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Cablegate: Turkish Parliament Ratifies 2008 Budget

VZCZCXRO7454
RR RUEHDA
DE RUEHAK #0036 0090558
ZNR UUUUU ZZH
R 090558Z JAN 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 4868
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 3719
RUEHDA/AMCONSUL ADANA 2587
RUEHBS/USEU BRUSSELS

UNCLAS ANKARA 000036

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - JROSE

SENSITIVE
SIPDIS

REF: A) ANKARA 35 B) 2007 ANKARA 2052

E.O. 12958: N/A
TAGS: EFIN TU
SUBJECT: Turkish Parliament Ratifies 2008 Budget


1. (U) Summary: The most significant aspect of Turkey's 2008 budget
is the decrease in the primary surplus target to 5.5 percent of
Gross Domestic Product (GDP). For five years, the Government of
Turkey (GOT) has used a primary surplus target of 6.5 percent of
GDP. In working to achieve the ambitious 6.5 percent target, the
GOT was able to cut expenses, save more, and pay its debts ahead of
schedule, thereby easing the debt-to-GDP ratio from more than 90
percent to slightly below 60 percent. For 2008, interest payments
and social security transfers will continue to be the primary
expenses. Indirect taxes, including value-added taxes and special
consumption taxes on cigarettes and alcohol, will be the main
sources of government revenue. Personal income tax receipts (5.3
percent of GDP) will significantly exceed corporate taxes (2 percent
of GDP). End Summary.

2. (U) The GOT proposes a budget deficit of YTL 17.9 billion ($15.2
billion; $1 = YTL 1.17); 2.5 percent of GDP and 19.3 percent higher
than the 2007 target. In 2008, the GOT plans to spend YTL 222.6
billion ($186.6 billion) and expects to collect YTL 204.6 billion
($172.3 billion). The 2008 budget indicates a primary surplus of
YTL 38.0 billion ($31.9 billion) before debt service.

3. (U) The GOT has set a 2008 GDP target of YTL 716.6 billion
($602.2 billion). The budget also targets 2008 inflation at 4
percent and per capita income at $7,000. (The GOT was unsuccessful
in reaching its 2007 inflation target of 4 percent; instead, it
ended the year with 8.4 percent inflation.) The GOT estimates 2008
exports valued at $117 billion and imports valued at $182 billion.
The 2008 budget assumes an average USD/YTL exchange rate of 1.37;
with a 15 percent appreciation from the current level of 1.17. The
GOT expects a 10.9 percent increase in corporate income tax
collection and 10.0 percent in personal income tax collection. The
2008 budget includes a 7.6 percent hike in civil servant wages--well
above the 4 percent inflation estimate.

4. (SBU) Reftel A describes anticipated energy shortfalls and the
need to fill the gap in the short term with alternative, and more
expensive, sources. Gas price increases will hit consumers but also
hit the GOT, since it uses liquid natural gas to fire many of its
electricity plants. These energy price hikes will make budget
targets harder to achieve.

5. (U) The 2008 budget anticipates delaying enforcement of the
social security law to June 2008 despite industry calls for more
rapid implementation. The social security reform is significant for
the long-term structural health of the Turkish economy and is a
requirement under Turkey's IMF program.

6. (SBU) Comment: Turkey's IMF program will expire in May 2008 and
the GOT and IMF are now considering what type of agreement might
follow. Without an IMF anchor, the GOT might feel more comfortable
in cutting fiscal discipline and increasing spending. The lower
primary surplus target of 5.5 percent could be a signal of negative
change in the future. In the past five years, with a 6.5 percent
target, the GOT has been successful in cutting inflation from 70
percent to 8.4 percent, lowering debt-to-GDP ratios, and maintaining
stability. These impressive results were not obtained easily, and
the GOT will have to maintain strict fiscal discipline to cut
inflation further. Industry and trade officials are impatiently
pushing for faster growth and more job creation, which would likely
result in inflation increases. Unfortunately, Turkish business
leaders are experts at operating under high-inflation conditions.
End Comment.

McEldowney

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