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

231521Z Jul 03

UNCLAS SECTION 01 OF 02 ANKARA 004666 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN PREL TU
SUBJECT: CONSTITUTIONAL COURT RULING THROWS MONKEY WRENCH 
INTO TURKISH BUDGET, IMF REVIEW 
 
 
REF: A. (A) ANKARA 4551 
     ¶B. (B) ANKARA 4480 
 
 
¶1.  (SBU) Summary: The Turkish Constitutional Court this 
afternoon annulled an additional tax on motor vehicles, 
potentially creating a $780 million budget hole just as the 
government was moving to fill a $1.65 billion fiscal gap as 
 
 
 
 
 part of an agreement with the IMF.  It is not clear yet 
whether this decision will stick (i.e. is final), whether it 
could prompt challenges to other GOT fiscal measures, or how 
it will affect the IMF's Fifth Review.  Earlier in the day, 
IMF ResRep had told us that he expected the GOT to complete 
the remaining prior actions for the Fifth Review this week. 
He also had identified key issues for the Sixth Review, 
notionally scheduled for October, to include keeping on track 
on the fiscal side (including the 2004 budget), agreeing on 
language for direct tax reform legislation, parliamentary 
approval of the Public Financial Management Law, and further 
progress on reducing redundant State Economic Enterprise 
workers.  End Summary. 
 
 
¶2.  (SBU)  The Constitutional Court this afternoon annulled 
an additional tax on motor vehicles that the GOT had imposed 
earlier this year.  The government had expected to collect 
some TL 1.1 quadrillion ($780 million) in revenues through 
this measure this year, so the court's decision potentially 
creates a substantial hole in the budget.  It comes just as 
the GOT had agreed to implement additional fiscal measures to 
close a TL 2.3 quadrillion gap identified in discussions this 
month with IMF staff.  The court, which was acting in 
response to a suit brought by the opposition CHP party, 
decided not to annual additional taxes on property. 
 
 
¶3.  (SBU) IMF ResRep and GOT officials with whom we spoke 
tonight were scrambling to gauge the impact of the decision. 
ResRep said the first question is whether this decision will 
stick (i.e. is final) and, if so, whether it will affect the 
nearly TL 400 trillion the government has already collected 
via the tax.  The second is whether it will prompt legal 
challenges to other fiscal measures, potentially creating a 
larger fiscal gap.  The third, assuming the decision stands, 
is how the GOT will fill the resulting gap, and how this 
process will affect timing for the Fifth Review.  Although 
the Court has not made public its reasoning, one Istanbul 
analysts speculates that its concern had to do with legal 
process, in which case the government could reintroduce the 
additional tax via separate legislation. 
 
 
¶4.  (SBU) Earlier in the day, before the Court's decision, 
IMF ResRep had provided us with further details on Fund-GOT 
discussions and the just-concluded LOI.  He noted that the 
fiscal gap was TL 2.3 quadrillion (not TL 2.5 quadrillion, as 
previously reported), including the projected budget cost of 
recent public sector pay hikes.  He largely confirmed -- with 
a few amendments --  the Finance Ministry's analysis (ref B) 
of how the GOT would fill the gap:  TL 1.2 quadrillion by 
continuing a partial spending freeze (mostly on investments, 
and including some savings from the lira's appreciation); TL 
250 trillion via increasing Tekel (tobacco and spirits) 
prices; TL 210 trillion via an increase in the Special 
Transactions Tax and Educational Levy; TL 580 trillion 
through turning "special revenues" over to the central budget 
(see ref b for explanation); and TL 75 trillion through the 
sale of Treasury's hazelnut stock.  ResRep said late today 
that the government had implemented all of these measures, 
save the partial spending freeze, which required a Finance 
Minister circular (and which ResRep expects to be done in the 
next day or two).  (Note:  None of these measures required 
Parliament's approval.  End note). 
 
 
¶5.  (SBU) The other major prior action for the Fifth Review 
was passage of the two remaining social security laws, 
covering the Bag-Kur Fund for the self-employed and the 
Social Security Fund.  Parliament is expected to pass both 
pieces of legislation this week.  The one outstanding issue, 
per ResRep, concerns the handling of social security arrears, 
which total some $10 billion.  Here, the GOT and Fund staff 
had been unable to reach agreement for months, as Fund staff 
insisted they could not accept anything that smacked of a 
general amnesty.  Fortunately, a Fund technical team that 
came out with the latest Mission made significant progress, 
and Fund staff now have an agreement on principles to be 
inserted into the pending legislation.  ResRep said this 
approach would preserve the net present value of the arrears 
by linking them to government t-bill rates, while determining 
the payment schedule based on a the individual's (or 
company's) ability to pay.  ResRep expects the legislation to 
reflect these principles, but is watching closely to ensure 
there is no slippage. 
 
 
¶6.  (SBU) Given delays in other structural reforms, Fund 
staff has added one more prior action for this review: 
agreement on principles of the all-important Public Financial 
Management Law, which will reshape Turkey's entire budgetary 
process.  ResRep noted that this legislation has prompted 
major bureaucratic disputes between the relevant ministries 
(and ministers), but added that a ministerial-level meeting 
last week had produced general agreement.  One of the more 
difficult issues has been determining whether the Finance 
Minister or State Planning Organization will have the lead on 
implementing public investment projects.  ResRep said World 
Bank officials want to study this question further; once they 
give their blessing, the Fund will consider this prior action 
completed. 
 
 
¶7.  (SBU) Looking ahead to the Sixth Review, ResRep said the 
key issues will be keeping the budget on track, including 
preparation of the 2004 budget; obtaining Parliament's 
approval of the Public Financial Management Law and 
legislation designed to strengthen the Banking Regulatory and 
Supervisory Agency's (BRSA's) ability to deal with legal 
challenges; and final agreement on direct tax reform 
legislation.  On the latter, he noted that the intent of the 
reform was to reduce tax incentives provided to various 
regions and Turkey's numerous Free Zones.  However, this 
effort was facing stiff political opposition, including from 
State Minister for Trade Kursad Tuzmen.  The latest GOT draft 
actually had extended tax incentives to nearly 50 percent of 
Turkey's territory.  Fund staff decided the best approach was 
to stop this version of the legislation from moving forward 
(they succeeded), and to bring in another technical 
assistance team to try to move the GOT in a better direction. 
 
 
¶8.  (SBU) Finally, ResRep reported that the government had 
fallen short of its end-June target of eliminating 9900 
redundant positions at State Economic Enterprises (SEE's), 
cutting only 7400.  He expressed hope that, with public 
sector wage negotiations out of the way, the GOT would step 
up its efforts and come close to reaching its 19,400 
end-September target. 
 
 
 
 
DEUTSCH