Cablegate: Imf, Turkey Expect to Sign Loi for 8th Review Next

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

290946Z Jun 04





E.O. 12958: N/A


1. (SBU) IMF ResRep told us June 28 that the
recently-completed Mission had resolved most outstanding
issues, although the work was harder and took longer than
expected. He predicted they would sign the Letter of Intent
for the 8th Review next week, enabling the IMF Board to
complete the review before it begins its summer holiday.

2. (SBU) Brekk said there were two substantive outstanding
issues when the Mission departed. First, the GOT needed to
agree to pass higher oil prices on to consumers, i.e., stop
compressing the Petroleum Excise Tax to avoid passing on
higher world prices. The government on June 29 announced a
five percent increase in petroleum product prices. Second,
the GOT had not been fully living up to its commitment to
transfer Special Revenues (which in the past were earmarked)
to the general budget. The end-June target was to transfer
TL 1.3 quadrillion ($872 million), but the GOT had only
transferred TL 600 million ($403 million) as of mid-June.
After the Mission departed, the authorities transferred
another TL 600 million, so they are now close to the end-June
target. Brekk said the GOT clearly had been trying to take
advantage of fiscal overperformance to spend more money
(i.e., use these formly earmarked funds for spending outside
the budget), but the Fund stopped this.

3. (SBU) In a June 25 conversation, Treasury U/S Canakci
agreed the review had been more difficult than expected, in
large part due to disagreements over the Petroleum Excise Tax
and a GOT proposal to expand investment incentives. He added
that the GOT and Fund had also discussed a GOT legislative
initiative to cap municipal borrowing (previously limited
only by Treasury's willingness to provide guarantees for
external borrowing). The GOT had proposed capping borrowing
at 200 percent of a munipality's annual revenue, but -- after
the Fund weighed in -- agreed to reduce the cap to 100
percent of annual revenues.

4. (SBU) Brekk said they would have to plug in revised
macroeconomic numbers to the LOI, based on GNP and inflation
figures due to come out June 30. He predicted that the GOT
would have to revise up both projected GNP growth and the
current account deficit, which he acknowledged was becoming a
concern. Canakci also acknowledged for the first time that,
because of the growing current account deficit and large debt
repayments, a financing gap was likely to emerge in 2005. He
reiterated that the GOT had not yet decided whether to seek
another IMF Stand-by, but said he understood from comments by
Fund officials that the IMF would be willing to provide more
lending if requested. Separately, AK MP Reha Denemec told us
June 28 that, in economic terms, there was no doubt that
Turkey needed additional IMF financing, but GOT officials
were hesitant because of the perceived domestic political
cost of pursuing that option.

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