Cablegate: Imf Mission Begins Talks Amid Growing Market Angst

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


1. (SBU) Summary: An IMF team began talks in Ankara this
afternoon amid growing market nervousness over U.S.-Turkish
relations and continued delays in meeting the conditions for
the Fifth Review under the IMF-backed program. Treasury U/S
Canakci told us the government still is shooting for an IMF
Board Review by the end of the month, but he admitted the GOT
still has much work to do to address the fiscal gap and pass
legislation to restructure Turkey's various social security
funds. Canakci also confirmed that the government will
shortly replace all three of his deputies; he insisted that
the replacements would reassure the markets. End Summary.

2. (SBU) An IMF mission began talks with GOT officials this
afternoon on the remaining steps to be taken for the Fifth
Review under the IMF-backed economic reform program. The
talks began as markets continued to slide, with bond yields
on the benchmark t-bill rising to 56 percent and the lira
weakening to TL 1.42 million/dollar. Market analysts
attributed the decline to growing nervousness over
U.S.-Turkish relations (in the wake of the July 4 U.S.
detention of Turkish special forces personnel in Northern
Iraq), delays in completion of the Fifth Review, and press
reports that all three Treasury Deputy Undersecretaries would
be sacked.

3. (SBU) Treasury U/S Canakci told us this morning that the
GOT still hopes to complete the review this month. He noted
that Parliament had already approved legislation
restructuring the state unemployoment agency (Is-Kur), and
that the Budget Committee is now debating legislation to
restructure the Bag-Kur and SSK social security funds (press
reports indicate the Commitee approved the SSK legislation
late today). Canakci said the government had given up on the
idea of making these bills "fundamental laws," which would
have put them on a legislative fast-track; however, the
opposition CHP had agreed to work with the government to
accelerate passage of both bills. The government also has
been unable to reach agreement with the IMF on language about
rescheduling social security arrears. Despite the GOT's best
efforts, Fund staff continue to worry that the government has
in mind a general amnesty or rescheduling, which would
violate the terms of the last LOI. As a result, the
government has left rescheduling language out of the
legislation. (Note: Canakci confirmed that expectations of
a social security amnesty has caused a decline in social
security premium payments, especially to the Bag-Kur fund.)

4. (SBU) Canakci admitted that the government still had not
agreed on all of the measures needed to close the fiscal gap
that the previous IMF mission had identified. That gap, he
said, was equal to 0.4 percent of GNP or about TL 1.05
quadrillion ($750 million at today's exchange rate). The
cabinet is now considering a decree to increase the Special
Transaction Tax and an educational levy; if approved, this
would reduce the gap by approximately TL 250 trillion.
Treasury plans to cover the remaining TL 750 trillion gap via
a combination of electricity price increases (TL 500
trillion) and other measures yet to be identified; however,
the Energy Minister continues to oppose electricity price
increases. In addition, the outcome of ongoing wage/salary
negotiatons with civil servants could add to the fiscal gap,
though Canakci insisted the government would remain tough and
limit the fiscal damage. (Note: IMF ResRep has previously
told us the fiscal gap was slightly larger, at 0.5 percent of
GNP, and also has pointed out that it may be revised,
depending on the current mission's review of budget results
through end-June.)

5. (SBU) On other structural conditions, Canakci
acknowledged that the GOT was behind schedule on eliminating
redundant employees in state enterprises. It has eliminated
7400 redundant positions, against an end-June target of 9900.
He predicted that this process would accelerate as soon as
the ongoing civil service wage negotiations conclude. On
Turk Telekom, he echoed IMF ResRep in saying that the Fund
had agreed that the GOT would work with the World Bank to
name a privatization coordinator (already done) and put in
place a full privatization strategy by Fall.

6. (SBU) Canakci also confirmed press reports that all three
of his deputies would be replaced shortly. In fact, the
document authorizing their removal is now with the Prime
Minister for approval. Canakci said the government had not
yet decided on replacements, but he insisted they would be
well-qualified people who would inspire confidence in the
markets. (Note: IMF ResRep told us last night that he
understood one of the replacements would be a highly-regarded
official from the State Planning Organization.)

7. (SBU) Finally, Canakci expressed optimism about economic
trends, noting that growth was trending up while inflation
was declining. If present trends continue, he said, Turkey
could end the year with growth above five percent, inflation
close to the 20 percent annual target, and a net public
debt/GNP ratio at 74-75 percent, below the 77.2 percent
year-end target. We responded that such a positive scenario
was indeed possible, and suggested that vigorous, consistent
implementation of the economic reform program could help
ensure it. We noted that much of the projected decline in
the debt/GNP ratio depended on the continued strength of the
lira, and that real interest rates remained very high because
investors remained unsure of the government's commitment to
reform. Rapid movement by the government now to complete the
Fifth Review and otherwise move the reform process forward
would be of great benefit in the Fall, when investors will
try to determine whether and how Turkey will meet its large
2004 debt obligations.

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