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

081536Z Oct 03

UNCLAS SECTION 01 OF 02 ANKARA 006342 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD, AND EUR/SE 
TREASURY FOR OASIA - MMILLS AND JLEICHTER 
NSC FOR MCKIBBEN AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV TU
SUBJECT: NO AGREEMENT WITH IMF LIKELY UNTIL AT LEAST NEXT 
WEEK 
 
 
REF: A. ANKARA 6269 
     ¶B. ANKARA 6241 
 
 
 ¶1.  (Sbu) Summary: IMF Resident Representative told Econoffs 
October 8 that the Fund Mission is highly unlikely to wrap up 
agreement on the Sixth Review until early next week at the 
earliest.  Though the Turkish economic team had a long 
meeting with the Prime Minister October 7 on the IMF issues, 
the P.M. has not taken the decisions needed on difficult 
issues like the direct tax reform and the budget.  Further 
complicating efforts to get to agreement are Minister 
Babacan's planned trip to London October 9, the AK party 
Congress on October 12, and the bullishness of the markets. 
End Summary. 
 
 
¶2. (SBU) In a meeting the afternoon of October 8, IMF 
Resident Representative Odd Per Brekk and Deputy ResRep 
Christoph Klingen updated econoffs on the state of play with 
the IMF mission.  Though the mission has had its ups and 
downs, there has not been significant progress since Mission 
Chief Reza Moghadam briefed USG officials on October 6.  The 
one significant step forward is that the Turkish economic 
team had an opportunity to meet with Prime Minister Erdogan 
the evening of October 7.  According to Brekk, the P.M. did 
not take any decisions.  On the Fund's compromise proposals 
for Direct Tax Reform, however, the P.M. said he wanted to be 
sure and include Trade Minister Tuzmen--a strong defender of 
Free Trade Zone tax exemptions--in the discussion. 
 
 
¶3. (SBU) On the budget issues, Brekk said they still have a 
0.7 percent of GDP gap for 2004 between measures agreed and 
revenues needed to achieve the 6.5 percent target.  Even to 
get to this level, the GOT and Fund had to retain the 
earthquake tax, special consumption tax and fund levy. 
Though none of these were desirable taxes from the Fund's 
perspective they were needed to reach the target.  The 0.7 
percent gap includes 0.2 percent resulting from the 
Constitutional Court's decision yesterday to strike down for 
the second time the supplementary motor vehicle tax. Though 
there is still a small gap on the 2003 numbers this is less 
of a problem than the 2004 budget. 
 
 
¶4. (SBU) On financial sector issues, Brekk said the GOT had 
reasonable proposals to deal with the Imar Bank case.  On 
Pamuk Bank, it will cost $1.1 Billion to recapitalize the 
bank and the GOT needs to find a way to take about $1.7 
billion in non-marketable government securities off of 
Pamuk's balance sheet before sale.  There are reportedly two 
bidders: Finansbank and a foreign individual without banking 
experience, so the GOT has concerns about these candidates. 
On the privatizations and restructuring of Vakif Bank and 
Halk Bank there was not much progress. 
 
 
¶5. (SBU) Regarding the target for elimination of redundant 
employees at State Economic Enterprises, Brekk and Klingen 
confirmed that the GOT had missed the 19,000-employee 
end-September target by about 7,500 employees.  As Fund 
officials had explained previously, however, the GOT-Fund 
solution is to introduce a new law increasing the severance 
payment for retirements that take place by year-end.  This 
seems to be moving forward.  Brekk said the GOT is still 
confident it will attain the 25,000-employee year-end target. 
 
 
¶6. (SBU) One disappointing development has been a new delay 
on the Public Financial Management and Control Law.  Whereas 
Fund staff and the GOT had reached agreement on a text, now 
the GOT wants to take the additional step of reviewing how 
this law meshes with the GOT's new thinking on a broader law 
on public sector reform.  Brekk said Finance Minister 
Unakitan expressed confidence that this new step will only 
take a couple of weeks, allowing the law to be introduced 
before the IMF board considers the Sixth Review.   On the law 
to strengthen the BRSA, the Fund was negotiating with the GOT 
on the details of a new judicial body that would handle all 
cases arising from BRSA actions.  The GOT had now extended 
the scope of this body to all independent regulatory bodies. 
The IMF lawyer on the mission's initial reaction to the 
latest GOT proposals was that there might be significant 
issues for the Fund. 
 
 
¶7.  (SBU) The Bank-Fund project to find ways of reducing Bank 
intermediation costs is running up against the need for tax 
revenue, according to Brekk, such that the phase-in of lower 
taxes on banks would have to be slow.  When econoffs asked 
about how the Fund would tackle the broader problem of high 
taxation on the formal sector, Brekk said a technical mission 
on this very issue would be coming later this Fall, but that 
it was a difficult problem. 
 
 
¶8. (SBU) Brekk said the Turk Telekom privatization plan 
appears likely to be approved by the end of October, 
satisfying a key Sixth Review condition.  Though he said we 
should check this detail out with the World Bank, Brekk 
thought that the Turkish law on telecoms only allowed for the 
liberalization of fixed telephony when Turk Telekom is 
privatized, rather than at a fixed date. 
 
 
¶9. (SBU) With Babacan planning to go on a trip to London the 
evening of October 9, and an AK Party conference to be held 
on October 12, Brekk doubted the GOT would reach agreement 
with the Mission before early next week. Key members of the 
Mission are likely to stay in Ankara beyond this week in 
hopes of clinching a deal.  Though a number of issues remain 
unresolved, things could change quickly.  Brekk thought the 
imminent party congress made it harder for high-level 
decisions on controversial issues, and the bullishness of the 
markets meant there was less pressure for a deal with the 
Fund. 
EDELMAN