US embassy cable - 03ANKARA4551

UNCLAS ANKARA 004551 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: FUND MISSION AND GOT REACH AGREEMENT ON LOI, SHOOT 
FOR AUGUST 1 BOARD DATE 
 
 
REF: ANKARA 4480 
 
 
1.  (SBU) IMF Mission Director Reza Mogdaham and State 
Minister Ali Babacan announced July 20 that they had reached 
initial agreement on a Letter of Intent.  In a brief 
telephone call, IMF ResRep (protect) advised July 21 that, 
assuming IMF management approval of the agreed-upon text, 
they hope to sign the LOI this Friday (July 25) and have the 
Board review the following Friday (August 1).  He said Fund 
staff supported this accelerated approach to compensate for 
some of the delays in completing the Fifth Review. 
 
 
2.  (SBU) As reported reftel, the main factor facilitating 
the agreement was the GOT's decision to take a series of 
measures to close the projected TL 2.5 quadrillion fiscal gap 
in this year's budget.  IMF ResRep said implementation of 
these measures -- already underway -- along with 
Parliamentary passage of the two remaining pieces of social 
security legislation, without amnesty provisions, were prior 
actions for the Board review.  We understand the full 
Parliament will consider these two bills this week.  (Note: 
The press reported last week that Parliament had approved the 
legislation; in fact, only a Parliamentary committee had 
approved them.  End note)  ResRep said a Fund technical 
assistance team had made good progress working with the GOT 
to narrow differences on a proposed social security amnesty. 
Based on that, ResRep is now hopeful that the GOT's proposal 
on this issue will address the Fund's concerns. 
 
 
3.  (SBU) ResRep said Fund staff continue to work with GOT 
officials on the Financial Management and Control Law as well 
as direct tax reform legislation.  On the latter, he said the 
GOT had "so many bad ideas" that Fund staff had asked them to 
postpone the legislation, pending arrival of another Fund 
technical assistance team.  Embassy will report more fully on 
structural issues following a July 23 meeting with ResRep. 
 
 
4.  (SBU)  Separately, the Central Bank intervened in the 
currency markets in a big way on Friday, buying $940 million 
above its normaly daily purchase in response to what the Bank 
called excessive volatility.  The intervention (actually the 
Bank intervened 2-3 times during the course of the trading 
day) pushed the lira, which had reached TL 1.375 
million/dollar, back to TL 1.4 million/dollar before it 
recovered to close at TL 1.395 million.  The Bank also cut 
overnight interest rates three percentage points and 
increased its daily dollar purchases from $40 to $50 million 
late last week.  Local analysts, such as Istanbul-based 
Bender Securities, are growing increasingly skeptical of the 
Bank's claim that it is intervening only in response to 
excessive volatility. 
PEARSON