Cablegate: October 3 Update On Imf Mission

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

REF: A. (A) ANKARA 6199
B. (B) ANKARA 6141

1. (SBU) Summary: IMF ResRep told us late today that
progress in reaching agreement on measures for the 6th review
had been a bit slower than they had planned, but he remained
hopeful the mission could wrap things up by the end of next
week. The main issues remain winning GOT political-level
support for a compromise approach on direct tax reform, and
sorting out the details of the 2004 budget. He and State
Planning Organization U/S Tiktik said intensive technical
level discussions on the budget would continue through the
weekend, with the focus on how much the GOT should rely on
continuation of so-called "one-off" measures to meet its 2004
primary surplus target. End Summary.

2. (SBU) IMF ResRep told us late today that talks with the
GOT had progressed more slowly than staff had planned. The
main delay occurred yesterday, when an important internal GOT
meeting with Prime Minister Erdogan to discuss proposed
measures on direct tax reform (and a few lesser issues) was
cancelled due to the PM's heavy schedule. Discussions on the
2004 budget had also gone slowly until last night, when a
long, intensive meeting "got things going."

3. (SBU) ResRep provided a quick update on the key issues:

-- Public Sector Management and Control bill: Fund staff and
the GOT have agreed on a text, which the GOT was to submit to
Parliament today.

-- Legislation to strengthen BRSA's hand: Deputy PM Sahin
told the Fund mission that Parliamentary passage of this bill
would be "no problem.' Fund staff is unhappy that this
legislation, drafted months ago, apparently fell through the
cracks, and is waiting to see how quickly this proceeds now.
Parliamentary passage by end-October is a performance
criteria for the 6th review.

-- Redundant SEE workers: Turkey missed the end-September
target by a wide margin, but IMF staff deems credible the
GOT's proposal to accelerate the process by offering
extra-large severance packages (10-30 percent more than
normal packages) to workers who agree to retire by year-end.
Deputy PM Sahin told Fund staff today that the government
should be able to issue a decree authorizing this by October
15. Fund staff is less moved by the GOT's argument that any
reductions in excess of company=-specific targets (ref a)
should count toward the target; ResRep pointed out that the
World Bank's original number of redundant SEE workers had
already been "watered down" significantly, so Fund staff was
not inclined to be too generous in flexible how the GOT
reached the target. On the other hand, given the generally
positive economic trends, it would be hard for the Fund to
delay the review -- and perhaps rock the markets -- because
the GOT had not fired enough workers.

-- Direct Tax Reform: The Fund's intent was to phase out tax
incentives, both in economic free zones and elsewhere.
Instead, PM Erdogan had publicly committed to offer
additional tax incentives in poor provinces, and State
Minister Tuzman was strongly opposing any reduction of
incentives in free zones. Fund staff has reached tentative
agreement with GOT technocrats on a compromise approach on
tax incentives in the poor regions; the idea is to offer an
approach that is "more refined" than the original GOT
proposal. ResRep said that, given the lack of economic
activity and tax receipts in these regions, the Fund was not
concerned too much about direct tax losses resulting from
incentives. Rather, staff is deeply suspicious that the GOT
will not be able to monitor and control the incentives scheme
to prevent companies from outside of the incentive areas from
evading taxes. On free zones, the Fund wants to phase out
some tax benefits (i.e. corporate and personal income tax
exemptions) for existing investors, and eliminate those
"unnecessary" benefits completely for new investors. On both
tax incentives for poor regions and free zones, GOT
technocrats need to convince Prime Minister Erdogan and, to a
lesser extent, State Minister Tuzmen to go along with
compromise approaches. (SPO U/S Tiktik said the PM was
insisting on tax incentives for the 36 provinces with per
capita income under $1500, and also wanted to offer them
subsidized energy and corporate tax exemptions. He noted
that private sector proponents of these incentives were
"determined and persuasive.")
-- Budget: Tiktik said there should be no problem reaching
this year's primary surplus target of 6.5 percent of GNP. He
and ResRep agreed the more difficult task will be the 2004
budget. Tiktik, like Treasury U/S Canakci (ref a), argued
that the GOT would easily be able to continue or replicate a
number of the "one-off" measures taken this year, reducing
the size of the problem in 2004. For example, payments from
the 2003 "tax amnesty" will continue into 2004, and the GOT
can continue the additional Special Consumption Tax and other
measures. He added that budget transfers to the social
security funds had declined in the aftermath of the social
security arrears amnesty, and the GOT expected that trend to
continue. ResRep said the Fund was wary of excessive
reliance on these one-off measures, and wants to see more
sustainable measures to reach the 6.5 primary surplus target
next year. He cautioned, however, that intensive budget
discussions had just begun last night (and would continue
through the weekend), so Fund staff would not be able to
provide a fuller assessment of the budget situation until
early next week.


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