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

021322Z Oct 03

UNCLAS SECTION 01 OF 03 ANKARA 006199 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD, EUR/SE 
TREASURY FOR OASIA - DLOEVINGER, MMILLS, JLEICHTER 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN EAID EINV PREL PGOV TU
SUBJECT: MEETING WITH TREASURY U/S CANAKCI 
 
 
REF: A. ANKARA 6141 
     ¶B. ANKARA 6162 
     ¶C. ANKARA 6165 
 
 
¶1. (SBU) SUMMARY: IN A MEETING WITH ECONOFFS, TURKISH 
TREASURY U/S CANAKCI DESCRIBED THE STILL-EARLY STATE OF PLAY 
WITH THE IMF SIXTH REVIEW MISSION.  CANAKCI CLAIMED THE GOT 
WAS ON TRACK TO MEET OR GET CLOSE TO END-YEAR INFLATION, 
GROWTH AND FISCAL TARGETS. HE WAS ALSO OPTIMISTIC ABOUT 
ACHIEVING A 6.5 PERCENT PRIMARY SURPLUS IN 2004. ON KEY 
STRUCTURAL REFORMS, ESPECIALLY THOSE INVOLVING LEGISLATION, 
PROGRESS WAS SLOWER.  ON DIRECT TAX REFORM, CANAKCI WAS 
OPTIMISTIC THAT THEY ARE NEARING AGREEMENT WITH THE FUND ON A 
COMPROMISE.  CANAKCI CLAIMED THE GOT HAD RECOMMITTED TO 
MOVING FORWARD ON WORLD BANK-PROPOSED STRUCTURAL REFORMS 
AFTER THE IMF REVIEW IS COMPLETE. HE CONFIRMED THAT THE U.S. 
FINANCIAL AGREEMENT HAD NOT YET BEEN PROPOSED TO THE COUNCIL 
OF MINISTERS AND PROVIDED NO INDICATION OF WHEN IT MIGHT BE 
PROPOSED, NOTING THE GOT HAD ADEQUATE CASH-FLOW FOR THE TIME 
BEING.  END SUMMARY. 
 
 
END-YEAR MACRO TARGETS WITHIN REACH: 
----------------------------------- 
 
 
¶2. (SBU) ECONOFFS MET WITH TREASURY UNDERSECRETARY IBRAHIM 
CANAKCI OCTOBER 2 TO GET AN UPDATE ON PROGRESS ON ECONOMIC 
REFORMS.  CANAKCI CHARACTERIZED DISCUSSIONS WITH THE IMF 
SIXTH REVIEW MISSION--CURRENTLY IN ANKARA--AS GOING WELL BUT 
STILL AT AN EARLY STAGE. DESPITE THE SECOND QUARTER SLOWDOWN 
IN GDP GROWTH, WHICH WAS PARTLY ATTRIBUTABLE TO THE WAR, 
CANAKCI EXPRESSED CONFIDENCE TURKEY WOULD ATTAIN ITS 5 
PERCENT 2003 GDP GROWTH TARGET.  CANAKCI CITED INDUSTRIAL 
PRODUCTION DATA SUGGESTING THAT THE PACE OF GROWTH HAD PICKED 
UP BEGINNING IN JUNE.  ON INFLATION, CANAKCI WAS SIMILARLY 
CONFIDENT ABOUT MEETING THE YEAR-END TARGET, SAYING THAT THE 
WHOLESALE PRICE INDEX MIGHT ACTUALLY BEAT THE 20 PERCENT 
TARGET AND COME IN AROUND 18 PERCENT FOR THE YEAR.  THE 
CURRENT ACCOUNT DEFICIT, ON THE OTHER HAND, MIGHT BE SLIGHLTY 
HIGHER THAN THE 3.2 PERCENT OF GDP PROJECTED AT THE TIME OF 
THE FIFTH REVIEW. 
 
