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

171628Z Nov 04

UNCLAS SECTION 01 OF 02 ANKARA 006427 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EUR/SE, EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN TU IZ
SUBJECT: CENTRAL BANK GOVERNOR ON MACRO SITUATION, MONETARY 
POLICY AND IRAQ DEBT 
 
REF: A. ANKARA 6354 
 
     ¶B. ANKARA 6426 
 
¶1. (Sbu) Summary:  Turkey's Central Bank Governor is 
optimistic about disinflation and downplays the risk inherent 
in the current account deficit.  He favors a cautious 
approach to moving monetary policy to explicit 
inflation-targeting.  Serdengecti is opposed to forgiving 
Turkish claims on Iraq.  (The Governor,s comments on IMF 
negotiations are reported septel.)  End Summary. 
 
Positive Inflation Outlook: 
--------------------------------- 
 
¶2.  (Sbu) In a November 12 meeting, Central Bank Governor 
Sureyya Serdengecti was optimistic that the 2004 consumer 
price inflation target of less than 12% would be met.  Though 
the October CPI and WPI numbers had come in surprisingly high 
(at 2.2% and 3.2%, respectively), the Governor did not think 
this represented a trend.  In addition to seasonal factors, 
he said the October numbers were driven up by unusual factors 
in agricultural prices and the advent of Ramadan, which 
typically causes prices to rise.  In addition, higher world 
oil prices began to have an impact on consumer prices. 
(Serdengecti noted that he had been urging the Government to 
pass through the full effect of higher world oil prices in 
2004, rather than in 2005, when, he thought, meeting the 8% 
CPI target would be difficult.) 
 
¶3.  (Sbu) While many structural components of inflation had 
been eliminated, Serdengecti continued to be concerned about 
rigidities in rents and services prices.  Overall, he 
believes the economy is neither overheating nor slowing down 
in a way that would imply a need for changes in current 
monetary policy.  The Bank had begun focusing on this 
objective several months ago, keeping in mind that achieving 
next year's target is important for Central Bank credibility. 
 He was pleased that the exchange rate was not the cause of 
the higher October inflation numbers. 
 
Structural Changes in the Turkish Economy: 
--------------------------------------------- ---------- 
 
¶4. (Sbu) Serdengecti pointed to a number of favorable trends 
in the Turkish economy.  On oil prices, he asserted that 
companies can no longer pass on the full extent of their cost 
increases to consumers.  He said that the State Statistical 
Institute is working on changes to the CPI basket.  He 
believed this change may lead to a finding that inflation has 
been lower than previously reported.  The Institute will also 
develop a new calculation of core inflation -- CPI minus food 
and energy prices -- which the Central Bank could then begin 
targeting directly.  Serdengecti pointed to the huge 
increases in productivity in the private sector and the 
shrinking share of the public sector in the economy as 
evidence of the non-inflationary nature of growth.  Overall, 
he considers that most of the remaining problems lie in the 
public sector. 
 
Inflation Targeting: 
------------------------ 
 
¶5. (Sbu) Though Serdengecti agrees with the IMF that the Bank 
should move to "full-fledged" explicit inflation targeting 
over the medium term, he continues to urge caution:  "If you 
are not successful with inflation targeting, what do you do? 
You cannot target the exchange rate and you cannot target 
money supply in a high inflation environment."  He 
nevertheless accepts the need to prepare for explicit 
inflation targeting once a new program with the IMF has been 
agreed to and there has been a long period in which Central 
Bank has built up credibility. 
 
Current Account Deficit: 
------------------------------- 
 
¶6.  (Sbu) Serdengecti asserted that the public discussion of 
the current account deficit reflected past experience and an 
inability to fully comprehend the implications of a floating 
exchange rate regime.  To support the case that it,s a real 
float, he pointed out that the Central Bank had not been in 
the foreign currency market for five months.  If people 
complain about the risk of the current account deficit, "We 
answer they should buy more dollars, but they don,t want 
to," the Governor said. 
 
¶7.  (Sbu) Serdengecti also confirmed press reports that the 
bank was considering resuming its foreign exchange purchase 
auctions.  These purchases would help the Bank build 
reserves, which he admitted were not high enough given 
Turkey,s large foreign debt service requirements in coming 
years.  Other than reserve building, he said the Central Bank 
reserved the right to intervene if markets are too volatile, 
in which case they may buy large quantities on a single day. 
Serdengecti acknowledged and agreed with the IMF,s point 
that the Bank should make its intervention policy more 
transparent and said it would do so. 
 
Iraq Debt: 
------------ 
 
¶8. (Sbu) Econ/C raised the issue of the Central Bank,s 
holding of Iraq debt and pointed out the importance of debt 
forgiveness to ensure Iraq,s stability.  The Governor said 
the Bank would have a problem with debt forgiveness, claiming 
that Turkey, a poor country, could not afford debt 
forgiveness, even for a very good cause.  He said that if the 
Central Bank did forgive the debt, the Government would have 
to compensate it for the loss, and in a context of tight 
fiscal policy it would be difficult for the Government to do 
so.  While expressing sympathy for the Iraqi people, he noted 
that Iraq, unlike Turkey, had significant oil resources. 
While open to a rescheduling or "doing something about 
interest," he opposed forgiveness. 
 
Comment: 
------- 
 
¶9. (Sbu) We raised the Iraqi debt issue with Serdengecti 
since most of Turkey,s Iraq debt is held by the Central 
Bank.  However, it will be the Turkish government, not the 
independent Central Bank, that will need to make the policy 
call on Iraq debt, with an eye to more than economic 
considerations.  Serdengecti deserves tremendous credit for 
having preserved Central Bank independence and for bringing 
down inflation.  Although there are risks, the move to 
explicit targeting of inflation will be jewel in the crown of 
his successful campaign to transition Turkey to a more 
"normal", low-inflation economy. 
 
Baghdad minimize considered. 
EDELMAN