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Cablegate: Got Technocrats On Imf Negotiations: Slow But

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

171607Z Nov 04

UNCLAS SECTION 01 OF 03 ANKARA 006426

SIPDIS

SENSITIVE

STATE FOR E, EUR/SE, AND EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: EFIN ECON TU
SUBJECT: GOT TECHNOCRATS ON IMF NEGOTIATIONS: SLOW BUT
STEADY PROGRESS

REF: ANKARA 6135

1. (SBU) Summary: Turkish economic technocrats describe
slow but steady progress on the many issues outstanding when
the IMF mission left Ankara late last month, including social
security reform, VAT tax rates, and a new banking law.
Difficult political decisions remain to be made --
particularly on social security pension reform -- but it
seems increasingly likely that IMF talks could resume in
early December and that a letter of intent could be concluded
before the December 17 EU decision on Turkish accession,
although the timing will be tight. A strong U.S. message of
support for the IMF when Secretary Snow sees Minister Babacan
November 20 would help reinforce the political dynamic in
Turkey in support of an effective new IMF program. End
Summary.

2. (SBU) In a series of meetings before the November 12-16
Bayram holiday, economic technocrats described substantial
progress on the many issues outstanding when the second IMF
mission left town in late October. Though several tough
issues remain, a number of others have been resolved and the
remaining issues are mostly either being framed for
high-level decision or will have to be hashed out with the
IMF in the final stages of the negotiation.

3. (SBU) The tone of our meetings was surprisingly positive.
In contrast to discussions following previous IMF missions,
none of the officials seemed angry with or irritated at the
IMF, even when they disagreed with the IMF,s position, and
some were openly sympathetic to the IMF,s arguments.

Backing Away from VAT Cut?
--------------------------

4. (SBU) Treasury Undersecretary Ibrahim Canakci and an
exhausted-looking Director of Tax Administration Osman
Arioglu told us separately that the GOT had hoped to couple a
reduction in VAT tax rates with a major campaign to improve
tax compliance. (Arioglu claimed that improvements in the
tax administration,s information technology would be a big
help in tracking delinquent taxpayers.) However, several
officials said the Turks had now given up on a generalized
VAT rate cut, but were still hoping to convince the IMF to
allow a rate cut limited only to certain sectors, notably
textiles. Arioglu argued that given the high level of tax
fraud in the textile sector, a lower rate combined with
tougher enforcement would boost collections. He also thought
the revenue impact of a rate cut would be offset by lower VAT
rebates on exported textiles. Nevertheless, both Arioglu and
Deputy Budget Director Ahmed Kesik told us the IMF remained
opposed to any VAT rate cuts. Kesik thought the Turkish side
would eventually give in, and seemed sympathetic to the IMF
argument.

Special Consumption Tax Hikes Seem Agreed
-----------------------------------------

5. (SBU) Kesik also said the IMF had agreed to the recently
announced hike in the Special Consumption Tax (SCT) on autos,
which many economists hope will help moderate surging auto
imports. Kesik confirmed press reports that there will be
significant increases in the SCT rate for a variety of
products, most likely including tobacco, alcohol, and
petroleum products. Kesik noted that with revenue targets
substanially above projected inflation, the GOT will rely on
SCT rate increases to finance the increase in investment in
the 2005 budget. On Personal Income Tax rate changes, State
Planning Organization Deputy Undersecretary Birol Aydemir
said any change in tax rates would be revenue-neutral.

Tax Adminstration Reform Differences Narrowing
--------------------------------------------- -

6. (SBU) A new draft Tax Administration reform law -- an
oft-postponed reform under the existing IMF program -- is
being negotiated both with the IMF and between the Ministry
of Finance and the Prime Ministry. After months in which
multiple contacts told us that the Prime Ministry staff, led
by Undersecretary Omer Dincer, had reservations about the
draft law prepared by the Ministry of Finance,s Tax
Administration, the number of issues has now been
significantly narrowed. The two principal remaining ones are
whether the Tax Administration should have responsibility for
tax policy (as desired by the Tax Administration and opposed
by the IMF) and whether the tax audit function should be
merged into the Tax Administration (as desired by the Prime
Ministry Undersecretary). Currently, tax audit is the
responsibility of the board of tax auditors which, although
it is also under the umbrella of the Ministry of Finance, is
a separate board. Aydemir was optimistic the GOT would
resolve the dispute and achieve final agreement with the IMF
on the draft law.

