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Cablegate: Meeting with Treasury U/S Canakci

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

021322Z Oct 03

UNCLAS SECTION 01 OF 03 ANKARA 006199

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD, EUR/SE
TREASURY FOR OASIA - DLOEVINGER, MMILLS, JLEICHTER
NSC FOR BRYZA AND MCKIBBEN


E.O. 12958: N/A
TAGS: EFIN EAID EINV PREL PGOV TU
SUBJECT: MEETING WITH TREASURY U/S CANAKCI


REF: A. ANKARA 6141
B. ANKARA 6162
C. ANKARA 6165


1. (SBU) SUMMARY: IN A MEETING WITH ECONOFFS, TURKISH
TREASURY U/S CANAKCI DESCRIBED THE STILL-EARLY STATE OF PLAY
WITH THE IMF SIXTH REVIEW MISSION. CANAKCI CLAIMED THE GOT
WAS ON TRACK TO MEET OR GET CLOSE TO END-YEAR INFLATION,
GROWTH AND FISCAL TARGETS. HE WAS ALSO OPTIMISTIC ABOUT
ACHIEVING A 6.5 PERCENT PRIMARY SURPLUS IN 2004. ON KEY
STRUCTURAL REFORMS, ESPECIALLY THOSE INVOLVING LEGISLATION,
PROGRESS WAS SLOWER. ON DIRECT TAX REFORM, CANAKCI WAS
OPTIMISTIC THAT THEY ARE NEARING AGREEMENT WITH THE FUND ON A
COMPROMISE. CANAKCI CLAIMED THE GOT HAD RECOMMITTED TO
MOVING FORWARD ON WORLD BANK-PROPOSED STRUCTURAL REFORMS
AFTER THE IMF REVIEW IS COMPLETE. HE CONFIRMED THAT THE U.S.
FINANCIAL AGREEMENT HAD NOT YET BEEN PROPOSED TO THE COUNCIL
OF MINISTERS AND PROVIDED NO INDICATION OF WHEN IT MIGHT BE
PROPOSED, NOTING THE GOT HAD ADEQUATE CASH-FLOW FOR THE TIME
BEING. END SUMMARY.


END-YEAR MACRO TARGETS WITHIN REACH:
-----------------------------------


2. (SBU) ECONOFFS MET WITH TREASURY UNDERSECRETARY IBRAHIM
CANAKCI OCTOBER 2 TO GET AN UPDATE ON PROGRESS ON ECONOMIC
REFORMS. CANAKCI CHARACTERIZED DISCUSSIONS WITH THE IMF
SIXTH REVIEW MISSION--CURRENTLY IN ANKARA--AS GOING WELL BUT
STILL AT AN EARLY STAGE. DESPITE THE SECOND QUARTER SLOWDOWN
IN GDP GROWTH, WHICH WAS PARTLY ATTRIBUTABLE TO THE WAR,
CANAKCI EXPRESSED CONFIDENCE TURKEY WOULD ATTAIN ITS 5
PERCENT 2003 GDP GROWTH TARGET. CANAKCI CITED INDUSTRIAL
PRODUCTION DATA SUGGESTING THAT THE PACE OF GROWTH HAD PICKED
UP BEGINNING IN JUNE. ON INFLATION, CANAKCI WAS SIMILARLY
CONFIDENT ABOUT MEETING THE YEAR-END TARGET, SAYING THAT THE
WHOLESALE PRICE INDEX MIGHT ACTUALLY BEAT THE 20 PERCENT
TARGET AND COME IN AROUND 18 PERCENT FOR THE YEAR. THE
CURRENT ACCOUNT DEFICIT, ON THE OTHER HAND, MIGHT BE SLIGHLTY
HIGHER THAN THE 3.2 PERCENT OF GDP PROJECTED AT THE TIME OF
THE FIFTH REVIEW.


