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Cablegate: Meeting with Imf Resident Representative

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

080634Z Dec 03

UNCLAS SECTION 01 OF 03 ANKARA 007494

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD, AND EUR/SE
TREASURY FOR OASIA - JLEICTHER AND MMILLS
NSC FOR MBRYZA AND TMCKIBBEN


E.O. 12958: N/A
TAGS: EFIN ECON PGOV TU
SUBJECT: MEETING WITH IMF RESIDENT REPRESENTATIVE


REF: A. ANKARA 7417
B. ANKARA 7145
C. ANKARA 7140


1. (Sbu) IMF Resrep Odd Per Brekk told econoffs it is still
possible the IMF Board could meet to
approve the Sixth Review this year, but it will require
expedited parliamentary action on the
required legislation the week of December 8-12. The GOT
seems to be making a serious effort to
get the board vote in December. The IMF has acquiesced in
the GOT's plan to create a separate
deposit insurance fund board from the bank regulatory board,
thereby enabling the GOT to assert
greater control. End Summary.


Push for Completion of Prior Actions to Allow a December
Board Date:
--------------------------------------------- ---


2. (Sbu) In a meeting December 4 with econoffs, IMF Resident
Representative Odd Per Brekk and
his deputy Christoph Klingen explained that a December board
date for the Sixth Review is still
possible, provided the GOT makes a big push to get the
necessary legislation passed the week of
December 8-12. At the December 1 Council of Ministers
meeting, the GOT reportedly agreed to clear
the parliamentary agenda to deal with legislation required
for the Sixth Review. According to
Brekk, Prime Minister Erdogan has made calls to key
parliamentarians to move things forward.


3 (Sbu) Brekk explained that the Board's last meetings of the
year are on December 19, and Board
policy is that prior actions need to be completed 5 days
prior, with rare exceptions. If the
Board date slips into 2004, this would complicate the
schedule for the Seventh Review and make it
more difficult to comply with strict IMF rules about
completing standby programs within 36 months.


4. (Sbu) Passage of the Public Financial Management and
Control Law, a key requirement, has become
more controversial because it includes a provision reducing
the power of the Financial Inspection
Board in the Ministry of Finance. With the legislation
decentralizing the audit function to line
ministries, the long powerful Financial Inspection Board--an
elite body dating from Ottoman times
and modelled on the French Financial Inspectors--would lose
its powers to investigate other
ministries. The influential Financial Inspection Board is
fighting back and Brekk noted that
several key parliamentarians are former financial inspectors
themselves.


5. (Sbu) Although Fund staff reached a compromise with the
GOT on regional incentives and Free
Trade Zones in the indirect tax reform package, the draft
legislation needs to be approved by the
Council of Ministers. Brekk hoped the Council would act on
December 8.


Banking Sector issues:
---------------------


6. (Sbu) As U/S Canakci had told econoffs (ref c) the draft
law to strengthen the hand of the BRSA
had expanded to include elements not originally envisioned by
the IMF. Brekk said that the
Ministry of Justice, without consulting the Fund, had added
the new provisions. He explained that
one new element was to include draconian provisions on
seizure of bank owners' and their relatives'
assets. Brekk and Klingen said that the Fund staff believe
the new provisions are impractical in
their harshness--and are being resisted by the Bankers'
Association--but that the Fund staff cares
much more about the other new provisions relating to bank
regulatory institutions.


7. (Sbu) Brekk said the legislation includes provisions that
would allow a new board to be
appointed for the deposit insurance fund (SDIF), with board
members differing from the members of
the bank regulatory agency (BRSA) board. This would be a
significant departure from the current
arrangement, whereby the two agencies, though legally
distinct, are run by boards with identical
membership. Though the new SDIF board--like the BRSA
board--would be independent, by creating a
new, separate board, the current Government will have the
opportunity to appoint all new members,
thereby asserting control--for now--over this nominally
independent body. Brekk said the issue had
become politicized because Justice Minister Cicek had gone
public. The IMF had succeeded in getting
the GOT to drop a provision that would have transferred asset
collection for failed banks from SDIF
to the Ministry of Finance, but Fund staff had opted to go
along with the creation of a new SDIF
board. The Fund had agreed out of pragmatism, according to
Brekk, but also because it had
originally advocated separating SDIF from BRSA at the
institutions' inception. Finally, Brekk
claimed that the Fund accepted the change on condition the
new board members be qualified, and would
scrutinize selections carefully.