 
FISCAL SITUATION AND 2004: 
------------------------- 
 
 
¶3. (SBU) CANAKCI SAID THEY ARE GOING THROUGH THE END-AUGUST 
FISCAL DATA WITH THE IMF TEAM, ALTHOUGH THEY STILL LACK FULL 
PUBLIC SECTOR-WIDE NUMBERS, INCLUDING FROM SEE'S.  HE 
ASSERTED THAT THE GOT MIGHT REACH ITS END-AUGUST FISCAL 
TARGET OR ONLY HAVE A SLIGHT DEVIATION. IT WAS MORE 
MEANINGFUL, HOWEVER, TO FOCUS ON THE FULL YEAR,  SINCE THE 
MONTH-T0-MONTH NUMBERS CAN BE MISLEADING DUE TO SEASONAL OR 
SPECIAL CIRCUMSTANCES. ONE SUCH EXAMPLE COULD BE FOUND IN THE 
NEGATIVE IMPACT ON THE JULY NUMBERS CAUSED BY FRONT-LOADING 
SOME EXPENDITURES THAT WOULD NORMALLY HAVE TAKEN PLACE IN 
AUGUST AND SEPTEMBER. THIS EXPLAINED THE SHARP IMPROVEMENT IN 
THE MONTHLY PRIMARY SURPLUS FROM JULY TO AUGUST. CANAKCI 
CLAIMED THE GOT'S STUDIES SHOW THAT TURKEY WILL ACHIEVE THE 
FULL-YEAR 6.5 PERCENT PRIMARY SURPLUS TARGET. 
 
 
¶4. (SBU) WITH GOT AND IMF OFFICIALS IN INTENSIVE 
CONSULTATIONS ON THE NUMBERS, CANAKCI EXPECTED THE BROAD 
OUTLINES OF THE 2004 BUDGET AND A CLEARER PICTURE OF THE 
END-YEAR FISCAL PROJECTION TO BE READY BY MONDAY.  HIGH 
PLANNING COUNCIL MEETINGS ON OCTOBER 8 AND 11 WOULD FURTHER 
CLARIFY THE BUDGET TO BE PROPOSED TO PARLIAMENT BY OCTOBER 
¶17.  CANAKCI STATED THAT BOTH THE IMF AND GOT BELIEVE THAT, 
IF THERE IS ANY SHORTFALL IN REVENUE, THERE IS ROOM TO MAKE 
UP FOR THIS BY CUTTING EXPENDITURES.  THOUGH THE 
UNANTICIPATED STRENGTH OF THE LIRA HAD RESULTED IN LOWER VAT 
COLLECTIONS, THIS WAS OFFSET BY THE EXCHANGE RATE'S POSITIVE 
EFFECT ON CERTAIN EXPENDITURES. HE ALSO DISAGREED WITH 
ANALYSTS' CONTENTION THAT THE RELIANCE ON ONE-OFF MEASURES 
WILL CREATE SERIOUS PROBLEMS IN ATTAINING 2004 FISCAL 
TARGETS.  HE EXPLAINED THAT THE ONE-OFF MEASURES AMOUNTED TO 
ABOUT 2.7 PERCENT OF GNP BUT THAT ALMOST HALF OF THEM, SUCH 
AS THE SPECIAL COMMUNICATIONS TAX AND THE SPECIAL 
TRANSACTIONS TAX, COULD EASILY BE REPEATED.  MOREOVER, IN 
2004 THE GOT EXPECTS TO SEE THE FULL-YEAR IMPACT OF 2003 
BUDGET CUTS IN HEALTH AND SOCIAL SECURITY, AS WELL AS THE 
STAFF REDUCTIONS IN SEE'S.  CANAKCI DENIED THAT LOWER GAS 
PRICES OR EARLY PAYMENTS OF CIVIL SERVICE BONUSES WOULD 
INTERFERE WITH THE GOT REACHING ITS FISCAL TARGET.  THE GAS 
PRICE REDUCTION STEMMED FROM LOWER COSTS, AND THE TL 160 
TRILLION (USD 114 MILLION) BONUS PAYMENTS--IF PAID 
EARLY--WOULD BE OFFSET. 
 
