VZCZCXRO1473
RR RUEHDA
DE RUEHAK #1409/01 0751447
ZNR UUUUU ZZH
R 161447Z MAR 06
FM AMEMBASSY ANKARA
TO UEHC/SECSTATE WASHDC 4021
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC
RUEHIT/AMCONSUL ISTANBUL 0059
RUEHDA/AMCONSUL ADANA 0515
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 001409 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
DEPARTMENT PASS EXIMBANK 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: Turkish Treasury Under Secretary Optimistic about 
IMF Program 
 
Ref: Ankara 1332 
 
1.(SBU) Summary: Treasury Under Secretary Canakci believes 
the recent VAT rate cut and delays on Social Security 
legislation can be managed within the framework of the IMF 
program, saying the Prime Minister will ensure the Social 
Security legislation will passed soon.  Canakci downplayed 
the importance of the choice of Central Bank Governor, 
asserting the reform process is "institutionalized."  He 
requested U.S. support in the OECD Export Credit Agency 
discussions of Turkey's sovereign credit rating and for an 
increase in its IMF quota. End Summary. 
 
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---------------------- 
Optimism on IMF Program Despite VAT Cut, Social Security 
Delay 
--------------------------------------------- --------------- 
---------------------- 
 
¶2. (SBU) Turkish Treasury Under Secretary Ibrahim Canakci 
told us Turkey's relationship with the IMF has "ups and 
downs" but expressed optimism that the program would 
continue.  He agreed that the biggest problem for relations 
with the Fund relating to the recent VAT rate cut was more 
one of principle than the measure itself.  Confirming that 
Treasury had opposed the recent Value-Added Tax rate cut, 
which was supported by the Ministers of Commerce, Foreign 
Trade and Finance, Canakci explained that the textile 
companies had pushed for a long list of measures, including 
extending regional tax incentives to all textile companies, 
reducing social security premia payments, and reduced energy 
prices.  With textile VAT export rebates exceeding VAT 
collections, the Tax Administration has long argued cutting 
the VAT rate for textiles would be revenue-neutral or even 
add revenue.  Though Canakci, like the IMF, is skeptical of 
this claim, he said the VAT rate cut was the least costly of 
the measures proposed by the textile firms. 
 
¶3. (SBU) Canakci pointed out that cutting the VAT rate would 
not help exports per se, since VAT on exported products is 
rebated.  The line ministries argue, however, that by 
helping formal sector textile companies compete domestically 
with the large number of local companies who don't pay their 
taxes or social security contributions, the rate cut will 
help formal sector companies, enabling them to compete 
internationally. 
 
¶4. (SBU) Going forward, the challenge will be to resist 
other sectors' demands for comparable rate cuts.  Canakci 
told us he hoped the GOT would be able to do so, citing the 
unique importance of the textile sector for employment and 
exports.  In contrast, the tourism sector is arguably 
suffering from temporary factors such as Avian Flu. 
 
¶5. (SBU) On the Social Security legislation, Canakci 
revealed that the parametric reform legislation-the key 
structural condition the IMF is waiting for-had finally 
moved from the parliamentary sub-commission to the full 
Budget and Planning Commission, which would begin 
deliberations on it March 15.  Canakci said the GOT hoped to 
pass it in conjunction with the legislation merging the 
three social security institutions, which was already out of 
commission and in the general assembly.  According to 
Canakci, the Prime Minister is personally following this 
issue, reminding ministers that he promised IMF Managing 
Director Rato he would have the legislation passed in 
February. 
 
--------------------------------------------- ------- 
Downplaying Central Bank Governor Issue 
--------------------------------------------- ------- 
 
¶6. (SBU) With the newspapers full of the March 14 departure 
of Central Bank Governor Serdengecti and the naming of Vice- 
Governor Erdem Basci as Acting Governor, Canakci (who had 
been widely-discussed as a possible candidate) downplayed 
the importance of the change.  He noted that the most 
important contributor to disinflation was the government's 
strong fiscal policy.  Though he praised Serdengecti's 
"personal qualities" and strong communications policy, he 
said monetary policy and the bank's independence had become 
"institutionalized," such that it had become less important 
 
ANKARA 00001409  002 OF 002 
 
 
who was named to lead the Bank. 
 
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-------------------------------------- 
Turkey's Improved Situation Not Reflected in OECD ECA 
Sovereign Risk Rating 
--------------------------------------------- --------------- 
-------------------------------------- 
 
¶7. (SBU) Canakci requested U.S. support in the OECD Export 
Credit Agency forum that sets a common sovereign risk rating 
for borrowing countries.  He said Turkey is rated a 5 on a 
scale of 1 to 7.  has not been upgraded recently to reflect 
Turkey's improvement as a sovereign credit.  Turkey was 
upgraded from a 6 to a 5 two years ago, but has not been 
upgraded recently to reflect Turkey's improvement as a 
sovereign credit.  As a result, export credit agency charges 
are increasingly becoming uncompetitive, raising the 
relative cost of ECA-financed projects substantially. 
Commercial credits have begun offering longer maturities and 
grace periods, rendering them newly-competitive with ECA's. 
Canakci attributes the problem to the "backward-looking" 
approach of the models used.   He said the OECD group had 
met in February and would meet again in April.  Canakci said 
he may raise this issue in his upcoming meeting with U.S. 
Treasury DAS Sobel on the margins of the G-20 deputies 
meeting. 
 
--------------------------------------------- --------------- 
----------------------------------------- 
Turkey Pushing for Ad Hoc Quota Increase and Worried about 
IMF Interest Charges 
--------------------------------------------- --------------- 
------------------------------------------- 
 
¶8. (SBU) Canakci said he also wants to raise two IMF issues 
with the U.S. Treasury.  Turkey is pushing for an "Ad Hoc" 
quota increase in the IMF to better reflect it's (and other 
key emerging markets') weight in the world economy. 
 
¶9. (SBU) Turkish Treasury is also worried about the risk 
that the IMF will raise the interest rates it charges to 
Turkey.  With Brazil and Argentina having repaid early, and 
the Fund financing its operations from a much smaller 
lending portfolio, Turkey fears it will be charged a higher 
margin.  Canakci says that with IMF terms already 
approaching what Turkey can tap in the Eurobond market, 
increased rates would make it harder for Treasury to justify 
IMF borrowings domestically.  Comment: This last point omits 
the substantial positive signaling effect which Turkey 
derives from having an IMF program, not to mention that it 
is doubtful there is market appetite sufficient to replace 
IMF borrowing on the terms Turkey has recently received. 
End Comment. 
 
Wilson