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Cablegate: Imf and Got Close to Agreement On Fifth Review

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

UNCLAS SECTION 01 OF 02 ANKARA 004480

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD AND EUR/SE
TREASURY FOR OASIA - LOEVINGER, MILLS AND LEICHTER
NSC FOR BRYZA


E.O. 12958: N/A
TAGS: EFIN EAID PREL PGOV TU
SUBJECT: IMF AND GOT CLOSE TO AGREEMENT ON FIFTH REVIEW

REF: ANKARA 4316


1. (SBU) Summary: IMF and Turkish officials are close to an
agreement that would pave the way for the Fifth Review to
proceed, and hope to announce agreement by Friday, July 18.
Discussions this week have focused on closing the estimated
$1.8 billion fiscal gap. Although there has been some talk
here that the Fund staff has been "lenient" on the fiscal
side, ResRep and Mission Chief insist Turks have agreed to
ambitious and credible measures to close the gap. On the
structural side, Parliament passed the final piece of social
security legislation July 17. We understand other structural
conditions will be pushed into the Sixth Review. Mission
Chief has urged Turks to travel to Washington as soon as they
complete the LOI to finalize and sign the financial agreement
on U.S. assistance. Meanwhile, markets have strengthened
this week due to investor perceptions of progress on the
review and on U.S.-Turkish relations, with an added boost
from the Central Bank's July 16 interest rate cut. End
Summary.


2. (SBU) IMF and GOT officials told us late July 16 that
they have made substantial progress this week, and hope to
announce agreement on an LOI by Friday, July 18. IMF ResRep
said the discussions have focused on fiscal issues,
specifically how to fill the fiscal gap -- the expected
shortfall in this year's primary surplus target of 6.5
percent of GNP. According to both IMF and GOT officials, the
gap -- identified by the last mission at approximately TL 1
quadrillion -- has grown, due in part to the government's
recent wage hike for civil servants, and now is projected at
TL 2.5 quadrillion (approximately $1.8 billion).


3. (SBU) Treasury Acting Director General Melih Nemli and
Finance Deputy DG for the Budget Ahmet Kisik outlined to us
on July 16-17 the measures the GOT has agreed to take fill
the gap: (a) continuing until year-end a freeze on TL 1.2
quadrillion in spending (of the TL 4 quadrillion in spending
that was temporarily frozen in the spring); increasing the
Special Transaction Tax and Educational Levy (TL 210
trillion); sale of Treasury's hazelnut stock (TL 70
trillion); savings on the foreign currency element of certain
investment projects resulting from the lira's strength (TL
200 trillion); and shifting "special revenues" normally
earmarked for individual agencies to the general budget (TL
580 trillion). Kisik explained that the "special revenues"
were a remnant of Turkey's various off-budget funds, most of
which have been closed. Beginning next year, nearly all of
these revenues will go to the general budget. This year was
a transition period, but the government has decided to shift
the revenues to the general budget to help close the fiscal
gap. He added that any remaining gap should be filled by
higher-than anticipated petroleum taxes.


4. (SBU) A few observers, incluidng an Istanbul economist
and a mid-level GOT economic official, have suggested to us
that the Fund team was "lenient" in accepting the GOT's
proposed fiscal measures. IMF ResRep and Mission Chief
insisted, however, that they were being tough and that the
Turkish measures were credible and serious. ResRep said
Mission Chief had given a strong opening statement in the
initial Fund-GOT meeting that had caused State Minister
Babacan's face to fall. Mission Chief said the Turkish team
seemed to have a different -- much more serious -- attitude
this time around, and had agreed to an "impressive" series of
measures, something he attributed in part to the efforts of
Treasury U/S Canakci. He addeed that he had warned Ministers
Babacan and Unakitan that the GOT's populist "noise" was
undermining market confidence, and that they needed to step
up their peformance (and improve their rhetoric) to begin to
regain that confidence.


5. (SBU) The often-skeptical Ahmet Kisik agreed that the
fiscal measures were credible. While complaining that the
GOT could and should have completed this review two months
ago, potentially saving TL 2-3 quadrillion (through lower
interest rates), he argued that the government has become
more serious. He suggested that Finance Minister Unakitan's
recent roadshow to the U.S. -- during which U.S. investors
had stressed the importance of completing the Fifth Review --
had a major impact on GOT thinking. He added that the new
fiscal measures would not cause much pain to the public and
could be implemented through administrative action. In fact,
he already has sent a letter to all the line ministries
advising them that the Ministry has frozen TL 1.2 quadrillion
in spending, and the government announced the increase in the
Special Transaction Tax and Educational Levy in the July 17
official gazette.


6. (SBU) IMF ResRep said Fund staff had agreed to push some
structural measures into the next review, though it would
turn at least a few of them into prior actions to ensure
their completion. He said the one remaining structural prior
action for the Fifth Review, passage of the last of three
laws strengthening and reorganizing the government's social
security institutions, should be completed shortly -- in
fact, press reports indicate Parliament passed it on the
morning of July 17. (Note: Embassy will report more fully
on the structural side once LOI is completed, when Fund staff
and GOT officials have more time to provide details. End
note)


7. (SBU) Turkish markets, meanwhile, have rallied this week,
with the lira strengthening to 1.381 million/dollar, bond
yields on the benchmark t-bill falling to 47.09, and the
stock exchange rising to 10,758 (as of the close of morning
trade July 17). Analysts attribute the rally to investor
perceptions that the GOT was making progress on completing
the Fifth Review and on addressing the flap with the U.S.
over the July 4 detention of Turkish soldiers in Northern
Iraq. In addition, the Central Bank's July 16 decision to
cut overnight interest rates 3 percentage points created room
for t-bill yields to fall, per several investors. Analysts
were surprised by the timing of the announcement -- they had
expected it after the GOT and IMF had agreed on the LOI --
but generally agreed it was justified by recent indications
that inflation is declining.


8. (SBU) IMF Mission Chief told us July 16 that he had urged
GOT officials to travel to Washington as soon as possible
after completion of the LOI to finalize and sign the
financial agreement related to the U.S. assistance package.
He said an early signing of the agreement, coupled with
completion of the IMF review, would boost markets
substantially. He was not sure if GOT officials would heed
his advice, as they seemed concerned about some of the
language in the draft agreement (he did not provide further
details).
PEARSON

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