Cablegate: Imf Readout

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

151508Z May 03





E.O. 12958: N/A

Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: IMF resident rep in Ankara briefed us May
13 on the status of the Fifth Review. Given the number of
unmet conditions at this point, the earliest date for the
Fifth Review Board meeting is likely to be early July. While
the GOT may meet its primary surplus criterion, there are
underlying fiscal weaknesses, exacerbated by plans for more
amnesties (especially an amnesty on employers payments of
social security premiums). On structural reforms, the
parliament passed the direct tax reform law, but there are
delays on eliminating public sector redundancies. The Turk
Telekom privatization plan adopted by the Counci of Ministers
doesn't pass Fund or Bank muster. Resrep was fairly
optimistic about growth (meeting the 5 percent target should
be achievable) and guarded on inflation (too early to revise
the 20 percent CPI target). But the Fifth Review could well
be difficult, given the amnesty talk by the GOT. End

2. (SBU) In a May 13 meeting, IMF resrep briefed us on the
status of the Fifth Review. The staff mission will begin on
May 21 and end by May 31 (since outgoing Turkish Mission
Chief Kahkonen takes up a new job on June 2.) Resrep
believes Fund staff will not be in a position to recommend a
Board date by the end of this Mission, given the large number
of outstanding conditions detailed below.

3. (SBU) Resrep was generally optimistic about Turkey's
macroeconomic performance. On growth, even if Turkey only
stays at the level of fourth quarter 2002 GNP, it will obtain
about 2 percent growth over 2003; preliminary indications
show growth above the fourth quarter baseline. Growth
remains uneven, with export industries performing well, and
many domestically oriented companies still stagnant.
Reaching the 20 percent year-end CPI inflation target will be
challenging, given 10 percent cumulative inflation in thie
first four months. This means averaging about one percent
CPI inflation per month for th rest of the year. But Fund
staff are unlikely to recommend revising the target at this

Quantitative Targets - Focus on The Budget

4. (SBU) Resrep said Turkey had met all monetary targets.
The debt ceiling numbers were not yet in, but he believes
those will be met as well. The primary surplus performance
criterion is the big question, and the final numbers
(including state economic enterprise balances) will not be in
until mid-June. Resrep opined that it appeared from
preliminary data that the GOT would met the primary surplus
condition, owing to better-than-projected revenue in April
from the tax amnesty. However, there was continuing
weaknesses in other areas, particularly in the social
security funds. Employers' premium payments have dropped
off considerably (because of talk of another amnesty on
arrearages), forcing greater transfers from the budget to
keep the funds solvent. If the GOT met the end April primary
surplus condition through one-off measurse like the tax
amnesty and its partial spending freeze, with ongoing
weaknesses, then the budgetary balances looking forward would
be problematic, per Resrep.

5. (SBU) The Fund is unhappy with the GOT's proposed
amnesties/reschedulings of social security and electricity
arrearages, which conflict with its commitment, in the Letter
of Intent, not to engage in general reschedulings of public
sector receivables. ResRep said Deputy Managing Director
Krueger had been tough on this issue during her recent visit,
warning that it would complicate the Fifth Review, but GOT
officials had insisted they would go ahead anyway. State
Planning Organization Deputy U/S Birol Aydemir had explained
to Fund staff that the social security amnesty was not a
general rescheduling but rather a specific one. ResRep said
he has already received a copy of proposed legislation on
social security arrears.

6. (SBU) Resrep acknowledged that revenues from Turkey's
"tax peace" would be higher than the Fund had estimated, as
payments totaling TL 800 trillion had already been made in
April. Nonetheless, he predicted that, because local tax
officials had taken a heavy handed approach, many of those
who had signed up would drop out during the year. He
confirmed what we had been told earlier by Finance Ministry
U/S - that the majority of any additional revnues, beyond
the amount projected in the budget, would be used to pay down
domestic debt. In addition, some TL 310 trillion would be
spent on relief for farmers, specifically a diesel fuel
subsidy. Resrep noted two problems with this subsidy.
First, the World Bank wanted aid to farmers to be channeled
into the currentl under-funded Direct Income Support program,
which is more efficient; the GOT was characterizing the
diesel fuel subsidy as part of this program when it clearly
wasn't. Second, this subsidy from the IMF point of view was
an ad hoc spending measure outside the budget and undermined
the budget prioritization process.

Structural Reforms

7. (SBU) Resrep gave a status report, showing mixed results,
on the major structural conditions (both performance criteria
and benchmarks) in the Fifth Review.

Public Sector Reforms:

-- Parliamentary passage of the direct tax reform law was
completed April 9.

-- Parliamentary passage by end June of the Public Financial
Management Law, which will make the budget much more
transparent (it will include for instance the military
procurement spending): the legislation has been drafted and
is circulating among the Council of MInister prior to
submission to parliament.

-- Parliamentary passage of Bankruptcy law amendments by end
May: some delay, but law is in parliament.

-- Parliamentary passage of amendments to the State Economic
Enterprise governance laws, in June, which is intended to
make the SEEs more autonomous from political control: draft
now in parliament.

-- Reduce 9,900 redundant public sector jobs by end June:
only about 2,000 jobs eliminated thus far. The GOT has
delegated the downsizing to state enterprise managers, but PM
Erdogan will need to exert continued pressure to achieve the
condition, per Resrep.

Banking Sector Reforms:

-- Announce sale by end June of first tranche of $250
million in assets from the intervened banks: some resistance
in BRSA until the new bankruptcy law is in place.

-- Prepare legislation by end June to strengthen BRSA's
ability to intervene failed banks (by limiting the period of
legal appeals): BRSA has prepared a draft.

-- Develop an action plan by end May to reduce financial
intermediation costs: some resistance from the Finance
Ministry to reducing transaction taxes.

Private Sector Enhancements:

-- Council of MInisters approval of Turk Telekom
privatization plan by end April: the plan adopted doesn't
meet World Bank or IMF standards.

-- Parliamentary passage of new Foreign Direct Investment law
by end-April: the law is in parliament.

8. (SBU) ResRep said AK plans to amend the public
procurement law were problematic. The amendments are being
done at AK party headquarters, outside the GOT. At a
minimum, the GOT needs to consult with the World Bank and
Fund before going forward with the amendments. There are, he
admitted, technical problems with implementing some
provisions of the Public Procurement Law, and the IFIs want
to help the GOT establish standards that conform with EU
practice. The bottom line, however, is that AK has to
coordinate with the IFIs, which it is not doing, he

New Treasury Undersecretary Reaffirms Commitment
--------------------------------------------- ---

9. (SBU) Treasury U/S Ibrahim Canakci told us May 13 that
Prime Minister Erdogan had made a strong commitment to IMF
Deputy Managing Director Krueger to implement the reform
program fully. Erdogan, briefed by Krueger on the welter of
pending conditions in the Fifth Review, had instructed State
Minister Babacan and Canakci to make it happen. Canakci said
he thought Turkey was in good shape on its macro targets and
was making good progress on most structural reforms, though
he acknowledged they had identified some problem areas.

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