 
PARASTATAL STAFF REDUCTION: 
-------------------------- 
 
 
¶5. (SBU) CANAKCI ADMITTED THE GOT HAD ONLY REDUCED REDUNDANT 
POSITIONS AT STATE ECONOMIC ENTERPRISES BY 12,000 OUT OF THE 
19,400 TARGETED IN THE IMF PROGRAM BY THE END OF SEPTEMBER, 
¶2003.  CANAKCI POINTED OUT THAT A PORTION OF THE 
SHORTFALL--AT LEAST 3,000 POSITIONS--STEMMED FROM THE DELAY 
IN THE TEKEL PRIVATIZATION WHICH WAS ORIGINALLY SCHEDULED FOR 
THE THIRD QUARTER OF 2003 AND NOW WOULD TAKE PLACE IN THE 
FOURTH QUARTER.  CANAKCI ALSO CLAIMED THAT THE GOT HAD IN 
SOME CASES REDUCED STAFF IN EXCESS OF COMPANY-SPECIFIC 
TARGETS, BUT THAT THE IMF DID NOT GIVE THE GOT CREDIT FOR 
THESE ADDITIONAL REDUCTIONS. THE GOT IS NOW WORKING WITH THE 
IMF TO GET CREDIT FOR THESE REDUCTIONS BY COMMITTING NOT TO 
REHIRE.  TO FURTHER REDUCE PUBLIC SECTOR STAFFING, THE GOT IS 
STUDYING THE POSSIBILITY OF PROVIDING ADDITIONAL INCENTIVE 
PAYMENTS FOR YEAR-2003 RETIREMENT BY ANY OF THE 33,000 PUBLIC 
SECTOR EMPLOYEES ELIGIBLE FOR RETIREMENT. 
 
 
DIRECT TAX REFORM: 
----------------- 
 
 
¶6. (SBU) CANAKCI AGREED THAT THE GOT HAD "CONSTRAINTS" 
ARISING FROM THE PRIME MINISTER'S PUBLIC COMMITMENT TO 
REGIONAL INCENTIVES AND RESISTANCE TO REDUCTION IN FREE TRADE 
ZONE TAX EXEMPTIONS, LED BY TRADE MINISTER TUZMEN.  CANAKCI 
CONFIRMED IMF STAFF'S EARLIER COMMENTS THAT THE FUND TEAM WAS 
WORKING WITH GOT OFFICIALS TO DEVELOP A COMPROMISE. CANAKCI 
WAS OPTIMISTIC THAT LONG MEETINGS WEDNESDAY ON THIS ISSUE HAD 
BROUGHT THE TWO SIDES CLOSER TO AGREEMENT.  CANAKCI SAID 
THERE WOULD BE A MEETING WITH THE PRIME MINISTER ON THE 
DIRECT TAX REFORM THURSDAY EVENING.  ON FREE TRADE ZONES, THE 
COMPROMISE WOULD PHASE OUT EXEMPTIONS, PARTICULARLY ON 
PERSONAL INCOME TAX, THOUGH THERE WOULD BE SOME 
GRANDFATHERING OF ESTABLISHED COMPANIES. 
 
 
LEGISLATION: 
----------- 
 
 
¶7. (SBU) THE PUBLIC SECTOR FINANCIAL MANAGEMENT AND CONTROL 
LEGISLATION HAS BEEN PREPARED.  NOW THAT MINOR INTERAGENCY 
DISAGREEMENTS HAVE BEEN RESOLVED AND THE GOT HAS COME TO AN 
UNDERSTANDING WITH THE IMF TEAM, CANAKCI EXPECTED THE DRAFT 
LAW TO BE SUBMITTED TO PARLIAMENT ON MONDAY.  THE AMENDMENT 
TO THE BANKRUPTCY LAW THAT WOULD ALLOW A CHAPTER 11-STYLE, 
PRE-PACKAGED BANKRUPTCY IS MOVING FORWARD, WITH IMF EXPERTS 
IN MEETINGS AT THE JUSTICE MINISTRY THURSDAY. CANAKCI 
EXPECTED THE LAW TO PASS BY END-NOVEMBER AND THE IMPLEMENTING 
REGULATIONS TO BE PROMULGATED IN DECEMBER. 
 
