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

180429Z Jun 03

UNCLAS SECTION 01 OF 02 ANKARA 003916 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE AND EB 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
USDA FOR FAS FOR EC AND CCC/FSA 
 
 
E.O. 12958: N/A 
TAGS: EFIN EINV PGOV TU
SUBJECT: FIFTH REVIEW DELAY RAISES NEW CHALLENGES 
 
 
REF: A. A. ANKARA 3693 
     ¶B. B. ANKARA 3815 
 
 
Sensitive but Unclassified.  Not for Internet distribution. 
 
 
¶1.  (SBU) Summary: IMF Resident Representative Odd Per Brekk 
indicated to us today that, even with speedy conclusion of 
the GOT's letter of intent, the IMF's fifth review "cannot" 
be completed by the end of June, bringing into full play 
tough end-of-June performance targets.   Benign markets 
stemming largely from external factors, he suggested, have 
made the government complacent.  For the fifth review, Breck 
highlighted two key outstanding issues-- government agreement 
to additional fiscal measures to close the one-half percent 
of GNP shortfall the Fund sees in the primary surplus, and 
agreement on technical measures to implement a compromise 
"case-by-case" approach to the government's desired social 
security amnesty.  State Minister Babacan will chair a 
meeting at Treasury today to review the government's 
commitments under the fifth review.  Brekk stressed that the 
Fund has not discussed the idea of merging the fifth and 
sixth reviews, and that he would argue strongly against such 
a course, as it would essentially reward "bad" behavior. 
While the Treasury's initial auctions this week have been 
successful, Brekk characterized the Treasury's current cash 
position as "not comfortable," and suggested it would only 
"scrape by" in tomorrow's large bond redemption.  End Summary. 
 
 
¶2.  (SBU) Oustanding Issues: Brekk noted that internal IMF 
timelines virtually preclude completion of an IMF board 
meeting on Turkey before the end of June, even if all 
outstanding issues were resolved quickly.  Several key issues 
remain outstanding, notably agreement on additional fiscal 
measures to achieve the targeted 6.5 percent primary surplus, 
and completion of "technical work" to implement agreement on 
a "case-by-case" approach to a social security amnesty, in 
place of the general amnesty that the government had earlier 
proposed and at which the Fund had balked.  (Brekk noted that 
he believes Erdogan, at heart, still wants the latter.) 
Brekk noted that a range of measures to reduce the primary 
surplus shortfall (which the Fund estimates at 0.5 percent of 
GNP) have been agreed, including indexing certain taxes, 
increasing petroleum excise taxes, raising alcohol and 
tobacco prices, and allocating some special revenues to the 
general budget (though a final figure for the latter has not 
been agreed).  Brekk noted that additional measures are 
required, and the IMF does not believe the government's 
proposal to maintain a freeze on non-essential spending is 
sufficient.  However, the GOT at the political level is 
balking at some suggested measures, such as raising 
electricity prices. 
 
 
¶3. (SBU) Tight finances: Brekk noted that the overall 
negative trend in the budget is essentially revenue driven, 
as the government is consistently falling short on its 
revenue targets (mainly due to weakness in tax and social 
security contribution collections), and only making up the 
shortfall by squeezing capital expenditures.  State Minister 
Babacan will chair a Treasury meeting on these and other 
issues related to the fifth review this evening (June 17), 
before departing for a conference in London on June 18. 
 
 
¶4. (SBU) Tough line: Brekk stressed that the IMF will 
maintain its tough approach on budget issues, as even with 
additional revenues from the government's tax amnesty, there 
are "no excess revenues."  He reiterated that this has been a 
hard message to sell in the government, as few ministers have 
understood the country's true financial situation, and 
instead have been living in a false "psychology of excess 
revenue."  Brekk noted that the Treasury's cash position is 
very tight.  He predicted that it would "scrape by" in 
tomorrow's large (TL 6.4 quadrillion auction), but would not 
have much to spare.  One reason for the lack of cash, despite 
good rollover rates, is the fact that the Treasury had to pay 
out some USD 1.4 billion in April that had been collected in 
enforced savings accounts. 
 
 
¶5. (SBU) June Targets: Brekk conceded that any delay into 
July will automatically bring into full play tough 
end-of-June financial targets.  Given that data will not be 
available until August, however, the government will have to 
seek a "waiver of applicability," requiring it to make an 
effective case that the data will show it met the targets. 
"Strong measures will help," he emphasized.  Brekk added that 
to date the Fund has given no consideration to the idea of 
merging the fifth and sixth reviews, and that he would argue 
strongly against the idea.  Any such proposal, he argued, 
would "reward bad behavior," and move the IMF away from its 
policy of regular bimonthly and quarterly reviews to keep the 
pressure on the Turkish government to proceed with program 
implementation. 
 
 
¶6. (SBU) Quiet Markets: Meanwhile, Turkish markets remained 
flat on June 17, with the stock exchange rising from Monday's 
close of 11,036 to 11,169, while the lira strengthened 
slightly to 1.414 million (from 1.417).  Brekk noted that he 
had seen some weakening in markets earlier in the day, based 
on concern about Prime Minister Erdogan's apparent flirtation 
with the "Malaysia model" on his Asian trip, but "modestly 
favorable" (in one brokerage's estimation) budget results for 
May brought some relief.  Those May figures included a 
central government primary surplus of USD 1.7 billion, for a 
cumulative January-May surplus of USD 5.9 billion.  Real 
non-interest fiscal expenditures rose 2.9 percent, while real 
revenues rose 9 percent. 
PEARSON