FISCAL SITUATION AND 2004:
-------------------------


3. (SBU) CANAKCI SAID THEY ARE GOING THROUGH THE END-AUGUST
FISCAL DATA WITH THE IMF TEAM, ALTHOUGH THEY STILL LACK FULL
PUBLIC SECTOR-WIDE NUMBERS, INCLUDING FROM SEE'S. HE
ASSERTED THAT THE GOT MIGHT REACH ITS END-AUGUST FISCAL
TARGET OR ONLY HAVE A SLIGHT DEVIATION. IT WAS MORE
MEANINGFUL, HOWEVER, TO FOCUS ON THE FULL YEAR, SINCE THE
MONTH-T0-MONTH NUMBERS CAN BE MISLEADING DUE TO SEASONAL OR
SPECIAL CIRCUMSTANCES. ONE SUCH EXAMPLE COULD BE FOUND IN THE
NEGATIVE IMPACT ON THE JULY NUMBERS CAUSED BY FRONT-LOADING
SOME EXPENDITURES THAT WOULD NORMALLY HAVE TAKEN PLACE IN
AUGUST AND SEPTEMBER. THIS EXPLAINED THE SHARP IMPROVEMENT IN
THE MONTHLY PRIMARY SURPLUS FROM JULY TO AUGUST. CANAKCI
CLAIMED THE GOT'S STUDIES SHOW THAT TURKEY WILL ACHIEVE THE
FULL-YEAR 6.5 PERCENT PRIMARY SURPLUS TARGET.


4. (SBU) WITH GOT AND IMF OFFICIALS IN INTENSIVE
CONSULTATIONS ON THE NUMBERS, CANAKCI EXPECTED THE BROAD
OUTLINES OF THE 2004 BUDGET AND A CLEARER PICTURE OF THE
END-YEAR FISCAL PROJECTION TO BE READY BY MONDAY. HIGH
PLANNING COUNCIL MEETINGS ON OCTOBER 8 AND 11 WOULD FURTHER
CLARIFY THE BUDGET TO BE PROPOSED TO PARLIAMENT BY OCTOBER
17. CANAKCI STATED THAT BOTH THE IMF AND GOT BELIEVE THAT,
IF THERE IS ANY SHORTFALL IN REVENUE, THERE IS ROOM TO MAKE
UP FOR THIS BY CUTTING EXPENDITURES. THOUGH THE
UNANTICIPATED STRENGTH OF THE LIRA HAD RESULTED IN LOWER VAT
COLLECTIONS, THIS WAS OFFSET BY THE EXCHANGE RATE'S POSITIVE
EFFECT ON CERTAIN EXPENDITURES. HE ALSO DISAGREED WITH
ANALYSTS' CONTENTION THAT THE RELIANCE ON ONE-OFF MEASURES
WILL CREATE SERIOUS PROBLEMS IN ATTAINING 2004 FISCAL
TARGETS. HE EXPLAINED THAT THE ONE-OFF MEASURES AMOUNTED TO
ABOUT 2.7 PERCENT OF GNP BUT THAT ALMOST HALF OF THEM, SUCH
AS THE SPECIAL COMMUNICATIONS TAX AND THE SPECIAL
TRANSACTIONS TAX, COULD EASILY BE REPEATED. MOREOVER, IN
2004 THE GOT EXPECTS TO SEE THE FULL-YEAR IMPACT OF 2003
BUDGET CUTS IN HEALTH AND SOCIAL SECURITY, AS WELL AS THE
STAFF REDUCTIONS IN SEE'S. CANAKCI DENIED THAT LOWER GAS
PRICES OR EARLY PAYMENTS OF CIVIL SERVICE BONUSES WOULD
INTERFERE WITH THE GOT REACHING ITS FISCAL TARGET. THE GAS
PRICE REDUCTION STEMMED FROM LOWER COSTS, AND THE TL 160
TRILLION (USD 114 MILLION) BONUS PAYMENTS--IF PAID
EARLY--WOULD BE OFFSET.


