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

221356Z Jul 04

UNCLAS SECTION 01 OF 02 ANKARA 004095 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - LOEVINGER, MILLS, ADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN PREL TU
SUBJECT: TURKEY READY FOR FOR 8TH IMF REVIEW, 2005 STILL UP 
IN THE AIR 
 
REF: ANKARA 3662 
 
SENSITIVE BUT UNCLASSIFIED.  MARKET SENSITIVE NOT FOR NON-USG 
RELEASE. 
 
¶1.  (SBU)  Summary.  The IMF Executive Board has scheduled 
its eighth review of Turkey's performance under its stand-by 
program for July 30.  The Board will also discuss an IMF 
staff "Article IV" report on Turkey's economic developments 
and policies over the last three years.  Turkish officials 
and the IMF resrep expect the Board meeting to go smoothly, 
although they acknowledged that the discussions leading up to 
the board meeting were more protracted than expected.  An IMF 
mission in September will discuss the ninth review, which 
should go to the Board in October, as well as Turkey's 
relationship with the IMF after the stand-by expires in early 
February 2005.  End Summary. 
 
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8th Review 
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¶2.  (SBU)  On July 16, Turkish authorities signed a letter of 
intent with the IMF for completion of the 8th review of its 
current Stand-by Arrangement with the IMF.  The signing came 
nearly a month after the departure of the country team review 
mission (reftel) and during the last hours of parliament's 
session before going on its summer recess.  At the completion 
of the review mission, there were three unmet structural 
benchmarks that delayed what perhaps should have been an 
easier process given higher than expected GDP growth, strong 
fiscal results and continued disinflation.  (Structural 
"benchmarks" are not formal requirements necessary for 
completion of reviews, but are indicators that the Fund uses 
to assess performance under a program.) 
 
--  The first such benchmark concerned petroleum excise 
    taxes, which the GOT had been reducing as a way to keep 
    fuel prices low in the face of the current high global 
    oil price environment.  The Fund argued that this was a 
    departure from the established framework for taxation 
    ) a recurrent issue with Turkish fiscal policy -- and 
    that it was unwise given the widening current account 
    deficit.  IMF staff and the GOT finally agreed to 
    reinstate the excise tax at close to the level assumed 
    in the budget, thus partially fulfilling the benchmark. 
 
--  Second was the benchmark related to the process of 
    privatization of state banks.  In one of its last 
    actions before going on recess on July 16, the 
    parliament passed a law approving the merger of state- 
    owned Halk bank with Pamukbank, a troubled private 
    sector lender taken over by the Savings Deposit 
    Insurance Fund (SDIF).  This, along with publication of 
    a privatization strategy for the merged bank, served to 
    partially satisfy the IMF benchmark.  Publication of 
    privatization strategies for state-owned banks Ziraat 
    and Vakif has yet to occur. 
 
--  The final issue holding up the letter of intent was 
    passage of legislation providing for a separate revenue 
    office under the Ministry of Finance, which the Fund 
    had originally sought to have passed in May.  The IMF 
    had hoped to see this legislation enacted before the 
    board meeting.  Despite the goverment's efforts, 
    however, parliament was unable to complete action 
    before going on recess.  The GOT and IMF agreed that 
    passage of the legislation would be elevated to the 
    level of a formal performance criterion to be met prior 
    to the ninth review. 
 
¶3.  (SBU)  Another issue not included as a specific benchmark 
in the program, but that surfaced during the discussion 
surrounding the signing of the LOI was that of local 
government debt.  During its last week, parliament passed a 
new local administration law that sets limits on municipality 
borrowing and addresses the restructuring of current arrears 
on Treasury-guaranteed liabilities.  The IMF and World Bank 
were concerned about this law due to its implications for 
debt management and debt sustainability, but the GOT actively 
prevented their involvement in its design.  The law is part 
of the AK party decentralization agenda; how it will be 
implemented will continue to be a subject of discussion for 
the Fund. 
 
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POST FEBRUARY 2005 RELATIONSHIP WITH IMF 
---------------------------------------- 
 
¶4.  (SBU)  In several meetings with the Turkish Treasury, we 
have been able to get few specifics on thinking about the 
economic framework for 2005.  The GOT is currently preparing 
a three-year program that will orient budget and financing 
strategies going forward with a goal of continued debt 
reduction through a high primary surplus, according to 
Treasury U/S Canakci.  The GOT recently announced broad 
targets for next year, including GDP growth of 5%, an 
inflation rate of 8%, and an exchange rate of 1.7 New Turkish 
Lira (i.e. 1,700,000 current lira) per dollar.  Other key 
variables such as the role of the IMF and size of the primary 
surplus are still under discussion and are not set to be 
announced until September.  In a recent conversation with 
embassy economic section, Canacki made a reference to a 
successor IMF program by stating "the need for external 
anchors has to decline". 
 
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FURTHER PRIVATE SECTOR CRITICISMS 
--------------------------------- 
 
¶5.  (SBU)  Adding to the private sector criticism of the IMF 
voiced to the embassy by former GOT officials (reftel), 
another ex-official now consulting for a major bank raised 
concerns that the Fund has been "too easy" on the GOT.  He 
specifically mentioned the new local administration law and 
the lack of IFI involvement in its design, explaining that it 
was not strict enough in limiting municipalities ability to 
incur debt. (Note: the Deputy Director General of Budget and 
Fiscal Control at the Ministry of Finance expressed similar 
discontent in another meeting with econ officers.)  The 
consultant also spoke more generally about how markets have 
off-loaded the role of economic policy watchdog to the IMF 
and World Bank and that the GOT should do more to demonstrate 
to markets its ownership of economic reform. 
 
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COMMENT 
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¶6.  (SBU)  The delays in signing the letter of intent and 
scheduling the Board meetings highlighted the risk of 
complacency about structural reforms that post has described 
in previous reporting.  Rather than easing enactment of 
crucial structural reforms, better than expected growth and 
disinflation are perversely making the politics of reform 
more difficult for the government to manage.  During her 
recent visit to Turkey, State/EUR DAS Kennedy reinterated our 
message on the centrality of maintaining market confidence. 
We are taking advantage of other opportunities to reinforce 
this message.  The process of designing a new three-year 
program is positive in that it may address complaints that 
the GOT was simply interested in how much financing the IMF 
could make available without demonstrating "owned" a coherent 
framework that financing would support.  At the same time, 
however, lack of clarity about a follow-on relationship with 
the IMF serves to exacerbate market uncertainty regarding 
future Turkish policy. 
DEUTSCH