Cablegate: No Agreement with Imf Likely Until at Least Next

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

081536Z Oct 03





E.O. 12958: N/A

B. ANKARA 6241

1. (Sbu) Summary: IMF Resident Representative told Econoffs
October 8 that the Fund Mission is highly unlikely to wrap up
agreement on the Sixth Review until early next week at the
earliest. Though the Turkish economic team had a long
meeting with the Prime Minister October 7 on the IMF issues,
the P.M. has not taken the decisions needed on difficult
issues like the direct tax reform and the budget. Further
complicating efforts to get to agreement are Minister
Babacan's planned trip to London October 9, the AK party
Congress on October 12, and the bullishness of the markets.
End Summary.

2. (SBU) In a meeting the afternoon of October 8, IMF
Resident Representative Odd Per Brekk and Deputy ResRep
Christoph Klingen updated econoffs on the state of play with
the IMF mission. Though the mission has had its ups and
downs, there has not been significant progress since Mission
Chief Reza Moghadam briefed USG officials on October 6. The
one significant step forward is that the Turkish economic
team had an opportunity to meet with Prime Minister Erdogan
the evening of October 7. According to Brekk, the P.M. did
not take any decisions. On the Fund's compromise proposals
for Direct Tax Reform, however, the P.M. said he wanted to be
sure and include Trade Minister Tuzmen--a strong defender of
Free Trade Zone tax exemptions--in the discussion.

3. (SBU) On the budget issues, Brekk said they still have a
0.7 percent of GDP gap for 2004 between measures agreed and
revenues needed to achieve the 6.5 percent target. Even to
get to this level, the GOT and Fund had to retain the
earthquake tax, special consumption tax and fund levy.
Though none of these were desirable taxes from the Fund's
perspective they were needed to reach the target. The 0.7
percent gap includes 0.2 percent resulting from the
Constitutional Court's decision yesterday to strike down for
the second time the supplementary motor vehicle tax. Though
there is still a small gap on the 2003 numbers this is less
of a problem than the 2004 budget.

4. (SBU) On financial sector issues, Brekk said the GOT had
reasonable proposals to deal with the Imar Bank case. On
Pamuk Bank, it will cost $1.1 Billion to recapitalize the
bank and the GOT needs to find a way to take about $1.7
billion in non-marketable government securities off of
Pamuk's balance sheet before sale. There are reportedly two
bidders: Finansbank and a foreign individual without banking
experience, so the GOT has concerns about these candidates.
On the privatizations and restructuring of Vakif Bank and
Halk Bank there was not much progress.

5. (SBU) Regarding the target for elimination of redundant
employees at State Economic Enterprises, Brekk and Klingen
confirmed that the GOT had missed the 19,000-employee
end-September target by about 7,500 employees. As Fund
officials had explained previously, however, the GOT-Fund
solution is to introduce a new law increasing the severance
payment for retirements that take place by year-end. This
seems to be moving forward. Brekk said the GOT is still
confident it will attain the 25,000-employee year-end target.

6. (SBU) One disappointing development has been a new delay
on the Public Financial Management and Control Law. Whereas
Fund staff and the GOT had reached agreement on a text, now
the GOT wants to take the additional step of reviewing how
this law meshes with the GOT's new thinking on a broader law
on public sector reform. Brekk said Finance Minister
Unakitan expressed confidence that this new step will only
take a couple of weeks, allowing the law to be introduced
before the IMF board considers the Sixth Review. On the law
to strengthen the BRSA, the Fund was negotiating with the GOT
on the details of a new judicial body that would handle all
cases arising from BRSA actions. The GOT had now extended
the scope of this body to all independent regulatory bodies.
The IMF lawyer on the mission's initial reaction to the
latest GOT proposals was that there might be significant
issues for the Fund.

7. (SBU) The Bank-Fund project to find ways of reducing Bank
intermediation costs is running up against the need for tax
revenue, according to Brekk, such that the phase-in of lower
taxes on banks would have to be slow. When econoffs asked
about how the Fund would tackle the broader problem of high
taxation on the formal sector, Brekk said a technical mission
on this very issue would be coming later this Fall, but that
it was a difficult problem.

8. (SBU) Brekk said the Turk Telekom privatization plan
appears likely to be approved by the end of October,
satisfying a key Sixth Review condition. Though he said we
should check this detail out with the World Bank, Brekk
thought that the Turkish law on telecoms only allowed for the
liberalization of fixed telephony when Turk Telekom is
privatized, rather than at a fixed date.

9. (SBU) With Babacan planning to go on a trip to London the
evening of October 9, and an AK Party conference to be held
on October 12, Brekk doubted the GOT would reach agreement
with the Mission before early next week. Key members of the
Mission are likely to stay in Ankara beyond this week in
hopes of clinching a deal. Though a number of issues remain
unresolved, things could change quickly. Brekk thought the
imminent party congress made it harder for high-level
decisions on controversial issues, and the bullishness of the
markets meant there was less pressure for a deal with the

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