US embassy cable - 03ANKARA3206

UNCLAS SECTION 01 OF 03 ANKARA 003206 
 
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: EFIN, PGOV, TU 
SUBJECT: IMF READOUT 
 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
1. (SBU) Summary:  IMF resident rep in Ankara briefed us May 
13 on the status of the Fifth Review.  Given the number of 
unmet conditions at this point, the earliest date for the 
Fifth Review Board meeting is likely to be early July.  While 
the GOT may meet its primary surplus criterion, there are 
underlying fiscal weaknesses, exacerbated by plans for more 
amnesties (especially an amnesty on employers payments of 
social security premiums).  On structural reforms, the 
parliament passed the direct tax reform law, but there are 
delays on eliminating  public sector redundancies.  The Turk 
Telekom privatization plan adopted by the Counci of Ministers 
doesn't pass Fund or Bank muster. Resrep was fairly 
optimistic about growth (meeting the 5 percent target should 
be achievable) and guarded on inflation (too early to revise 
the 20 percent CPI target).   But the Fifth Review could well 
be difficult, given the amnesty talk by the GOT.  End 
Summary. 
 
 
2.  (SBU) In a May 13 meeting, IMF resrep briefed us on the 
status of the Fifth Review.   The staff mission will begin on 
May 21 and  end by May 31 (since outgoing Turkish Mission 
Chief Kahkonen takes up a new job on June 2.)   Resrep 
believes Fund staff will not be in a position to recommend a 
Board date by the end of this Mission, given the large number 
of outstanding conditions detailed below. 
 
 
3.  (SBU)  Resrep was generally optimistic about Turkey's 
macroeconomic performance.  On growth, even if Turkey only 
stays at the level of fourth quarter 2002 GNP, it will obtain 
about 2 percent growth over 2003; preliminary indications 
show growth above the fourth quarter baseline.   Growth 
remains uneven, with export industries performing well, and 
many domestically oriented companies still stagnant. 
Reaching the 20 percent year-end CPI inflation target will be 
challenging, given 10 percent cumulative inflation in thie 
first four months.  This means averaging about one percent 
CPI inflation per month for th rest of the year.  But Fund 
staff are unlikely to recommend revising the target at this 
point. 
 
 
Quantitative Targets - Focus on The Budget 
------------------------------------------ 
 
 
4.  (SBU) Resrep said Turkey had met all monetary targets. 
The debt ceiling numbers were not yet in, but he believes 
those will be met as well.   The primary surplus performance 
criterion is the big question, and the final numbers 
(including state economic enterprise balances) will not be in 
until mid-June.   Resrep opined that it appeared from 
preliminary data that the GOT would met the primary surplus 
condition, owing to better-than-projected revenue in April 
from the tax amnesty.   However, there was continuing 
weaknesses in other areas, particularly in the social 
security funds.   Employers' premium payments have dropped 
off considerably (because of talk of another amnesty on 
arrearages), forcing greater transfers from the budget to 
keep the funds solvent.  If the GOT met the end April primary 
surplus condition through one-off measurse like the tax 
amnesty and its partial spending freeze, with ongoing 
weaknesses, then the budgetary balances looking forward would 
be problematic, per Resrep. 
 
 
5.   (SBU) The Fund is unhappy with the GOT's proposed 
amnesties/reschedulings of social security and electricity 
arrearages, which conflict with its commitment, in the Letter 
of Intent, not to engage in general reschedulings of public 
sector receivables.  ResRep said Deputy Managing Director 
Krueger had been tough on this issue during her recent visit, 
warning that it would complicate the Fifth Review, but GOT 
officials had insisted they would go ahead anyway.  State 
Planning Organization Deputy U/S Birol Aydemir had explained 
to Fund staff that the social security amnesty was not a 
general rescheduling but rather a specific one.  ResRep said 
he has already received a copy of proposed legislation on 
social security arrears. 
 