PARASTATAL STAFF REDUCTION:
--------------------------


5. (SBU) CANAKCI ADMITTED THE GOT HAD ONLY REDUCED REDUNDANT
POSITIONS AT STATE ECONOMIC ENTERPRISES BY 12,000 OUT OF THE
19,400 TARGETED IN THE IMF PROGRAM BY THE END OF SEPTEMBER,
2003. CANAKCI POINTED OUT THAT A PORTION OF THE
SHORTFALL--AT LEAST 3,000 POSITIONS--STEMMED FROM THE DELAY
IN THE TEKEL PRIVATIZATION WHICH WAS ORIGINALLY SCHEDULED FOR
THE THIRD QUARTER OF 2003 AND NOW WOULD TAKE PLACE IN THE
FOURTH QUARTER. CANAKCI ALSO CLAIMED THAT THE GOT HAD IN
SOME CASES REDUCED STAFF IN EXCESS OF COMPANY-SPECIFIC
TARGETS, BUT THAT THE IMF DID NOT GIVE THE GOT CREDIT FOR
THESE ADDITIONAL REDUCTIONS. THE GOT IS NOW WORKING WITH THE
IMF TO GET CREDIT FOR THESE REDUCTIONS BY COMMITTING NOT TO
REHIRE. TO FURTHER REDUCE PUBLIC SECTOR STAFFING, THE GOT IS
STUDYING THE POSSIBILITY OF PROVIDING ADDITIONAL INCENTIVE
PAYMENTS FOR YEAR-2003 RETIREMENT BY ANY OF THE 33,000 PUBLIC
SECTOR EMPLOYEES ELIGIBLE FOR RETIREMENT.


DIRECT TAX REFORM:
-----------------


6. (SBU) CANAKCI AGREED THAT THE GOT HAD "CONSTRAINTS"
ARISING FROM THE PRIME MINISTER'S PUBLIC COMMITMENT TO
REGIONAL INCENTIVES AND RESISTANCE TO REDUCTION IN FREE TRADE
ZONE TAX EXEMPTIONS, LED BY TRADE MINISTER TUZMEN. CANAKCI
CONFIRMED IMF STAFF'S EARLIER COMMENTS THAT THE FUND TEAM WAS
WORKING WITH GOT OFFICIALS TO DEVELOP A COMPROMISE. CANAKCI
WAS OPTIMISTIC THAT LONG MEETINGS WEDNESDAY ON THIS ISSUE HAD
BROUGHT THE TWO SIDES CLOSER TO AGREEMENT. CANAKCI SAID
THERE WOULD BE A MEETING WITH THE PRIME MINISTER ON THE
DIRECT TAX REFORM THURSDAY EVENING. ON FREE TRADE ZONES, THE
COMPROMISE WOULD PHASE OUT EXEMPTIONS, PARTICULARLY ON
PERSONAL INCOME TAX, THOUGH THERE WOULD BE SOME
GRANDFATHERING OF ESTABLISHED COMPANIES.


LEGISLATION:
-----------


7. (SBU) THE PUBLIC SECTOR FINANCIAL MANAGEMENT AND CONTROL
LEGISLATION HAS BEEN PREPARED. NOW THAT MINOR INTERAGENCY
DISAGREEMENTS HAVE BEEN RESOLVED AND THE GOT HAS COME TO AN
UNDERSTANDING WITH THE IMF TEAM, CANAKCI EXPECTED THE DRAFT
LAW TO BE SUBMITTED TO PARLIAMENT ON MONDAY. THE AMENDMENT
TO THE BANKRUPTCY LAW THAT WOULD ALLOW A CHAPTER 11-STYLE,
PRE-PACKAGED BANKRUPTCY IS MOVING FORWARD, WITH IMF EXPERTS
IN MEETINGS AT THE JUSTICE MINISTRY THURSDAY. CANAKCI
EXPECTED THE LAW TO PASS BY END-NOVEMBER AND THE IMPLEMENTING
REGULATIONS TO BE PROMULGATED IN DECEMBER.


