Cablegate: Imf Concludes Staff Mission: Still Much Work to Do

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

301524Z May 03





E.O. 12958: N/A


1. (SBU) Summary: IMF Mission Director told us May 30 that,
while the staff mission had gone somewhat better than he
expected, Turkish authorities still had much work to do in
the next 10-14 days if they hoped to see a Fund board review
by end-June. The government needs to adopt new fiscal
measures to address worrisome underlying budget trends. On
the structural side, the GOT is behind schedule, and has
promised to try to accelerate Parliamentary action on key
legislation. Most important is rapid passage of legislation
governing social security institutions. Turkish authorities
have promised to tailor public procurement law amendments and
the proposed rescheduling of social security arrears to Fund
address concerns; Kakhonen is skeptical but is taking a
wait-and-see approach. End Summary.

2. (SBU) IMF Mission Director Juha Kakhonen provided us with
an outbrief this morning on the just-concluded staff mission.
He said the mission had gone somewhat better than he
expected, but added that his expectations had been low. The
bottom line, he said, was that, if the GOT makes a strong
effort in the next 1-2 weeks, it might be possible to
schedule the Fifth Review before the end of June.

Need for More Fiscal Measures
3. (SBU) The Fund still does not have final fiscal data for
the first four months, but believes Turkey probably met the
primary surplus targets. However, this success disguises
worrisome underlying trends. The Central Government
underperformed, due to weaker-than-projected revenues, even
counting the higher-than-expected revenues from the tax
amnesty program. The explanation, per Fund staff, lies in
part in the negative impact of the tax amnesty, which they
believe has weakened overall compliance while generating an
increase in certain tax refunds (which are paid out
immediately, while payments of arrears are made over time).
Other factors include below-target social security
collections, which Kakhonen again blamed on expectations of
an amnesty, and the government's failure to implement price
increases on items such as electricity.

4. (SBU) The State Economic Enterprises (SEEs)
overperformed, but this overperformance is not sustainable,
per Fund staff. Kakhonen explained that SEEs had delayed
expenditures in the first quarter because of the tight
interim budget and problems caused by the procurement law.
However, he expects the SEEs to "catch up" during the
remainder of the year, and thus not to overperform in budget

5. (SBU) To rectify the situation, the Fund is insisting
that the government adopt new fiscal measures in the next
7-10 days. GOT bureaucrats already have identified measures
that would fill most of the expected gap, but the politicians
still have to approve them. According to Kakhonen, State
Minister Babacan briefed the cabinet on the budget situation
on May 28. The Ministers, who have been hearing nothing but
positive reports (especially by Finance Minister Unakitan)
about how the tax amnesty is providing excess revenue, were
apparently shocked to learn the true situation. Kakhonen
hopes that shock will spur them into agreeing to additional
measures rapidly.

6. (SBU) Kakhonen commented on three other
amnesties/reschedulings that have been in the news:

-- electricity arrears: The GOT already approved an amnesty
that violates the LOI. GOT officials offered the weak excuse
that the state-owned electricity distribution company (TEDAS)
had decided, on its own, to implement the amnesty. To
compensate for this move, the Fund has insisted that the
draft LOI include a provision committing the GOT to cut off
electricity supplies to any customer who develops new arrears;

-- farm debt to Ziraat Bank: Fund staff does not have a
problem with the state bank's decision to reschedule certain
agricultural loans because the bank had already determined
that the loans in question were non-performing and had
written them down to zero;

-- social security arrears: This is the big one. Under
intense Fund pressure, GOT authorities have agreed not to
proceed with a broad amnesty, but instead to insert a clause
in new social security legislation that would allow
rescheduling of certain arrears. Per Kakhonen, the Fund
could accept some type of rescheduling provision, as long as
it was drafted in consultation with Fund staff and authorized
reschedulings only for those unable to pay (rather than
indiscriminately). However, the first draft of the
legislation the GOT presented to the Fund looked like a
general amnesty, so Fund staff is awaiting a revised version.

More to Do on Structural Side
7. (SBU) On the structural side, there have been numerous
delays. When the Mission arrived, the GOT had completed only
one of the eight structural benchmarks for April-May (having
to do with Central Bank internal auditing). Kakhonen's sense
is that the authorities, having completed the Fourth Review
and seeing market sentiment improve significantly, relaxed a
bit. During the mission, the leadership woke up and realized
they needed to move on a series of legislative measures. As
a result, they have promised to try to accelerate
Parliamentary approval of key legislation, including new laws
governing the social security institutions and bankruptcy.
Even so, Kakhonen expects most legislation will be delayed
for at least one month (though Parliament may approve the new
foreign investment law more quickly).

8. (SBU) The government is also behind on some end-June
targets, including laying off redundant workers at SEEs and
passing the Public Financial Management Reform law. Although
the GOT technically does not have to meet these targets if
the board review takes place before June 30, Fund staff will
have to be able to say the reforms are on track. If the
review is delayed, of course, these and other end-June
targets come fully into play.

9. (SBU) Kakhonen addressed three other "problem areas":

-- public procurement law: although the government is still
planning to amend this law, Kakhonen believes things are now
moving in a better direction. Fund staff accept the need for
some revisions, particularly regarding the treatment of some
SEEs, such as utility companies. Also, the GOT procurement
agency -- which had been complaining about being ignored --
now tells the Fund that it is fully involved in drafting the
amendments. The Fund will continue to watch this closely to
ensure the GOT does not weaken the law;

-- law on independent regulatory agencies: Fund staff is
worried that this legislation might weaken the independent
agencies. So far, per Kakhonen, GOT officials have been
"telling us what we want to hear." Fund staff have not seen
a draft, and are waiting for the GOT to fill in some gaps in
the draft LOI on this issue;

-- Turk Telekom privatization: The "plan" the GOT approved
in April was insufficient. In the past few days, the World
Bank and GOT have clarified what is needed to move the
process forward, though completion of an acceptable plan
probably will not occur before the Fall.

General Comments
10. (SBU) Kakhonen said the key is for the GOT to adopt new
fiscal measures and pass the law on social security
institutions in the next two weeks, while getting any social
security rescheduling "right." He noted that State Minister
Babacan, while still having limited influence, has been
playing a positive role. In addition to telling the cabinet
the harsh truth about the fiscal situation, he urged the
Prime Minister and Finance Minister to stop pressuring the
Central Bank to cut interest rates. (Note: When Kakhonen
expressed concern on this point to Finance Minister Unakitan,
the Minister picked up the phone and called CB Governor
Serdengecti to apologize, per Kakhonen. End note)

11. (SBU) Kakhonen said that the budget financing situation
looked better now than at the time of the Fourth Review, as
Treasury has been able to roll over debt well and t-bill
yields have fallen. Still, he expressed little optimism that
Turkey would be able to do more than muddle through in the
coming months.

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