Cablegate: Imf Near Agreement with Got On Seventh Review

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


1. (Sbu) Summary: According to IMF Resident Representative
Odd Per Brekk, the Fund Mission is near agrement with the GOT
on a Letter of Intent for the Seventh Review. On the fiscal
side, the GOT and Fund have agreed on measures to plug the 7
Quadrillion TL fiscal gap: increasing the cut in
discretionary spending from 10 to 13 percent, reallocating
0.5 Quadrillion TL from earmarked Special Revenues to the
general budget, cutting investment incentives and imcreasing
natural gas, alochol, and tobacco prices. The GOT-proposed
cut in VAT rates on textiles is off the table, though the
Fund has accepted a VAT rate cut on pharmaceuticals. Fund
Staff is likely to consider the enactment of all these
measures to be prior actions required before the board vote.
On banking sector issues, the Fund has reached agreement with
the head of the Bank Regulatory Agency and Economy Minister
Babacan to increase legal protections for bank regulatory
staff, narrow the ability of the higher court to overturn
lower court banking-related rulings, and strengthen on-site
inspection. Babacan has also reportedly agreed to help lower
public expectations about potential Deposit Guarantee Fund
collections. Brekk said the World Bank continues to work
with the GOT on developing a new strategy for the State
Banks. The IMF is likely to wrap up discussions next week,
with a board vote in April. End Summary.

IMF and GOT Close Fiscal Gap:

2. (Sbu) IMF Resident Representative Odd Per Brekk told us
today that the Mission and the GOT had reached broad
agreement on the measures needed to close the 7 Quadrillion
($5.2 billion) 2004 fiscal gap. According to Brekk, about
two-thirds of the adjustment would come from the spending
side. By increasing the previously-announced 10 percent
across-the-board cut in discretionary spending to 13 percent
the Fund estimates this cut will save 3.8 Quadrillion TL.
The Parliament's Budget Committee approved the increased cut
last night, and Brekk said the full Parliament was supposed
to vote on the amendment today.

3. (Sbu) Another 0.5 Quadrillion TL will be gained by
reallocating funds from Special Revenues to the General
Budget, i.e. by cutting the spending for which these
off-budget funds were allocated. There would also be
(unspecified) reductions in investment incentives. The
remainder of the fiscal gap will be filled through a
combination of increased taxes on alcohol, tobacco and
natural gas (contrary to the public statements by the Energy
Minister). The Mission has agreed to let the GOT have
another week to try to convince Turkey's Iranian gas supplier
to lower prices, but if this fails the GOT has agreed to
raise local gas prices instead.

4. (Sbu) Brekk also confirmed that the GOT proposal to reduce
the Value-Added tax rate on the textile sector from 18 to 8
percent was no longer under discussion--in fact, he said it
was a condition of the IMF Mission even coming to Turkey that
the GOT stop pushing this idea. The proposed decrease in VAT
rates on pharmaceuticals, however, had been accepted by the
Mission, which believes it will be revenue neutral. Note:
In a separate meeting, the leading opposition parliamentarian
on the budget committee, who is also a former director of the
tax administration, told econoff this measure would entail a
net loss to the State. End Note.

5. (Sbu) Brekk said the IMF has yet to take a formal decision
but he believes all of the above revenue and tax measures
will become prior actions.

Banking Sector Issues:

6. (Sbu) The Mission has reached agreement at the level of
Bank Regulatory Agency (BRSA) Chairman Tevfik Bilgin,
reportedly with Economy Minister Babacan's support, on three
politically-sensitive revisions to the banking law. First,
Bilgin and Babacan agreed to incorporate increased legal
protections for staff at the BRSA and the Deposit Guarantee
Fund (SDIF). Note: IMF staff have long been pushing for these
protections, and these agencies risk paralysis if official
acts are constantly questioned and investigated, as now seems
to be happening. End Note. Second, the high court of
appeals--which has been revisiting the substance of the
decisions made by the lower court specialized in banking
issues--would be allowed to review only the process by which
the lower court decision was taken. Third, the BRSA's
on-site inspection powers would be strengthened. The BRSA
would be authorized to bring in outside expertise, besides
the sworn auditors who have monopolized bank inspection.
Bilgin, himself a former sworn auditor, is reportedly unhappy
with this measure.

7. (Sbu) Brekk said Babacan has also agreed to help try to
lower public expectations about the sums likely to be
collected by SDIF from failed bank owners or from assets
currently held by the SDIF. Several current and former bank
regulators have complained to econoffs about this problem,
and Brekk said Babacan agreed to a press conference at which
the public would be informed about the GOT's more realistic

8. (Sbu) Brekk noted the ongoing work of the World Bank team
that has been in Turkey studying the issue of the state-owned
banks. Though there is no concrete plan as yet, according to
Brekk, one idea the Bank is looking into is to remove the
large government securities portfolios from the state banks,
and try to create a "real bank" from what's left and run it
professionally. Econcouns noted with concern that the GOT
seems to have completely reversed course on state bank
privatization (see septel).

9. (Sbu) Brekk said the GOT and bank regulators have decided
to merge SDIF-intervened Pamuk Bank with state-owned Halk
Bank, a far better approach in the Fund's view than a
possible cession of Pamuk Bank to Demir Bank's former owner.
The latter idea had been briefly under consideration as a way
to get Demir Bank's owner to drop his lawsuits against SDIF
and HSBC, which bought Demir Bank from SDIF. Note: Current
and former BRSA officials have told econoffs that the
Pamuk-Halk merger makes sense because: a) it reduces the cost
to the GOT of recapitalizing Pamuk and, b) it will help Halk
improve both the quality of its staff and its systems. End

10. (Sbu) Brekk said the consideration of SDIF's appeal of
the Danistay's (State Court of Accounts) initial decision to
overturn SDIF's takeover of Demir Bank is still pending.
(Brekk revealed that IMF Managing Director Koehler had raised
this issue with Prime Minister Erdogan, and wondered whether
the court's delay stems from pressure from Erdogan.)
Separately, HSBC CEO Piraye Antika told EconCouns that
Demir's former owner has also filed a suit against HSBC
istelf, and that HSBC global management is quite concerned.

11. (Sbu) Brekk said the controversial Cukurova group
continues to push for regulatory approval to allow the Cayman
Islands-based "North Way" Production Company to repay
Cukurova's debts to Yapi Kredi Bank and take over management
of that bank. According to Brekk, BRSA Chairman Bilgin has
been good so far about not accepting Cukurova's proposal.
Brekk said the IMF continues to press the GOT to name a
widely-respected person to lead an inquiry into the Imar Bank
collapse but the GOT has not been able to identify a suitable

Next Steps:

12. (Sbu) Brekk was optimistic the Fund Mission would leave
more or less on schedule next week. He doubted there would
be a board vote before April, however, given the necessary
preparation time and prior actions. Brekk said the Fund
might reduce the planned number of reviews this year from
five to three for practical reasons.

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