 
¶8. (SBU) CANAKCI CONFIRMED THE IMF RESREP'S REPORT OF DELAYS 
IN PREPARATION OF THE LAW TO STRENGTHEN THE HAND OF BRSA IN 
GOING AFTER ASSETS OF OWNERS OF INTERVENED BANKS.  AFTER BRSA 
PROPOSED A DRAFT TO DEPUTY PRIME MINISTER SENER'S OFFICE, 
SENER TURNED IT OVER TO MINISTER SAHIN, WHO IS RESPONSIBLE 
FOR GOVERNMENT-PARLIAMENT RELATIONS AND THE JUDICIARY.  THE 
LAW SOMEHOW GOT BOGGED DOWN IN SAHIN'S OFFICE, SUCH THAT IT 
WILL NOT BE READY FOR SUBMISSION TO PARLIAMENT IN TIME FOR AN 
OCTOBER SIXTH REVIEW.  NOW THAT THE PROCESS HAS BEEN 
REINVIGORATED WITH HELP FROM THE PRIME MINISTRY, CANAKCI SAID 
GOT ACTION ON THIS DRAFT LAW WOULD BE "RELEVANT" WERE THE 
SIXTH REVIEW TO COME TO THE IMF BOARD IN NOVEMBER RATHER THAN 
OCTOBER.  COMMENT: POST WONDERS WHY THIS IMF REQUIREMENT 
WOULD NOT BE RELEVANT IF THE SIXTH REVIEW GOES TO THE IMF 
BOARD IN OCTOBER. END COMMENT.  CANAKCI THOUGHT THERE MIGHT 
BE SOME NEED TO REVISE THE TEXT BECAUSE THE JUDICIAL 
AUTHORITIES OBJECTED TO TIME LIMITS IN THE LEGISLATION. 
 
 
PRIVATIZATION: 
------------- 
 
 
¶9. (SBU) CANAKCI SAID PRIVATIZATION AUTHORITY PRESIDENT METIN 
KILCI BELIEVES THE TEKEL PRIVATIZATION WILL BE WRAPPED UP BY 
YEAR-END, POSSIBLY EVEN IN NOVEMBER.  ON TURK TELECOM, 
CANAKCI SAID THE EVALUATION AND TENDERING COMMITTEES HAD DONE 
THEIR WORK BUT IT WAS NOT YET CLEAR WHEN THE PROPOSED 
STRATEGY WOULD GO TO THE COUNCIL OF MINISTERS. 
 
 
IMAR BANK: 
--------- 
 
 
¶10. (SBU) THE TREASURY IS WAITING FOR THE SDIF (THE DEPOSIT 
GUARANTOR UNDER THE UMBRELLA OF BRSA) TO COMPLETE ITS 
FINDINGS ON THE COST OF PAYING IMAR BANK'S DEPOSITORS AND ON 
A FINANCING PLAN.  CANAKCI SAID TREASURY, THE CENTRAL BANK 
AND BRSA ARE WORKING TOGETHER ON THIS AND HAVE LAID OUT THREE 
PRINCIPLES:  1) THE REPAYMENT PLAN SHOULD NOT PUT PRESSURE ON 
DOMESTIC INTEREST RATES AND PROJECTIONS FOR INTEREST 
PAYMENTS.  2) IT SHOULD NOT CREATE A DUTY LOSS ON STATE BANKS 
WHEN THE DEPOSITS ARE TRANSFERRED TO STATE BANKS.  3) IT 
SHOULD NOT PUT PRESSURE ON MONETARY TARGETS OR DETERIORATE 
THE BALANCE SHEET OF THE CENTRAL BANK.  CANAKCI CONFIRMED 
THAT THE PLAN WILL MOST LIKELY INVOLVE TRANSFERRING THE 
DEPOSITS TO A STATE BANK, SUCH AS ZIRAAT BANK, AND THE 
TREASURY WOULD PROVIDE FUNDS TO EITHER PAY CASH TO DEPOSITORS 
OR PAY IN INSTALMENTS. EITHER WAY, THE PLAN WOULD RESULT IN 
AN INCREASE TO THE GOVERNMENT'S DEBT-TO-GDP RATIO.  HE NOTED 
THAT THE CENTRAL BANK WOULD HAVE TO PROVIDE SOME LIQUIDITY 
FOR THE CASH PAYMENT PORTION. 
 
