Cablegate: Imf Board Approval Amid Local Debate

DE RUEHAK #1272/01 1441306
R 241306Z MAY 07






E.O. 12958: N/A
SUBJECT: IMF Board Approval Amid Local Debate

1. (SBU) Summary: The IMF Board's May 18 review of Turkey's
stand-by program focused on the risk of fiscal slippage during an
election, a risk also identified by many local analysts. Approval
of the $1.1 billion IMF tranche also coincides with a rekindled
debate about what form Turkey's future relationship with the IMF
should take. Nationalist and "secular" opposition parties have been
the most vociferous opponents of the IMF program. But
debate about the IMF role is not limited to the opposition -- former
Central Bank Governor Serdengecti notes a weakening of the IMF
"anchor" but stresses the need for a strong domestic policy anchor
following the end of the current stand-by arrangement next year.
End Summary.

Fiscal Slippage, Populism

2. (SBU) So far, election-year spending has not been significant
enough to cause problems with the IMF, as the IMF has firm
commitments from the government both to block excess 2007 spending
and make up for any shortfall after the fact. Nevertheless, as
election-day approaches, there are press reports about populist GOT
steps that would cause fiscal slippages. Among the measures
reported in the press are: amnesties to 400,000 farmers who
reportedly owe YTL 400 million to the State; payments to Imar Bank
bond holders that will cost about YTL 1.6 billion to the budget;
opening more universities; converting 218,000 temporary workers to
permanent employment status; broadening regional investment
incentives; supplemental allocations for highway construction;
increased health expenditures through usage of private hospitals;
and pre-election government wage hikes.

3. (SBU) These reports need to be taken with a grain of salt, since
reported policies are often not implemented. We understand the
government has assured the IMF it will not add $1.5 billion in
highway spending, despite press reports. Nevertheless, the obvious
election-year pressures lend the reports some credibility to the
concerns of the IMF. Prime Minister Erdogan's call for VAT rate
reductions in his May 23 speech to TUSIAD is an obvious concern.

4. (SBU) Monthly budget results also raise questions about a
possible election-year fiscal loosening. January-April data show an
8.3% increase in spending in real terms. VAT receipts are down 12%
from last year's level. Special Consumption tax receipts are also
down but non-tax revenues -- mostly profits from state-owned
enterprises -- overperformed. Still, the overall deficit and
primary surplus seem to be broadly in line with achieving the
year-end targets: the January-April primary surplus is 37.8% of the
full-year target. Nevertheless, IMF rep calculates a shortfall from
the primary surplus target of about 0.3% of GDP for the first four
months of the year, i.e. a 1% of GDP shortfall on an annual basis.

Local Debate about Sticking with the IMF

5 (SBU) Despite the political uncertainties, Turkey's finances seem,
on their face, stronger than ever. Investor inflows have driven the
lira to a level higher than before last spring's sell-off. Debt and
reserve ratios are the strongest they have been since before the
2001 crisis, the elections have also rekindled the debate about the
necessity of the IMF "anchor." With investors still pouring into
Turkey, many Turks wonder why the IMF is still needed.

6. (SBU) The political opposition to AKP is the most vocal anti-IMF
voice. The secularist crowds in Ankara, Istanbul, Izmir and Samsun
featured signs critical of the AKP government's perceived bowing to
the EU, the U.S., and -- equally prominently -- the IMF.
Speech-makers at these rallies decry sales of state assets and the
IMF-supported privatization program.

7. (SBU) Rahsan Ecevit, the widow of former Prime Minister Bulent
Ecevit, recently volunteered a set of economic policy prescriptions
as she blessed the election alliance of the leftist CHP and DSP
parties. Ecevit called for an end to "submission" to EU and IMF
demands, as well as termination of land sales to foreigners and an
end to Turkey being "an open market for U.S. and EU agricultural
products" (sic). The radicalism of this agenda reveals the
economic policy cluelessness of many opposition political figures,
as reflected in the courts' and President Sezer's frequent
derailment of economic reform measures, especially privatizations.

8. (SBU) For his part, CHP leader Deniz Baykal suggests that the
terms of Turkey's EU accession framework need to be renegotiated and
that AKP-era privatizations would be questioned if CHP came to

ANKARA 00001272 002 OF 002

power. He characterized as "nut money" the $6.5 billion a Saudi
investor paid for control of Turk Telekom. Baykal has stressed the
need to emphasize local "production" and the "real economy" rather
than "demand." This emphasis on local production, echoed by the
center-right DYP's economic policy expert, has long been a theme of
statist Turkish economic thinking.

--------------------------------------------- ---
Even Reformers are Debating the post-IMF Program Environment
--------------------------------------------- ---

9. (SBU) Readineess to discuss a lessened IMF role is not confined
to the opposition. Even economic reformers are talking about it,
although they frame the debate differently. Former Central Bank
Governor Surreyya Serdengecti, a supporter of the IMF program, said
he believes the IMF anchor had weakened. He said Turkey needed to
develop its own "anchor" if the IMF anchor is to be reduced in
importance. Similarly, Garanti Bank CEO Ergun Ozgen recently talked
about the need for a strong IMF surveillance program if the IMF will
no longer be in a lending role once the current Standby Arrangement
runs its course. That people like Serdengecti and Ozen are
discussing these issues, combined with market bullishness and
Turkey's reduced vulnerabilities, suggest that even a single-party
AKP government might consider moving to a reduced IMF role even
before the existing program ends in spring 2008. With Turkey's
traditional dislike of foreign-imposed constraints, if the next
government thinks it can reduce the IMF's role without being
punished by markets, it is likely to do so.


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