US embassy cable - 03ANKARA3536

UNCLAS SECTION 01 OF 03 ANKARA 003536 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, PGOV, TU 
SUBJECT: IMF CONCLUDES STAFF MISSION:  STILL MUCH WORK TO DO 
 
 
REF: ANKARA 3206 
 
 
1.  (SBU) Summary:  IMF Mission Director told us May 30 that, 
while the staff mission had gone somewhat better than he 
expected, Turkish authorities still had much work to do in 
the next 10-14 days if they hoped to see a Fund board review 
by end-June.  The government needs to adopt new fiscal 
measures to address worrisome underlying budget trends.  On 
the structural side, the GOT is behind schedule, and has 
promised to try to accelerate Parliamentary action on key 
legislation.  Most important is rapid passage of legislation 
governing social security institutions.  Turkish authorities 
have promised to tailor public procurement law amendments and 
the proposed rescheduling of social security arrears to Fund 
address concerns; Kakhonen is skeptical but is taking a 
wait-and-see approach.   End Summary. 
 
 
2.  (SBU) IMF Mission Director Juha Kakhonen provided us with 
an outbrief this morning on the just-concluded staff mission. 
 He said the mission had gone somewhat better than he 
expected, but added that his expectations had been low. The 
bottom line, he said, was that, if the GOT makes a strong 
effort in the next 1-2 weeks, it might be possible to 
schedule the Fifth Review before the end of June. 
 
 
Need for More Fiscal Measures 
----------------------------- 
3.  (SBU) The Fund still does not have final fiscal data for 
the first four months, but believes Turkey probably met the 
primary surplus targets.  However, this success disguises 
worrisome underlying trends.  The Central Government 
underperformed, due to weaker-than-projected revenues, even 
counting the higher-than-expected revenues from the tax 
amnesty program.   The explanation, per Fund staff, lies in 
part in the negative impact of the tax amnesty, which they 
believe has weakened overall compliance while generating an 
increase in certain tax refunds (which are paid out 
immediately, while payments of arrears are made over time). 
Other factors include below-target social security 
collections, which Kakhonen again blamed on expectations of 
an amnesty, and the government's failure to implement price 
increases on items such as electricity. 
 
 
4.  (SBU) The State Economic Enterprises (SEEs) 
overperformed, but this overperformance is not sustainable, 
per Fund staff.  Kakhonen explained that SEEs had delayed 
expenditures in the first quarter because of the tight 
interim budget and problems caused by the procurement law. 
However, he expects the SEEs to "catch up" during the 
remainder of the year, and thus not to overperform in budget 
terms. 
 
 
5.  (SBU) To rectify the situation, the Fund is insisting 
that the government adopt new fiscal measures in the next 
7-10 days.  GOT bureaucrats already have identified measures 
that would fill most of the expected gap, but the politicians 
still have to approve them.  According to Kakhonen, State 
Minister Babacan briefed the cabinet on the budget situation 
on May 28.  The Ministers, who have been hearing nothing but 
positive reports (especially by Finance Minister Unakitan) 
about how the tax amnesty is providing excess revenue, were 
apparently shocked to learn the true situation.  Kakhonen 
hopes that shock will spur them into agreeing to additional 
measures rapidly. 
 
 
6.  (SBU) Kakhonen commented on three other 
amnesties/reschedulings that have been in the news: 
 
 
-- electricity arrears:  The GOT already approved an amnesty 
that violates the LOI.  GOT officials offered the weak excuse 
that the state-owned electricity distribution company (TEDAS) 
had decided, on its own, to implement the amnesty.  To 
compensate for this move, the Fund has insisted that the 
draft LOI include a provision committing the GOT to cut off 
electricity supplies to any customer who develops new arrears; 
 
 
-- farm debt to Ziraat Bank:  Fund staff does not have a 
problem with the state bank's decision to reschedule certain 
agricultural loans because the bank had already determined 
that the loans in question were non-performing and had 
written them down to zero; 
 
