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Cablegate: Turkey's Economy: Update On Reform Measures

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

UNCLAS SECTION 01 OF 02 ANKARA 000376

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD/OMA AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S ECONOMY: UPDATE ON REFORM MEASURES

REF: ANKARA 343


Sensitive but Unclassified. Not for internet distribution.


1. (SBU) Summary: A GOT team of experts is drafting a letter
of intent for the 2003 IMF program. IMF resrep hopes to
receive the draft by this weekend, paving the way for an IMF
mission as early as next week. The IMF focus remains the
2003 budget. While the GOT has formally committed to a 6.5
percent of GNP primary surplus, IMF resrep calculates a 3.5
percent of GNP shortfall towards that target, after figuring
in the fiscal saving measures announced last week. The GOT's
LOI drafting team is debating a second set of fiscal saving
measures, but meanwhile State Minister Babacan appears to
have announced a new spending measure - refinancing of Ziraat
Bank loans to farmers. On structural reforms, progress is
mixed: a good privatization program; very bad Public
Procurement Law amendments, if adopted; and no forward
movement on banking sector reform. End Summary.


Timing and Content of Letter of Intent
--------------------------------------


2. (SBU) A GOT team, led by Deputy Undersecretary of
Treasury Aydin Karaoz, is drafting a letter of intent for the
IMF. One participant, Central Bank deputy director of
research Domac, told us the team is too large to come to
agreement on many issues. Furthermore, per Domac, there is
friction between Treasury staff (usually have the lead in
relations with the IMF), and State Planning experts (who are
closer to the AK Party). IMF resrep told us he was expecting
the draft LOI by mid-week.


3. (SBU) Arrival of the IMF Mission tentatively slated for
second half of January is conditioned on the contents of this
LOI, and some amount of progress on outstanding structural
reform conditions under the IMF Fourth Review. Resrep said
the IMF staff have four "non-negotiable" elements: GOT and
Central Bank commitment to a floating exchange rate (as
"clean" as the current floating regime); a primary budget
surplus of 6.5 percent of GNP; GOT commitment to the
independence of the BRSA (so that it can take urgent clean-up
measures with insolvent and undercapitalized banks); and GOT
commitment to Central Bank independence.


Fiscal Policy - Talk of New Savings Measures,
But Also New Spending Announced
--------------------------------------------


4. (SBU) The linchpin of the IMF program remains the 6.5
percent of GNP primary budget surplus. IMF resrep told us
that, after the fiscal saving measures announced by PM Gul
last week, Turkey still faces a 3.5 percent of GNP shortfall
towards this 2003 target, or roughly $6 billion. (The IMF
assesses the real effect of the measures announced last week
as 1.0 percent of GNP at best, though at face value they
amounted to 1.7 percent. Resrep is skeptical that the "tax
peace" law will result in any additional tax collection,
noting that some payment of tax arrearages was already
included in the revenue baseline assumptions.)


5. (SBU) IMF Mission Chief Kahkonen has sent a letter to
Finance Minister Unakitan and State Minister in charge of
Treasury Babacan warning that the "tax peace" law currently
in parliament is "an unacceptable initiative," per the IMF
resrep. This tax amnesty is too generous (establishes a very
recent cut-off date for full tax collection of October 2002)
and is not accompanied by measures to strengthen tax
administration (in fact the AK government canceled such a
measure, the "Financial Year Zero" law). The "tax peace" law
also contravenes a GOT commitment in prior LOIs not to adopt
any tax amnesties. The law is still in parliamentary
committee.


6. (SBU) Finance Ministry budget deputy director general
Ahmet Kesik told us January 15 that the GOT team working on
the LOI is considering a second set of fiscal saving
measures. One large expenditure cut under consideration
would expand the portion of civil servant wages subject to
social security withholding. Such a move would have the
effect of reducing civil servants net wages, and thus faces
resistance.
7. (U) On the other hand, it appears that State Minister
Babacan announced a new spending measure on January 14. In an
interview with Bloomberg, Babacan announced that state-owned
Ziraat Bank would reschedule farmers' loans. Comment: If
the GOT has taken this decision, then it will, under the
banking law amendments of 2001, have to budget the cost of
writing down Ziraat loans - this will add to the 3.5 percent
of GNP fiscal shortfall for 2003. End Comment.


Structural Reforms - Mixed Picture
----------------------------------


8. (SBU) While there has been some forward movement on
structural reforms (privatization), the GOT is attempting to
backslide in one area (Public Procurement Law) and is not
moving forward in another (banking).


9. (U) Privatization: The ambitious program announced
January 13 was well received in the local press. The
adoption of a detailed privatization plan for TEKEL should
meet a prior action under the IMF Fourth Review (reftel).


10. (SBU) Public Procurement Law: The AK Party-proposed
amendments to the Public Procurement Law would have the
effect of watering down a key anti-corruption achievement of
the 2002 reform program. IMF resrep told us the 40 different
amendments under consideration in parliament would
collectively reduce the scope of the new law to less than one
third of GOT procurement.


11. (SBU) Others are lobbying against the Public Procurement
amendments. The World Bank sent a letter to State Minister
Babacan and Finance Minister Unakitan. According to WB
economist Jim Parks, WB Vice President Linn has a talking
point for his upcoming meeting with PM Gul that adoption of
these amendments would result in suspension of all World Bank
public sector lending to Turkey. (There are two tranches,
together worth $900 million, of WB lending scheduled for
2003). The EU Commission has written a letter to Treasury
U/S Oztrak protesting the proposed changes, and EU embassies
are attempting to organize a joint demarche against them as
well.


12. (SBU) Despite public and private pressures not to
proceed with the amendments, there are indications that AK
intends to push them through. Minister for Public Works Zeki
Ergezen told the press January 15 that "the Public
Procurement Law amendments were temporarily halted (in
committee) to make technical corrections, not because of
criticism." Erdal Saglam, a Hurriyet columnist and Ankara
insider, explained to us his view of the pressure within AKP
to make these changes: "The AK leadership wants to help a
group of businessmen in the same way that former President
Ozal enriched a whole class of businessmen - through
government contracts."


13. (SBU) Banking Reform: A key condition under the IMF
Fourth Review is resolution of the ownership of two large
banks - Pamuk and Yapi Kredi. Pamukbank was declared
insolvent in June, and taken over by the BRSA; its sister
bank Yapi Kredi is seriously undercapitalized but not yet
insolvent.


14. (SBU) The Supreme Administrative Court (Danistay)
decision to return Pamukbank to its owners was formally given
to the BRSA on January 19, giving BRSA 30 days to return the
bank to its owner Cukurova Holding. We understand from BRSA
sources (Deputy Chairman Canakci) that Cukurova Holding is
holding out for a "sweet deal" in its talks with BRSA; it
wants return of the bank with the $2.5 billion in GOT
securities put in by the BRSA. Comment: The BRSA must by
court order return Pamuk, but it cannot do so with the public
funds invested. Thus the BRSA will likely have to take over
Pamuk once again - but will be reluctant to do so a second
time without strong political support.


15. (SBU) To date, AK support for BRSA has been lacking.
When challenged about BRSA actions on Pamuk and Yapi Kredi by
an AK MP in parliament recently, Deputy PM Sener read out a
statement prepared by the BRSA defending their actions. But
when this statement was reported in the press January 12,
Sener told the press he was just reading a prepared
statement, he refused to endorse the BRSA.
PEARSON

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