Cablegate: Fifth Review Delay Raises New Challenges

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

180429Z Jun 03





E.O. 12958: N/A

REF: A. A. ANKARA 3693
B. B. ANKARA 3815

Sensitive but Unclassified. Not for Internet distribution.

1. (SBU) Summary: IMF Resident Representative Odd Per Brekk
indicated to us today that, even with speedy conclusion of
the GOT's letter of intent, the IMF's fifth review "cannot"
be completed by the end of June, bringing into full play
tough end-of-June performance targets. Benign markets
stemming largely from external factors, he suggested, have
made the government complacent. For the fifth review, Breck
highlighted two key outstanding issues-- government agreement
to additional fiscal measures to close the one-half percent
of GNP shortfall the Fund sees in the primary surplus, and
agreement on technical measures to implement a compromise
"case-by-case" approach to the government's desired social
security amnesty. State Minister Babacan will chair a
meeting at Treasury today to review the government's
commitments under the fifth review. Brekk stressed that the
Fund has not discussed the idea of merging the fifth and
sixth reviews, and that he would argue strongly against such
a course, as it would essentially reward "bad" behavior.
While the Treasury's initial auctions this week have been
successful, Brekk characterized the Treasury's current cash
position as "not comfortable," and suggested it would only
"scrape by" in tomorrow's large bond redemption. End Summary.

2. (SBU) Oustanding Issues: Brekk noted that internal IMF
timelines virtually preclude completion of an IMF board
meeting on Turkey before the end of June, even if all
outstanding issues were resolved quickly. Several key issues
remain outstanding, notably agreement on additional fiscal
measures to achieve the targeted 6.5 percent primary surplus,
and completion of "technical work" to implement agreement on
a "case-by-case" approach to a social security amnesty, in
place of the general amnesty that the government had earlier
proposed and at which the Fund had balked. (Brekk noted that
he believes Erdogan, at heart, still wants the latter.)
Brekk noted that a range of measures to reduce the primary
surplus shortfall (which the Fund estimates at 0.5 percent of
GNP) have been agreed, including indexing certain taxes,
increasing petroleum excise taxes, raising alcohol and
tobacco prices, and allocating some special revenues to the
general budget (though a final figure for the latter has not
been agreed). Brekk noted that additional measures are
required, and the IMF does not believe the government's
proposal to maintain a freeze on non-essential spending is
sufficient. However, the GOT at the political level is
balking at some suggested measures, such as raising
electricity prices.

3. (SBU) Tight finances: Brekk noted that the overall
negative trend in the budget is essentially revenue driven,
as the government is consistently falling short on its
revenue targets (mainly due to weakness in tax and social
security contribution collections), and only making up the
shortfall by squeezing capital expenditures. State Minister
Babacan will chair a Treasury meeting on these and other
issues related to the fifth review this evening (June 17),
before departing for a conference in London on June 18.

4. (SBU) Tough line: Brekk stressed that the IMF will
maintain its tough approach on budget issues, as even with
additional revenues from the government's tax amnesty, there
are "no excess revenues." He reiterated that this has been a
hard message to sell in the government, as few ministers have
understood the country's true financial situation, and
instead have been living in a false "psychology of excess
revenue." Brekk noted that the Treasury's cash position is
very tight. He predicted that it would "scrape by" in
tomorrow's large (TL 6.4 quadrillion auction), but would not
have much to spare. One reason for the lack of cash, despite
good rollover rates, is the fact that the Treasury had to pay
out some USD 1.4 billion in April that had been collected in
enforced savings accounts.

5. (SBU) June Targets: Brekk conceded that any delay into
July will automatically bring into full play tough
end-of-June financial targets. Given that data will not be
available until August, however, the government will have to
seek a "waiver of applicability," requiring it to make an
effective case that the data will show it met the targets.
"Strong measures will help," he emphasized. Brekk added that
to date the Fund has given no consideration to the idea of
merging the fifth and sixth reviews, and that he would argue
strongly against the idea. Any such proposal, he argued,
would "reward bad behavior," and move the IMF away from its
policy of regular bimonthly and quarterly reviews to keep the
pressure on the Turkish government to proceed with program

6. (SBU) Quiet Markets: Meanwhile, Turkish markets remained
flat on June 17, with the stock exchange rising from Monday's
close of 11,036 to 11,169, while the lira strengthened
slightly to 1.414 million (from 1.417). Brekk noted that he
had seen some weakening in markets earlier in the day, based
on concern about Prime Minister Erdogan's apparent flirtation
with the "Malaysia model" on his Asian trip, but "modestly
favorable" (in one brokerage's estimation) budget results for
May brought some relief. Those May figures included a
central government primary surplus of USD 1.7 billion, for a
cumulative January-May surplus of USD 5.9 billion. Real
non-interest fiscal expenditures rose 2.9 percent, while real
revenues rose 9 percent.

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