 
-- social security arrears:  This is the big one.  Under 
intense Fund pressure, GOT authorities have agreed not to 
proceed with a broad amnesty, but instead to insert a clause 
in new social security legislation that would allow 
rescheduling of certain arrears.  Per Kakhonen, the Fund 
could accept some type of rescheduling provision, as long as 
it was drafted in consultation with Fund staff and authorized 
reschedulings only for those unable to pay (rather than 
indiscriminately).  However, the first draft of the 
legislation the GOT presented to the Fund looked like a 
general amnesty, so Fund staff is awaiting a revised version. 
 
 
More to Do on Structural Side 
----------------------------- 
7.  (SBU) On the structural side, there have been numerous 
delays.  When the Mission arrived, the GOT had completed only 
one of the eight structural benchmarks for April-May (having 
to do with Central Bank internal auditing).  Kakhonen's sense 
is that the authorities, having completed the Fourth Review 
and seeing market sentiment improve significantly, relaxed a 
bit.  During the mission, the leadership woke up and realized 
they needed to move on a series of legislative measures.  As 
a result, they have promised to try to accelerate 
Parliamentary approval of key legislation, including new laws 
governing the social security institutions and bankruptcy. 
Even so, Kakhonen expects most legislation will be delayed 
for at least one month (though Parliament may approve the new 
foreign investment law more quickly). 
 
 
8.  (SBU)  The government is also behind on some end-June 
targets, including laying off redundant workers at SEEs and 
passing the Public Financial Management Reform law.  Although 
the GOT technically does not have to meet these targets if 
the board review takes place before June 30, Fund staff will 
have to be able to say the reforms are on track. If the 
review is delayed, of course, these and other end-June 
targets come fully into play. 
 
 
9.  (SBU)  Kakhonen addressed three other "problem areas": 
 
 
-- public procurement law:  although the government is still 
planning to amend this law, Kakhonen believes things are now 
moving in a better direction.  Fund staff accept the need for 
some revisions, particularly regarding the treatment of some 
SEEs, such as utility companies.  Also, the GOT procurement 
agency -- which had been complaining about being ignored -- 
now tells the Fund that it is fully involved in drafting the 
amendments.  The Fund will continue to watch this closely to 
ensure the GOT does not weaken the law; 
 
 
-- law on independent regulatory agencies:  Fund staff is 
worried that this legislation might weaken the independent 
agencies.  So far, per Kakhonen, GOT officials have been 
"telling us what we want to hear."  Fund staff have not seen 
a draft, and are waiting for the GOT to fill in some gaps in 
the draft LOI on this issue; 
 
 
-- Turk Telekom privatization:  The "plan" the GOT approved 
in April was insufficient.  In the past few days, the World 
Bank and GOT have clarified what is needed to move the 
process forward, though completion of an acceptable plan 
probably will not occur before the Fall. 
 
 
General Comments 
---------------- 
10.  (SBU) Kakhonen said the key is for the GOT to adopt new 
fiscal measures and pass the law on social security 
institutions in the next two weeks, while getting any social 
security rescheduling "right."  He noted that State Minister 
Babacan, while still having limited influence, has been 
playing a positive role.  In addition to telling the cabinet 
the harsh truth about the fiscal situation, he urged the 
Prime Minister and Finance Minister to stop pressuring the 
Central Bank to cut interest rates.  (Note:  When Kakhonen 
expressed concern on this point to Finance Minister Unakitan, 
the Minister picked up the phone and called CB Governor 
Serdengecti to apologize, per Kakhonen.  End note) 
 
 
11.  (SBU) Kakhonen said that the budget financing situation 
looked better now than at the time of the Fourth Review, as 
Treasury has been able to roll over debt well and t-bill 
yields have fallen.  Still, he expressed little optimism that 
Turkey would be able to do more than muddle through in the 
coming months. 
PEARSON