8. (SBU) CANAKCI CONFIRMED THE IMF RESREP'S REPORT OF DELAYS
IN PREPARATION OF THE LAW TO STRENGTHEN THE HAND OF BRSA IN
GOING AFTER ASSETS OF OWNERS OF INTERVENED BANKS. AFTER BRSA
PROPOSED A DRAFT TO DEPUTY PRIME MINISTER SENER'S OFFICE,
SENER TURNED IT OVER TO MINISTER SAHIN, WHO IS RESPONSIBLE
FOR GOVERNMENT-PARLIAMENT RELATIONS AND THE JUDICIARY. THE
LAW SOMEHOW GOT BOGGED DOWN IN SAHIN'S OFFICE, SUCH THAT IT
WILL NOT BE READY FOR SUBMISSION TO PARLIAMENT IN TIME FOR AN
OCTOBER SIXTH REVIEW. NOW THAT THE PROCESS HAS BEEN
REINVIGORATED WITH HELP FROM THE PRIME MINISTRY, CANAKCI SAID
GOT ACTION ON THIS DRAFT LAW WOULD BE "RELEVANT" WERE THE
SIXTH REVIEW TO COME TO THE IMF BOARD IN NOVEMBER RATHER THAN
OCTOBER. COMMENT: POST WONDERS WHY THIS IMF REQUIREMENT
WOULD NOT BE RELEVANT IF THE SIXTH REVIEW GOES TO THE IMF
BOARD IN OCTOBER. END COMMENT. CANAKCI THOUGHT THERE MIGHT
BE SOME NEED TO REVISE THE TEXT BECAUSE THE JUDICIAL
AUTHORITIES OBJECTED TO TIME LIMITS IN THE LEGISLATION.


PRIVATIZATION:
-------------


9. (SBU) CANAKCI SAID PRIVATIZATION AUTHORITY PRESIDENT METIN
KILCI BELIEVES THE TEKEL PRIVATIZATION WILL BE WRAPPED UP BY
YEAR-END, POSSIBLY EVEN IN NOVEMBER. ON TURK TELECOM,
CANAKCI SAID THE EVALUATION AND TENDERING COMMITTEES HAD DONE
THEIR WORK BUT IT WAS NOT YET CLEAR WHEN THE PROPOSED
STRATEGY WOULD GO TO THE COUNCIL OF MINISTERS.


IMAR BANK:
---------


10. (SBU) THE TREASURY IS WAITING FOR THE SDIF (THE DEPOSIT
GUARANTOR UNDER THE UMBRELLA OF BRSA) TO COMPLETE ITS
FINDINGS ON THE COST OF PAYING IMAR BANK'S DEPOSITORS AND ON
A FINANCING PLAN. CANAKCI SAID TREASURY, THE CENTRAL BANK
AND BRSA ARE WORKING TOGETHER ON THIS AND HAVE LAID OUT THREE
PRINCIPLES: 1) THE REPAYMENT PLAN SHOULD NOT PUT PRESSURE ON
DOMESTIC INTEREST RATES AND PROJECTIONS FOR INTEREST
PAYMENTS. 2) IT SHOULD NOT CREATE A DUTY LOSS ON STATE BANKS
WHEN THE DEPOSITS ARE TRANSFERRED TO STATE BANKS. 3) IT
SHOULD NOT PUT PRESSURE ON MONETARY TARGETS OR DETERIORATE
THE BALANCE SHEET OF THE CENTRAL BANK. CANAKCI CONFIRMED
THAT THE PLAN WILL MOST LIKELY INVOLVE TRANSFERRING THE
DEPOSITS TO A STATE BANK, SUCH AS ZIRAAT BANK, AND THE
TREASURY WOULD PROVIDE FUNDS TO EITHER PAY CASH TO DEPOSITORS
OR PAY IN INSTALMENTS. EITHER WAY, THE PLAN WOULD RESULT IN
AN INCREASE TO THE GOVERNMENT'S DEBT-TO-GDP RATIO. HE NOTED
THAT THE CENTRAL BANK WOULD HAVE TO PROVIDE SOME LIQUIDITY
FOR THE CASH PAYMENT PORTION.


