US embassy cable - 03ANKARA1472

UNCLAS SECTION 01 OF 02 ANKARA 001472 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, TU 
SUBJECT: IMF AND MARKET UPDATE, MARCH 7 AM 
 
 
REF: ANKARA 1392 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary:  IMF Mission Chief told us morning of 
March 7 that his team and the GOT could in theory close on 
the LOI in a couple of days, but actual closure depends on 
GOT political will.  Outstanding issues remain World Bank 
objections to GOT-proposed spending cuts in agriculture and 
social programs, GOT efforts to delay key elements of direct 
tax reform, and the lack of progress on reducing the number 
of redundant workers in state enterprises.  Similarly, timing 
on parliamentary approval of the budget depends on political 
will.  Also on morning of March 7, Finance Minister Unakitan 
told the Ambassador that the budget would pass parliament in 
March; Unakitan assured the AMB he would "be tough on budget 
implementation."  Turkish markets were stable in morning 
trading, continuing to rely on the prospect of a U.S. 
financial package. End Summary. 
 
 
Ambassador Raises Budget with MinFinance 
---------------------------------------- 
 
 
2. (SBU) In an office call on MinFinance Unakitan March 7, 
the Ambassador asked Unakitan about timing of passage of the 
budget.   The Ambassador further noted the need for strict 
implementation of this budget, which would be key to market 
confidence in the GOT's ability to realize the 6.5 percent of 
GNP primary surplus. 
 
 
3.  (SBU)  In reply, Unakitan said the GOT was committed to 
passing the full-year 2003 budget in March rather than seek a 
second interim budget.  He didn't predict when in March it 
would pass.   Unakitan assured the Ambassador of complete and 
full implementation of the fiscal saving measures.  "The 
Minister of Finance is expected to be the tough guy, and as 
long as you accept the role, there's no problem," he said. 
Unakitan added that no GOT agency would be allowed to spend 
over its allocated amount (though he noted that overspending 
had been common in the past.) 
 
 
IMF Update 
---------- 
 
 
4.  (SBU) IMF Mission Director Juha Kahkonen provided us with 
an update March 7 on his discussions with the GOT on the 
Fourth Review.  Kahkonen said there were three main issues 
remaining: 
 
 
-- Budget:  As noted reftel, the IMF thinks the draft budget 
provides for the necessary 6.5 percent of GNP primary 
surplus, but World Bank staff object to the budget's cuts in 
direct income support payments to farmers and social 
spending.  Stressing that it was the GOT, not the Fund, that 
proposed these cuts, Kahkonen said he was waiting for the GOT 
to resolve this with the Bank.  If the GOT restored the 
spending, it would have to identify offsetting fiscal 
measures. 
 
 
-- Direct Tax Reform:  The GOT wants to delay several 
sensitive elements of the tax reform.  Fund staff have agreed 
to delay one -- related to Free Trade Zones -- but not the 
others. 
 
 
-- Redundant State Enterprise Employees:  Per Kahkonen, the 
GOT has made no progress in determining how to achieve the 
program target.  He said GOT bureaucrats raised the issue 
March 5 with Deputy PM Mehmet Ali Sahin, who is responsible 
for this issue, but the meeting produced nothing. 
 
 
5.  (SBU) Kahkonen said that these issues could in theory be 
resolved in a couple of days, but all depended on whether the 
GOT mustered the political will to make the necessary 
decisions.  Similarly, timing of parliamentary approval of 
the budget depended on political will.  Parliament could 
approve the budget quickly (maybe 7-10 days) if the GOT chose 
to limit debate; alternatively, it could drag out until the 
end of the month.  If the GOT made the necessary political 
decisions to move ahead rapidly, Fund Staff could take the 
Fourth Review to the Board in early April. 
 
 
Markets in Waiting Mode 
------------------------ 
 
 
6.  (U) Morning trading March 7 in Turkish financial markets 
was fairly light, with TL 536 trillion or $320 million in 
transaction volume in the domestic T-bill market (versus 
double that amount in morning sessions earlier in week.) 
T-bill yields were unchanged at 57.5 percent compounded.  The 
lira depreciated 0.5 percent from yesterday' close, to TL 1, 
615,000 and the Istanbul Stock Exchange was unchanged in 
morning trading. 
PEARSON