Cablegate: Imf and Turkish Central Bank On Next Steps for The

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

Sensitive but Unclassified. Not for internet distribution.

1. Summary: While the post-election market rally largely
continued on November 8, with T-bill rates dropping a further
2.5 percent, there was by the week's end greater press and
market attention to the likely policies of the new GOT. IMF
resrep reviewed with us the outstanding structural and fiscal
conditions on the Fourth Review; he hopes to have AK
agreement to a November visit by IMF's Deppler, followed by a
full Mission visit in December. The AK figures have yet to
meet with the economic bureaucrats, but Central Bank staff
told us they plan to stress to AK leaders: "stick with the
6.5 percent of GNP primary surplus target." End Summary.

2. (U) The strong market rallies largely continued on
November 8, on the back of local buying (Central Bank sources
say they didn't see large foreign inflows this week).
Lira-denominated T-bills dropped another 2.5 percentage
points to close at 53 percent compounded. The lira
appreciated one percent to close at TL 1,619,000. Profit
taking in the Istanbul stock exchange led to a 1.8 percent
decline, after a record week for trading volume. Volume in
the stock market today was $1.55 billion (versus prior daily
averages of about $200 million.)

IMF Resrep on Next Steps

3. (SBU) IMF resrep Brekk, meeting with visiting EUR/SE
director, said he spoke with AK's Ali Babacan today. Brekk
believes AK will agree to a courtesy visit by IMF's Europe 1
director Michael Deppler in late November, to be followed by
a full fledged IMF Mission visit in December, once the new
government is fully in place. Brekk noted that AK leadership
had focused first on EU accession, and had been briefed by
bureaucrats on EU issues, but had not yet engaged the
bureaucracy on the economic reform program issues. When they
did meet with Treasury and Central Bank, AK would learn of
the outstanding conditions on the Fourth Review.

4. (SBU) Among the key outstanding structural reform
conditions are:

-- Banking Board's resolution of Yapi Kredi Bank's share
ownership (still being negotiated with controlling
shareholder Mehmet Karamehmet.)

-- Submission to parliament of the direct tax reform bill.
(IMF has not seen a draft law, though there was agreement in
principle with MinFin Oral on contents of such a law.
Finance Ministry DG told us he will wait to show draft to new
AK MinFin before giving to IMF.)

-- Reducing redundant jobs in state companies. (GOT is
about 10,000 short of the 31,000 jobs identified as redundant
in a GOT study of state companies. This will require
lay-offs, which remains sensitive.)
-- Adoption of Tekel privatization plan. (The planned
restructuring of state alcohol and tobacco giant TEKEL goes
beyond the mandate of the Privatization Administration, since
it requires lay-offs and ending tobacco price supports. Thus
the plan must be submitted to the new GOT.)

5. (SBU) The most important concern under the IMF program
remains the primary budget surplus, see septel.

Central Bank Staff Optimistic About 2003,
If AK Government Keeps Budget Tight

6. (SBU) Central Bank Markets DG Akil Ozcay told us November
8 that he is optimistic about 2003, provided the new GOT
keeps a tight fiscal policy. "We'll tell the new government
that the 6.5 percent primary surplus target is not the IMF
target, it's the Treasury's and Central Bank's target. It's
the anchor of our reform program, th the key to bringing down
real interest rates and reducing the government's borrowing
costs in 2003."

7. (SBU) On inflation trends, Ozcay said the latest
expectations survey showed a year-end 2002 expectation of 31
percent CPI growth - well under the year-end 35 percent
target. However, the year-end 2003 expectation was currently
24 percent - above the program target of 20 percent. Ozcay
is confident that this expectation could be lowered by
maintaining tight monetary and fiscal policies. He recalled
that no one expected at the beginning of 2002 that the CPI
target of 35 percent would be met. Ozcay noted the market
pressures for the Central Bank to lower its overnight rates,
now that inflation was under program targets. He said the
Central Bank was hesitant to join the "exuberance bandwagon"
and thus might wait a bit before cutting rates.

8. (SBU) Other economic indicators were also good, per
Ozcay. On the balance of payments, current account numbers
were stronger than projected - the Central Bank now sees a
year-end current account deficit of about $500 million
(versus the projected $1.5 billion). He attributed this
performance both to over-performing export growth, despite
the real lira appreciation and to the record year for tourism
- expected revenue of just under $10 billion. He expects net
capital inflows in 2003, pointing to this week's successful
Eurobond offering.


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