WORLD BANK STRUCTURAL REFORMS:
-----------------------------


11. (SBU) CANAKCI DID NOT DISPUTE ECONOFFS' SUGGESTION THAT
THINGS SEEMED TO BE GOING BETTER WITH THE FUND THAN WITH THE
BANK. CANAKCI ATTRIBUTED THE DIFFICULTIES TO THE NATURE OF
THE BANK-SPONSORED STRUCTURAL REFORMS, WITHOUT ELABORATING.
HE REFERENCED A BABACAN CONVERSATION WITH WOLFENSOHN AND
WORLD BANK EUROPE DIRECTOR KATSU, SAYING THE GOT WOULD WORK
ON SOME OF THE BANK ISSUES AFTER OCTOBER.


U.S. FINANCIAL AGREEMENT:
------------------------


12. (SBU) CANAKCI REFERRED TO THE TREASURY-TO-TREASURY
UNDERSTANDING IN DUBAI THAT THE GOT MIGHT REQUEST A
DISBURSEMENT IN THE SECOND WEEK OF OCTOBER. HE CONFIRMED,
HOWEVER, THAT TREASURY HAD NOT YET SUBMITTED THE AGREEMENT TO
THE COUNCIL OF MINISTERS FOR RATIFICATION, AND COULD NOT SAY
WHEN IT WOULD DO SO. WHEREAS CANAKCI'S SUBORDINATE OZGUR
PEHLIVAN HAD EARLIER TOLD ECONOFF THAT THERE WAS NO NEED FOR
PARLIAMENTARY APPROVAL OF THE FA UNDER TURKISH LAW, CANAKCI'S
ONLY COMMENT WAS, "SOME PEOPLE ARE NOW SAYING THE FA NEEDS
PARLIAMENTARY APPROVAL." HE ALSO NOTED THAT THE TREASURY WAS
IN A COMFORTABLE CASH-FLOW POSITION FOR THE REMAINDER OF THE
YEAR.


13. (SBU) CANAKCI ALSO REFERRED TO THE TREASURY'S CONCERNS
ABOUT THE INTEREST RATE, CHUCKLING OVER THE OMB CALCULATION
METHODOLOGY BEING A "BLACK BOX." THOUGH CANAKCI ADMITTED THE
RATE WAS LOWER THAN WHAT THE GOT COULD GET IN THE MARKET, HE
NOTED THAT TURKEY'S BORROWING RATES WERE TRENDING DOWNWARDS,
SUCH THAT THEY MIGHT REACH THE LEVEL IN THE FA.


14. (SBU) ECONOFFS REMINDED CANAKCI OF THE DETAILED
INFORMATION REQUIREMENTS IN SCHEDULE C OF THE AGREEMENT THAT
THE USG WOULD NEED TO RECEIVE WHEN THE GOT REQUESTED A
DISBURSEMENT. ECONOFFS SUGGESTED MUCH OF THE SAME
INFORMATION THAT WAS UNDOUBTEDLY BEING DEVELOPED FOR THE IMF
MISSION COULD BE PROVIDED TO THE USG. ECONOFFS STRESSED THAT
THE USG WANTED TO HELP TURKEY, BUT THAT IT WAS CRITICAL FOR
THE GOT TO BE ABLE TO MAKE A CONVINCING CASE THAT THE REFORMS
WERE MOVING FORWARD. CANAKCI REPLIED THAT BEING ON TRACK WITH
THE IMF WAS THE MOST VISIBLE INDICATOR THAT THE GOT WAS
IMPLEMENTING STRONG ECONOMIC POLICIES.


INVESTMENT:
----------


15. (SBU) ECONOFFS NOTED GOT LEGAL REFORMS TO IMPROVE THE
INVESTMENT CLIMATE BUT ALSO POINTED OUT THE ABSENCE OF
RESOLUTION OF SPECIFIC U.S. COMPANIES' PROBLEMS. CANAKCI SAID
THE HIGH INVESTORS' COUNCIL (YOIK) WAS A VEHICLE TO HEAR
FOREIGN INVESTORS' COMPLAINTS. HE SAID THAT FOREIGN COMPANIES
HAD MADE PRESENTATIONS TO YOIK AND ENCOURAGED U.S. COMPANIES
TO DO SO. CANAKCI CLAIMED THAT TREASURY WAS DOING ITS BEST ON
THE INVESTMENT CLIMATE.


EDELMAN

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