 
6.  (SBU) Resrep acknowledged that revenues from Turkey's 
"tax peace" would be higher than the Fund had estimated, as 
payments totaling TL 800 trillion had already been made in 
April.  Nonetheless, he predicted that, because local tax 
officials had taken a heavy handed approach, many of those 
who had signed up would drop out during the year.  He 
confirmed what we had been told earlier by Finance Ministry 
U/S  - that the majority of any additional revnues, beyond 
the amount projected in the budget, would be used to pay down 
domestic debt.  In addition, some TL 310 trillion would be 
spent on relief for farmers, specifically a diesel fuel 
subsidy.   Resrep noted two problems with this subsidy. 
First, the World Bank wanted aid to farmers to be channeled 
into the currentl under-funded Direct Income Support program, 
which is more efficient; the GOT was characterizing the 
diesel fuel subsidy as part of this program when it clearly 
wasn't.   Second, this subsidy from the IMF point of view was 
an ad hoc spending measure outside the budget and undermined 
the budget prioritization process. 
 
 
Structural Reforms 
------------------ 
 
 
7.  (SBU) Resrep gave a status report, showing mixed results, 
on the major structural conditions (both performance criteria 
and benchmarks) in the Fifth Review. 
 
 
Public Sector Reforms: 
 
 
--  Parliamentary passage of the direct tax reform law was 
completed April 9. 
 
 
--  Parliamentary passage by end June of the Public Financial 
Management Law, which will make the budget much more 
transparent (it will include for instance the military 
procurement spending):  the legislation has been drafted and 
is circulating among the Council of MInister prior to 
submission to parliament. 
 
 
--  Parliamentary passage of Bankruptcy law amendments by end 
May:  some delay, but law is in parliament. 
 
 
-- Parliamentary passage of amendments to the State Economic 
Enterprise governance laws, in June, which is intended to 
make the SEEs more autonomous from political control:  draft 
now in parliament. 
 
 
--  Reduce 9,900 redundant public sector jobs by end June: 
only about 2,000 jobs eliminated thus far.  The GOT has 
delegated the downsizing to state enterprise managers, but PM 
Erdogan will need to exert continued pressure to achieve the 
condition, per Resrep. 
 
 
Banking Sector Reforms: 
 
 
--  Announce sale by end June of first tranche of $250 
million in assets from the intervened banks:  some resistance 
in BRSA until the new bankruptcy law is in place. 
 
 
--  Prepare legislation by end June to strengthen BRSA's 
ability to intervene failed banks (by limiting the period of 
legal appeals):  BRSA has prepared a draft. 
 
 
--  Develop an action plan by end May to reduce financial 
intermediation costs:  some resistance from the Finance 
Ministry to reducing transaction taxes. 
 
 
Private Sector Enhancements: 
 
 
--  Council of MInisters approval of Turk Telekom 
privatization plan by end April:  the plan adopted doesn't 
meet World Bank or IMF standards. 
 
 
-- Parliamentary passage of new Foreign Direct Investment law 
by end-April:  the law is in parliament. 
 
 
8.  (SBU) ResRep said AK plans to amend the public 
procurement law were problematic.   The amendments are being 
done at AK party headquarters, outside the GOT.  At a 
minimum, the GOT needs to consult with the World Bank and 
Fund before going forward with the amendments.  There are, he 
admitted, technical problems with implementing some 
provisions of the Public Procurement Law, and the IFIs want 
to help the GOT establish standards that conform with EU 
practice.   The bottom line, however, is that AK has to 
coordinate with the IFIs, which it is not doing, he 
concluded. 
 
 
New Treasury Undersecretary Reaffirms Commitment 
--------------------------------------------- --- 
 
 
9.  (SBU) Treasury U/S Ibrahim Canakci told us May 13 that 
Prime Minister Erdogan had made a strong commitment to IMF 
Deputy Managing Director Krueger to implement the reform 
program fully.  Erdogan, briefed by Krueger on the welter of 
pending conditions in the Fifth Review, had instructed State 
Minister Babacan and Canakci to make it happen.  Canakci said 
he thought Turkey was in good shape on its macro targets and 
was making good progress on most structural reforms, though 
he acknowledged they had identified some problem areas. 
PEARSON