Cablegate: Imf Close to Agreement On Sixth Review

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

141559Z Oct 03





E.O. 12958: N/A

B. ANKARA 6342

1. (SBU) Summary: IMF Resident Representative Odd Per Brekk
told econoff the IMF mission is close to agreement with the
GOT on a Letter of Intent. The budget issues have been
worked out and Brekk believes the Prime Minister has accepted
a version of the direct tax reform the Fund can live with.
The GOT will need to take a series of actions between now and
when the Sixth Review goes to the IMF board, most likely in
early November. End Summary

2. (SBU) In a brief telephone conversation October 14, IMF
ResRep Odd Per Brekk told econoff the IMF mission believes it
is close to a deal with the GOT. Assuming last-minute
details can be wrapped up this evening, there may be an
announcement as early as the morning of October 15.

3. (SBU) Brekk did not provide a detailed description of each
issue but, in sum:

--Budget: The Council of Ministers approved a budget October
13 that Brekk said was in line with what had earlier been
worked out between Fund staff. Brekk said the staff had held
a series of long meetings with Ministers Unakitan and Babacan
in recent days. Though IMF staff had yet to see the final
version approved by the Council, they understand it was what
they had earlier approved.

--Direct Tax Reform: Babacan and Unakitan reportedly
convinced Prime Minister Erdogan to curtail some of the
regional tax incentives the PM had publicly advocated to a
point that the IMF could accept. On Economic Free Zones,
the law will eliminate the exemption on personal income tax
for employees of newly-established companies and phase out
the personal tax exemption for employees of
already-established companies.

--SEE Staff Reduction: The GOT and Fund Staff, with World
Bank concurrence, have now agreed to increase the incentive
for SEE employees to retire before the end of 2003 and to
extend the coverage in the World Bank project for laid-off
employees of privatized companies to include employees of
not-yet privatized SEE's. Separately, though the IMF did not
agree to change its definition of redundant employees, GOT
agreement to abolish the positions at individual state
companies' that reduced staffing over their company-specific
targets provides some encouragement that the GOT is making an
effort to reduce SEE staffing.

--Banking issues: The only outstanding issue is a detailed
strategy to deal with Pamuk Bank. Pamuk Bank is losing money
and the GOT urgently needs to make a decision how to deal
with it, according to Brekk. To plug the hole will cost
Treasury approximately USD 1.1 billion, which Brekk believes
was the reason for GOT slowness in coming to a decision.
Brekk believes the GOT now understands the need for a
detailed plan before the Sixth Review comes to a vote in the
IMF Board.

4. (SBU) In addition to the Pamuk Bank issue, Brekk said
there are a number of actions the GOT will need to take
before the date of the IMF Board vote on the Sixth Review:

--BRSA Strengthening Legislation: The law will need to be
passed by Parliament.

--Public Financial Management and Control Law: Also needs
parliamentary passage.

--Direct Tax Reform: Approval by Council of Ministers.

5. (SBU) Finally, Brekk said there were a number of
(unspecified) implementation issues. Brekk now expects the
Board vote to take place in early November rather than in



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