.  "These guys just don't understand the 
issues."  (Note:  Kesik is a strictly observant Muslim from 
the AK stronghold of Konya.  Unlike some other senior 
bureaucrats, he has no ideological problems with AK.  His 
problem is he thinks they're incompetent.)  MinFinance 
Unakitan told the press late February 20 that the GOT would 
send the 2003 budget to the parliament "shortly, probably 
next week." 
 
 
5.  (SBU) Budget Note: One of Kesik's constant themes is the 
need for social security reform.  In the late 1980's, when he 
started at the Finance Ministry, the state's social security 
funds were self-financing.  Now the central government budget 
includes an annual appropriation of TL 16 quadrillion (nearly 
$10 billion) to keep these pension funds solvent.  The chief 
villain, per Kesik, is former President Demirel, who lowered 
the civil service retirement age to 39.  This was the first 
step in bankrupting the social security system in Turkey, per 
Kesik.  End Note. 
 
 
A Negative Surprise On Privatization 
------------------------------------ 
 
 
6. (SBU) Following the February 19 Cabinet meeting, Deputy PM 
Sener announced that the GOT had agreed to submit to 
parliament a "privatization job law."  The law would 
guarantee continued public sector employment for state 
enterprise workers who lose their jobs through privatization. 
 The daily Milliyet estimates that the law could establish as 
many as 70,000 new civil service positions (there are 
currently 62,000 unionized workers and 10,000 civil servants 
in the SEEs scheduled for privatization).  Sener said the 
following: 
 
 
--  "In a country with a serious unemployment problem like 
Turkey, a privatization program that ignores the need to 
provide jobs to those who lose them through privatization is 
unacceptable." 
 
 
--  "The core of the new law provides that workers who are 
likely to lose their jobs can apply for a new civil servant 
position within three months, and can continue to work for 
the government." 
 
 
7. (SBU) IMF resrep told us February 20 that IMF mission 
chief sent a written note to Treasury U/S Oztrak that the new 
law, which came as a surprise to the IMF mission, was 
"unacceptable." 
 
 
8.  (SBU)  Comment:  Sener has a point about the unemployment 
problems of privatization.  The solution is to work with the 
World Bank, which has offered the GOT loan programs to 
support severance payments and job retraining for privatized 
SEE workers.  Instead, Privatization Administration officials 
have complained to us that the World Bank's conditions make 
these loan programs unworkable.  Now the GOT is taking the 
counter-productive path of keeping everyone in the public 
sector, reducing much of the potential efficiency gains of 
privatization. 
PEARSON