8. (Sbu) In the end, the draconian collection provisions had
also been softened a litte bit,
according to Brekk. The law is still in committee, however.
Separately from the institutional
framework, Brekk said the biggest problem with SDIF is that
no official is willing to sell assets
of failed banks for fear they will later be accused of
selling below the assets' notional value.


9. (Sbu) Though the Government announced its plan to finance
the payments to Imar Bank depositors
with great fanfare several weeks ago, Brekk said the enabling
legislation is still in committee.
The IMF also wants the GOT to announce a Government
investigation of the Imar Bank case and the Fund
insists that the individual chosen to lead the investigation
have credibility with the financial
community in Istanbul. Brekk noted with a wry smile that the
GOT is having difficulty coming up
with an appropriate person. Regarding former BRSA Chairman
Engin Akcakoca, who is now being
prosecuted for having taken documents from BRSA when he was
forced out, Brekk said the IMF has been
supportive of Akcakoca, including a Krueger letter noting his
achievements at BRSA.


10. (Sbu) Though not a formal condition for the Sixth Review,
the IMF also wants to see Treasury
write a letter to the SDIF committing to fund the
recapitalization of Pamuk Bank. Brekk revealed
that the GOT has two prospective buyers for assets of Halk
Bank, Finansbank and a Libyan-Italian-
Canadian businessman. Brekk said the GOT seems uncomfortable
with these potential buyers.


State Enterprise Redundant Positions/Privatization/Fiscal
Targets:
---------------------------------------------


11. (Sbu) One law that has been passed is the legislation
sweetening early retirement incentives
for state enterprise employees who retire before the end of
2003. The legislation was designed
to help the GOT meet its target to reduce redundant SEE
employees by 25,000 between February 1, and
December 31, 2003. To garner the enhanced retirement
incentives, employees would have to apply by
December 8. Among the Sixth Review required actions, the GOT
has also approved in Council of
Ministers the plan to privatize Turk Telecom.


12. (Sbu) Brekk said that Fund staff have no particular
issues with the proposed 2004 budget but
that there still may be a gap in performance on the 2003
fiscal target. The problem, according to
Klingen, is not with the Central Government but with the
total public sector budget performance.
Turkey had missed the October prior condition by 1
Quadrillion TL. Though their fiscal expert is
coming to get a clearer fix, Klingen said it appears there
may still be a gap of between 1.5 and 2
Quadrillion TL or about 0.6-0.7 percent of GDP for all of
2003. If the gap is confirmed and the
Board vote slips into 2004, the fiscal issue could get become
very difficult between the Fund and
Finance Minister Unakitan. When it looked like the Board
vote would take place before the numbers
were clear, the GOT had requested a waiver of applicability.
But if the vote takes place after
the numbers are known and there is a gap it would require a
waiver of the GOT's performance on the
fiscal target, which would be much more controversial.


Outlook for the future:
----------------------


13. (Sbu) Brekk agreed when Econcouns outlined some of the
potential vulnerabilities in the outlook:
in the absence of aggressive structural reforms, Turkey's
growth could be closer to 4 percent than
to 6 percent and the country remains vulnerable to risks
relating to the Current Account Deficit.
Brekk agreed that the on-again off-again pattern of reform
was worrisome. Brekk said the Current
Account Deficit is not a problem in the same way that it was
in 2000. Instead, it is linked to the
debt problem, since a decline in the lira would quickly
exacerbate debt service problems. The CA
Deficit is current being financed by large errors and
omissions, which are a "black box." Though
the IMF considers that dollars flowing from Iraq are part of
the explanation for Errors and
Omissions, they do not fully account for the phenomenon.
Note: Central Bank statistics for the first
nine months of 2003 show Errors and Omissions of USD 3.6
billion. End Note.


14. (Sbu) For 2004, the IMF staff have not had detailed
discussions about their priorities. Brekk
expected a lot of focus on implementation issues. Though
fiscal issues will retain their importance,
the Fund will probably devote more attention to the
quality--rather than the quantity--of adjustment.
In this regard, Klingen noted that, following an initial
visit earlier in the fall, a larger Fund
team including experts is coming back to do more work on how
to broaden the tax base and capture the
unregistered economy. He explained that the experts' idea is
not only to try to capture the revenue
base from small businesses currently avoiding taxes, but also
to target larger corporations' tax
evasion schemes. For 2004, privatization will be important,
as well as the GOT's plans for reform
of Public Administration and Decentralization. A Seventh
Review mission is scheduled to come in
early January.


EDELMAN

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