Cablegate: Turkey Ready for for 8th Imf Review, 2005 Still Up

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

221356Z Jul 04





E.O. 12958: N/A



1. (SBU) Summary. The IMF Executive Board has scheduled
its eighth review of Turkey's performance under its stand-by
program for July 30. The Board will also discuss an IMF
staff "Article IV" report on Turkey's economic developments
and policies over the last three years. Turkish officials
and the IMF resrep expect the Board meeting to go smoothly,
although they acknowledged that the discussions leading up to
the board meeting were more protracted than expected. An IMF
mission in September will discuss the ninth review, which
should go to the Board in October, as well as Turkey's
relationship with the IMF after the stand-by expires in early
February 2005. End Summary.

8th Review

2. (SBU) On July 16, Turkish authorities signed a letter of
intent with the IMF for completion of the 8th review of its
current Stand-by Arrangement with the IMF. The signing came
nearly a month after the departure of the country team review
mission (reftel) and during the last hours of parliament's
session before going on its summer recess. At the completion
of the review mission, there were three unmet structural
benchmarks that delayed what perhaps should have been an
easier process given higher than expected GDP growth, strong
fiscal results and continued disinflation. (Structural
"benchmarks" are not formal requirements necessary for
completion of reviews, but are indicators that the Fund uses
to assess performance under a program.)

-- The first such benchmark concerned petroleum excise
taxes, which the GOT had been reducing as a way to keep
fuel prices low in the face of the current high global
oil price environment. The Fund argued that this was a
departure from the established framework for taxation
) a recurrent issue with Turkish fiscal policy -- and
that it was unwise given the widening current account
deficit. IMF staff and the GOT finally agreed to
reinstate the excise tax at close to the level assumed
in the budget, thus partially fulfilling the benchmark.

-- Second was the benchmark related to the process of
privatization of state banks. In one of its last
actions before going on recess on July 16, the
parliament passed a law approving the merger of state-
owned Halk bank with Pamukbank, a troubled private
sector lender taken over by the Savings Deposit
Insurance Fund (SDIF). This, along with publication of
a privatization strategy for the merged bank, served to
partially satisfy the IMF benchmark. Publication of
privatization strategies for state-owned banks Ziraat
and Vakif has yet to occur.

-- The final issue holding up the letter of intent was
passage of legislation providing for a separate revenue
office under the Ministry of Finance, which the Fund
had originally sought to have passed in May. The IMF
had hoped to see this legislation enacted before the
board meeting. Despite the goverment's efforts,
however, parliament was unable to complete action
before going on recess. The GOT and IMF agreed that
passage of the legislation would be elevated to the
level of a formal performance criterion to be met prior
to the ninth review.

3. (SBU) Another issue not included as a specific benchmark
in the program, but that surfaced during the discussion
surrounding the signing of the LOI was that of local
government debt. During its last week, parliament passed a
new local administration law that sets limits on municipality
borrowing and addresses the restructuring of current arrears
on Treasury-guaranteed liabilities. The IMF and World Bank
were concerned about this law due to its implications for
debt management and debt sustainability, but the GOT actively
prevented their involvement in its design. The law is part
of the AK party decentralization agenda; how it will be
implemented will continue to be a subject of discussion for
the Fund.


4. (SBU) In several meetings with the Turkish Treasury, we
have been able to get few specifics on thinking about the
economic framework for 2005. The GOT is currently preparing
a three-year program that will orient budget and financing
strategies going forward with a goal of continued debt
reduction through a high primary surplus, according to
Treasury U/S Canakci. The GOT recently announced broad
targets for next year, including GDP growth of 5%, an
inflation rate of 8%, and an exchange rate of 1.7 New Turkish
Lira (i.e. 1,700,000 current lira) per dollar. Other key
variables such as the role of the IMF and size of the primary
surplus are still under discussion and are not set to be
announced until September. In a recent conversation with
embassy economic section, Canacki made a reference to a
successor IMF program by stating "the need for external
anchors has to decline".


5. (SBU) Adding to the private sector criticism of the IMF
voiced to the embassy by former GOT officials (reftel),
another ex-official now consulting for a major bank raised
concerns that the Fund has been "too easy" on the GOT. He
specifically mentioned the new local administration law and
the lack of IFI involvement in its design, explaining that it
was not strict enough in limiting municipalities ability to
incur debt. (Note: the Deputy Director General of Budget and
Fiscal Control at the Ministry of Finance expressed similar
discontent in another meeting with econ officers.) The
consultant also spoke more generally about how markets have
off-loaded the role of economic policy watchdog to the IMF
and World Bank and that the GOT should do more to demonstrate
to markets its ownership of economic reform.


6. (SBU) The delays in signing the letter of intent and
scheduling the Board meetings highlighted the risk of
complacency about structural reforms that post has described
in previous reporting. Rather than easing enactment of
crucial structural reforms, better than expected growth and
disinflation are perversely making the politics of reform
more difficult for the government to manage. During her
recent visit to Turkey, State/EUR DAS Kennedy reinterated our
message on the centrality of maintaining market confidence.
We are taking advantage of other opportunities to reinforce
this message. The process of designing a new three-year
program is positive in that it may address complaints that
the GOT was simply interested in how much financing the IMF
could make available without demonstrating "owned" a coherent
framework that financing would support. At the same time,
however, lack of clarity about a follow-on relationship with
the IMF serves to exacerbate market uncertainty regarding
future Turkish policy.

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