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Cablegate: Imf Krueger and World Bank Linn Deliver Tough

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. (SBU) Summary: IMF Deputy Managing Director Krueger
delivered a tough message to Prime Minister Gul and the rest
of the GOT January 16, stressing that the government needed
to implement the economic reform program in light of its
"dangerous" financial situation. She and World Bank VP Linn,
who told Ambassador January 17 that he would deliver an
equally tough message, warned the Turks that any third party
assistance (i.e., from the U.S.) would only offset the impact
of an Iraq operation, and could not substitute for sound
policy. Gul and others told Krueger that, while there had
been some problems, they were now focused on the need to
implement the program, and would be meeting January 18 to
consider additional fiscal measures to meet the 6.5 percent
primary surplus target. However, proposed GOT amendments to
the Public Procurement Law and the GOT's "tax amnesty" remain
serious problems in the eyes of the Fund and Bank. Fund
staff will review the situation again next week, based on the
expected new fiscal measures and hoped-for draft LOI.
Meanwhile, Embassy will continue to push the reform message
with GOT officials and parliamentarians (septel). End

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Krueger Delivers Tough Message

2. (SBU) IMF Deputy Managing Director Anne Krueger started
with two meetings in Istanbul January 15: with TUSIAD
(Turkish Industrialists and Businessmen's Association)
Chairman Ozilhan, and Banks Association President Ozince.
Krueger's main point in those meetings - that any extra
financing that Turkey may receive in the event of an Iraq
operation is no substitute for good economic policy - was not
conveyed accurately to the Turkish press. Ozilhan told the
press that the IMF was contemplating additional financing.
The IMF promptly issued press statements both in Ankara and
Washington denying that she said this. (Comment: In
meantime, the Ozilhan statement temporarily buoyed local
financial markets.)

3. (SBU) In Ankara, Krueger met both senior government civil
servants (Treasury Undersecretary Oztrak, Banking Board
Chairman Akcakoca, Central Bank Governor Serdengecti), and AK
Cabinet members (PM Gul, Deputy PM Sener, State Minister
Babacan, Finance Minister Unakitan). IMF resrep said her
message on sticking with reforms got increasingly tough
throughout the day, and was especially tough by the time she
met with PM Gul in the evening, which was one of the most
substantive meetings.

4. (SBU) Krueger told Gul the IMF is concerned with the lack
of focus on economic policy, and that the financial situation
was "dangerous" given the GOT's precarious cash position.
This is no time to be complacent on reforms, she continued,
and financing from other sources (referring to potential U.S.
assistance in the event of Iraq) would help address
Iraq-related losses but would be no substitute for good
policy. She said several issues need to be resolved before
the IMF can be completed, mentioning the fiscal measures to
reach a 6.5 percent of GNP primary surplus, agreement on the
Pamuk and Yapi Kredi Banks, and implementation of the Public
Procurement Law.

5. (SBU) Gul replied, per Resrep, that he had a lot of
issues, including Iraq, but he is now focused on economic
policy. The Higher Planning Council (Note: a subset of the
full Cabinet) will meet on January 18 to consider a new set
of fiscal saving measures. Gul said he is talking with the
Chairman of the Supreme Administrative Court (Danistay) to
get early court resolution of the Pamuk Bank case (though we
understand Danistay will not be able to hear the case
quickly). Gul was less clear on the Public Procurement Law,
noting only that the law was in effect as of January 1, as
scheduled. (Comment: The problem is that the law is not
being implemented, and AK has proposed legislative amendments
now in parliamentary committee to limit the law.)

6. (SBU) In response to Gul's question on what was needed to
bring the IMF Mission back to Turkey, Krueger did not give a
detailed response, per IMF resrep ("her role is not to
negotiate," he said, "but they know our concerns.") But the
brief IMF press statement released after her meetings on
January 16 concluded with the sentence: "As soon as the
government has clarified its concrete policy plans further,
we stand ready to send an IMF mission to Ankara to discuss
the 2003 budget another issues key to the program." This
sentence was the local press lead on January 17 (and we
understand caused some concern among both Turkish officials
and emerging market bond traders in London).

7. (SBU) Krueger's other interlocutors "read from the same
script" and kept to generalities. Deputy PM Sener
highlighted the strong privatization program announced
January 15. (IMF is checking whether the TEKEL privatization
plan has been adopted by the High Privatization Council,
which would meet a Fourth Review prior action.) Asked about
the "Tax Peace" or amnesty law passed by parliament January
17, resrep noted that the version as passed contained some
amendments proposed by IMF staff. For instance, the cut-off
date for tax arrearages subject to the amnesty was pushed
back to 2001 (the original draft included arrearages
accumulated as recently as October 2002, right before the
elections.) However, any tax amnesty needs to include
measures to strengthen tax administration, in order to send a
credible signal of resolve on tax collection. The IMF staff
would have to verify that the right amendments were included;
if so, the law would not be a "show stopper" for the Fourth

8. (SBU) Looking forward, Krueger will meet with AK Chairman
Erdogan in Davos to reiterate her tough message. Following
the January 18 Higher Planning Council meeting, at which
fiscal measures are expected to be adopted, the IMF may send
out a team of technical fiscal experts to work with the GOT
on the budget. The full 2003 budget is scheduled to be
submitted to the Higher Planning Council on January 28, and
be passed by parliament on February 5, before the Muslim
holiday. Resrep believes the full IMF Mission may well be
delayed until after the February 11-14 holiday.

World Bank's Linn Equally Tough

9. (SBU) In a breakfast meeting with the Ambassador January
17, World Bank Vice President Johannes Linn said he planned
to deliver a similarly tough message in his meetings,
including with PM Gul. For the World Bank, adoption of the
Public Procurement Law amendments is a show stopper (i.e., it
would result in suspending some $900 million in public sector
adjustment loans scheduled for 2003).

10. (SBU) Linn was pessimistic about the GOT's fiscal
sustainability, saying that even a 6.5 percent of GNP primary
surplus may not be sufficient for 2003. Like the IMF's
Krueger, he planned to deliver a tough message on the
"Turkish perception of moral hazard in the potential U.S.
assistance package." The Ambassador assured Linn that the
U.S. has many times told the GOT of the economic reform
conditionality in any potential U.S. assistance. The Prime
Minister and others know that is our position.

11. (SBU) Linn said the Bank will remind the Turks of World
Bank anti-poverty programs, which are an AK priority. First,
the World Bank assists the GOT's Social Solidarity Fund,
which provides winter fuel, school supplies, and food to the
poorest segment of Turkish society (in 2002, this was only
funded at TL 875 trillion - about $500 million). Second, the
Bank is supporting the Direct Income Support program for
farmers, currently funded at about 1 percent of GNP. The
Bank says Turkish Treasury deliberately delays these
payments, in order to harness resources for other payment
needs, and the World Bank wants to improve delivery of this
key antipoverty measure.

12. (SBU) Linn concluded that World Bank assistance on this
and other GOT priorities is endangered by the Public
Procurement Law amendments, fiscal spending measures and
other concerns.

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