Politically Tough Social Security Reforms Moving
--------------------------------------------- ---

7. (SBU) Canakci and Aydemir confirmed that the health
insurance component of the social security reform had been
approved by the Council of Ministers. But the more
politically-difficult reform of the social security pension
system had not yet come to the Prime Minister for a final
decision. Canakci said Ministers Babacan (Economy), Unakitan
(Finance), and Basesioglu (Labor) met November 8 to hammer
out final details but would only make a detailed presentation
to the Prime Minister for decision after Bayram. Several
officials, including Central Bank Governor Serdengecti,
emphasized the political difficulty of deciding how much to
push back retirement ages and/or to increase current social
security payroll taxes. The political pain can be eased by
long or gradual phase-ins but the IMF insists on a clear
commitment to reduce the huge deficits in the social security
system, currently running at 4 percent of GDP.

Banking Law Stuck on Role of Sworn Auditors
-------------------------------------------

8. (SBU) The officials all said that the IMF and World Bank
joint team that came to Turkey the week of November 8 had
reached broad agreement on the text of a draft banking law,
with the exception of the issue of sworn bank auditors
retaining a monopoly on on-site inspection. BRSA Chairman
Tevfik Bilgin, himself a former sworn bank auditor, is
reportedly not budging on this issue, but neither is the IMF:
the independent commission that investigated the Imar Bank
collapse found that the sworn bank auditor monopoly on
inspection contributed to regulators, lack of awareness of
the fraud at Imar.

Privatization Not Breaking New Ground
-------------------------------------

9. (SBU) Officials gave conflicting accounts of how much
importance the new program is likely to place on
privatization. Ozgur Demirkol, the working-level Treasury
official responsible for coordination of IMF negotiations,
claimed that the new program would give privatization a big
push. State Planning's Aydemir, on the other hand, made the
usual GOT lament about how difficult it was to set targets
when the courts stymie GOT privatization efforts. Asked
about the possibility of legislating protections against
judicial prosecution of officials selling state enterprises
below a notional "value" -- a protection that might have
allowed last year,s Tekel tobacco privatization to go
through -- Aydemir said this was too difficult politically.
He said the government had been unable to legislate similar
protections for bank regulators, even though badly needed to
allow regulators to fulfill their responsibilities.

Pushing for Larger Access to IMF Funding?
-----------------------------------------

10. (SBU) Senior GOT officials were closed-mouthed on the
size of the financing. However, mid-level Treasury official
Ozgur Demirkol specifically asked for U.S. support on the
size of the financing -- with Turkey desiring an amount
substantially above the bottom of the board-approved range in
order to give the markets confidence. Note: Minister
Babacan may well make a pitch on this issue to senior USG
officials, including at his November 20 bilateral with
Secretary Snow. End Note.

SIPDIS

Timing is Tight
---------------

11. (SBU) Turkish officials still hope to be far enough along
to convince the IMF to return after Thanksgiving, and to wrap
up agreement on a draft Letter of Intent (LOI) before the
December 17 EU meeting. Central Bank Governor Surreya
Serdengecti said he had urged the government to move
expeditiously to wrap up a program several months ago, to be
sure and have a program in hand at the time of the EU
decision. He noted that his counsel was not heeded. He
believes the absence of an IMF program helps anti-Turk voices
in the EU. Canakci told us it would be desirable to have
agreement on a draft LOI before December 17, just in case the
decision went against Turkey's accession.

Comment
-------
12. (SBU) Secretary Snow's November 20 meeting with Minister
Babacan in Berlin offers an excellent opportunity to
reinforce the IMF's insistence that a new program contain
meaningful structural reforms. We are not able to
substantiate recent press reporting that the Prime Minister
is becoming increasingly impatient with Babacan's advocacy of
an economically rigorous approach, but such a message of
support would likely strengthen Babacan's influence in senior
political councils. If pressed by Turkish officials on the
size of the IMF financing, post recommends we maintain
support for the low end of the financing range, in order to
keep pressure on the GOT to maximize its own efforts by
privatizing state enterprises, selling the assets of failed
banks, and collecting more tax revenues.
EDELMAN

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