 
WORLD BANK STRUCTURAL REFORMS: 
----------------------------- 
 
 
¶11. (SBU) CANAKCI DID NOT DISPUTE ECONOFFS' SUGGESTION THAT 
THINGS SEEMED TO BE GOING BETTER WITH THE FUND THAN WITH THE 
BANK.  CANAKCI ATTRIBUTED THE DIFFICULTIES TO THE NATURE OF 
THE BANK-SPONSORED STRUCTURAL REFORMS, WITHOUT ELABORATING. 
HE REFERENCED A BABACAN CONVERSATION WITH WOLFENSOHN AND 
WORLD BANK EUROPE DIRECTOR KATSU, SAYING THE GOT WOULD WORK 
ON SOME OF THE BANK ISSUES AFTER OCTOBER. 
 
 
U.S. FINANCIAL AGREEMENT: 
------------------------ 
 
 
¶12.  (SBU) CANAKCI REFERRED TO THE TREASURY-TO-TREASURY 
UNDERSTANDING IN DUBAI THAT THE GOT MIGHT REQUEST A 
DISBURSEMENT IN THE SECOND WEEK OF OCTOBER.  HE CONFIRMED, 
HOWEVER, THAT TREASURY HAD NOT YET SUBMITTED THE AGREEMENT TO 
THE COUNCIL OF MINISTERS FOR RATIFICATION, AND COULD NOT SAY 
WHEN IT WOULD DO SO.  WHEREAS CANAKCI'S SUBORDINATE OZGUR 
PEHLIVAN HAD EARLIER TOLD ECONOFF THAT THERE WAS NO NEED FOR 
PARLIAMENTARY APPROVAL OF THE FA UNDER TURKISH LAW, CANAKCI'S 
ONLY COMMENT WAS, "SOME PEOPLE ARE NOW SAYING THE FA NEEDS 
PARLIAMENTARY APPROVAL."  HE ALSO NOTED THAT THE TREASURY WAS 
IN A COMFORTABLE CASH-FLOW POSITION FOR THE REMAINDER OF THE 
YEAR. 
 
 
¶13. (SBU) CANAKCI ALSO REFERRED TO THE TREASURY'S CONCERNS 
ABOUT THE INTEREST RATE, CHUCKLING OVER THE OMB CALCULATION 
METHODOLOGY BEING A "BLACK BOX."  THOUGH CANAKCI ADMITTED THE 
RATE WAS LOWER THAN WHAT THE GOT COULD GET IN THE MARKET, HE 
NOTED THAT TURKEY'S BORROWING RATES WERE TRENDING DOWNWARDS, 
SUCH THAT THEY MIGHT REACH THE LEVEL IN THE FA. 
 
 
¶14. (SBU) ECONOFFS REMINDED CANAKCI OF THE DETAILED 
INFORMATION REQUIREMENTS IN SCHEDULE C OF THE AGREEMENT THAT 
THE USG WOULD NEED TO RECEIVE WHEN THE GOT REQUESTED A 
DISBURSEMENT.  ECONOFFS SUGGESTED MUCH OF THE SAME 
INFORMATION THAT WAS UNDOUBTEDLY BEING DEVELOPED FOR THE IMF 
MISSION COULD BE PROVIDED TO THE USG. ECONOFFS STRESSED THAT 
THE USG WANTED TO HELP TURKEY, BUT THAT IT WAS CRITICAL FOR 
THE GOT TO BE ABLE TO MAKE A CONVINCING CASE THAT THE REFORMS 
WERE MOVING FORWARD. CANAKCI REPLIED THAT BEING ON TRACK WITH 
THE IMF WAS THE MOST VISIBLE INDICATOR THAT THE GOT WAS 
IMPLEMENTING STRONG ECONOMIC POLICIES. 
 
 
INVESTMENT: 
---------- 
 
 
¶15. (SBU) ECONOFFS NOTED GOT LEGAL REFORMS TO IMPROVE THE 
INVESTMENT CLIMATE BUT ALSO POINTED OUT THE ABSENCE OF 
RESOLUTION OF SPECIFIC U.S. COMPANIES' PROBLEMS. CANAKCI SAID 
THE HIGH INVESTORS' COUNCIL (YOIK) WAS A VEHICLE TO HEAR 
FOREIGN INVESTORS' COMPLAINTS. HE SAID THAT FOREIGN COMPANIES 
HAD MADE PRESENTATIONS TO YOIK AND ENCOURAGED U.S. COMPANIES 
TO DO SO. CANAKCI CLAIMED THAT TREASURY WAS DOING ITS BEST ON 
THE INVESTMENT CLIMATE. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EDELMAN