US embassy cable - 03ANKARA4316

UNCLAS SECTION 01 OF 02 ANKARA 004316 
 
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, PREL, ECON, TU 
SUBJECT: IMF MISSION BEGINS TALKS AMID GROWING MARKET ANGST 
 
REF: ANKARA 4180 
 
 
1.  (SBU) Summary:  An IMF team began talks in Ankara this 
afternoon amid growing market nervousness over U.S.-Turkish 
relations and continued delays in meeting the conditions for 
the Fifth Review under the IMF-backed program. Treasury U/S 
Canakci told us the government still is shooting for an IMF 
Board Review by the end of the month, but he admitted the GOT 
still has much work to do to address the fiscal gap and pass 
legislation to restructure Turkey's various social security 
funds.  Canakci also confirmed that the government will 
shortly replace all three of his deputies; he insisted that 
the replacements would reassure the markets.  End Summary. 
 
 
2.  (SBU) An IMF mission began talks with GOT officials this 
afternoon on the remaining steps to be taken for the Fifth 
Review under the IMF-backed economic reform program.  The 
talks began as markets continued to slide, with bond yields 
on the benchmark t-bill rising to 56 percent and the lira 
weakening to TL 1.42 million/dollar.  Market analysts 
attributed the decline to growing nervousness over 
U.S.-Turkish relations (in the wake of the July 4 U.S. 
detention of Turkish special forces personnel in Northern 
Iraq), delays in completion of the Fifth Review, and press 
reports that all three Treasury Deputy Undersecretaries would 
be sacked. 
 
 
3.  (SBU)  Treasury U/S Canakci told us this morning that the 
GOT still hopes to complete the review this month.  He noted 
that Parliament had already approved legislation 
restructuring the state unemployoment agency (Is-Kur), and 
that the Budget Committee is now debating legislation to 
restructure the Bag-Kur and SSK social security funds (press 
reports indicate the Commitee approved the SSK legislation 
late today).  Canakci said the government had given up on the 
idea of making these bills "fundamental laws," which would 
have put them on a legislative fast-track; however, the 
opposition CHP had agreed to work with the government to 
accelerate passage of both bills.  The government also has 
been unable to reach agreement with the IMF on language about 
rescheduling social security arrears.  Despite the GOT's best 
efforts, Fund staff continue to worry that the government has 
in mind a general amnesty or rescheduling, which would 
violate the terms of the last LOI.  As a result, the 
government has left rescheduling language out of the 
legislation.  (Note:  Canakci confirmed that expectations of 
a social security amnesty has caused a decline in social 
security premium payments, especially to the Bag-Kur fund.) 
 
 
4.  (SBU)  Canakci admitted that the government still had not 
agreed on all of the measures needed to close the fiscal gap 
that the previous IMF mission had identified.  That gap, he 
said, was equal to 0.4 percent of GNP or about TL 1.05 
quadrillion ($750 million at today's exchange rate).  The 
cabinet is now considering a decree to increase the Special 
Transaction Tax and an educational levy; if approved, this 
would reduce the gap by approximately TL 250 trillion. 
Treasury plans to cover the remaining TL 750 trillion gap via 
a combination of electricity price increases (TL 500 
trillion) and other measures yet to be identified; however, 
the Energy Minister continues to oppose electricity price 
increases.  In addition, the outcome of ongoing wage/salary 
negotiatons with civil servants could add to the fiscal gap, 
though Canakci insisted the government would remain tough and 
limit the fiscal damage.  (Note:  IMF ResRep has previously 
told us the fiscal gap was slightly larger, at 0.5 percent of 
GNP, and also has pointed out that it may be revised, 
depending on the current mission's review of budget results 
through end-June.) 
 
 
5.  (SBU) On other structural conditions, Canakci 
acknowledged that the GOT was behind schedule on eliminating 
redundant employees in state enterprises.  It has eliminated 
7400 redundant positions, against an end-June target of 9900. 
 He predicted that this process would accelerate as soon as 
the ongoing civil service wage negotiations conclude.  On 
Turk Telekom, he echoed IMF ResRep in saying that the Fund 
had agreed that the GOT would work with the World Bank to 
name a privatization coordinator (already done) and put in 
place a full privatization strategy by Fall. 
 
 
6.  (SBU) Canakci also confirmed press reports that all three 
of his deputies would be replaced shortly.  In fact, the 
document authorizing their removal is now with the Prime 
Minister for approval.  Canakci said the government had not 
yet decided on replacements, but he insisted they would be 
well-qualified people who would inspire confidence in the 
markets.  (Note:  IMF ResRep told us last night that he 
understood one of the replacements would be a highly-regarded 
official from the State Planning Organization.) 
 
 
7.  (SBU) Finally, Canakci expressed optimism about economic 
trends, noting that growth was trending up while inflation 
was declining.  If present trends continue, he said, Turkey 
could end the year with growth above five percent, inflation 
close to the 20 percent annual target, and a net public 
debt/GNP ratio at 74-75 percent, below the 77.2 percent 
year-end target.  We responded that such a positive scenario 
was indeed possible, and suggested that vigorous, consistent 
implementation of the economic reform program could help 
ensure it.  We noted that much of the projected decline in 
the debt/GNP ratio depended on the continued strength of the 
lira, and that real interest rates remained very high because 
investors remained unsure of the government's commitment to 
reform.  Rapid movement by the government now to complete the 
Fifth Review and otherwise move the reform process forward 
would be of great benefit in the Fall, when investors will 
try to determine whether and how Turkey will meet its large 
2004 debt obligations. 
PEARSON