VZCZCXYZ0043
RR RUEHWEB

DE RUEHAK #0682/01 0851429
ZNR UUUUU ZZH
R 261429Z MAR 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 1460
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHIT/AMCONSUL ISTANBUL 2392

UNCLAS ANKARA 000682 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: ELECTRICITY PRICE ISSUE HOLDING UP IMF PROGRAM 
 
REF: ANKARA 591 AND PREVIOUS 
 
¶1. (SBU) Summary: The IMF mission left Ankara March 21 
without reaching agreement on the terms of the Sixth Review. 
Both sides, however, were at pains to explain that agreement 
was reached in every area but one: what to do about the 
fiscal impact of constant electricity prices charged by 
state-owned energy companies, despite higher fuel costs.  The 
two sides are working to reach agreement through cost cuts 
since the Government seems determined not to raise 
electricity prices before elections.  Agreement was reached 
on spending cuts to make up for overspending in 2006 and 
subsequent populist measures that could hurt 2007 fiscal 
balances.  The Government persuaded IMF staff that it was 
unrealistic to try to submit pass social security reform 
legislation before the elections.  End Summary. 
 
 
------------------------- 
IMF Leaves Without a Deal 
------------------------- 
 
¶2. (SBU)  Following the more collegial Article IV discussions 
(reftel) the IMF Mission embarked on negotiations on the 
Sixth Review under its Standby Program.  Ultimately, the Fund 
mission finally left town March 21 without having reached 
agreement with the authorities -- a relatively rare 
occurrence for IMF missions here.  In the absence of an 
agreement, the customary press conference was not held, but 
both sides issued public statements to the effect that broad 
agreement had been reached in all areas except state energy 
company finances.   Minister Babacan followed up with an 
appearance before the press March 22.  We met with IMF and 
Turkish Treasury officials to get a fuller picture. 
 
---------------------------- 
Compensating Fiscal Measures 
---------------------------- 
 
¶3.  (SBU) Thanks largely to one-off revenues, in 2006 the 
Government overperformed on the centerpiece primary surplus 
target of 6.5% of GDP.  On the spending side, however, the 
Government violated its agreement with the Fund not to spend 
any of the overperformance and exceeded explicit spending 
caps.  To compensate for this overspending, it was agreed 
that 0.3% of GDP of spending cuts would be enacted in 2007. 
The outlook for 2007 performance has also been clouded by a 
series of measures, opposed by the IMF, such as expanding the 
number of provinces eligible for investment incentives, 
increasing pension payments more than projected,  and cutting 
special consumption taxes on vehicles.  Another 0.3% of GDP 
in cuts was therefore agreed by the two sides to bring 
projected fiscal balances back in line with the 2007 budget. 
The cuts are to expected to be spread across the budget, 
however, the public investment budget is likely to take the 
biggest hit. 
 
-------------------------------------- 
Health Care Spending Still Problematic 
-------------------------------------- 
 
¶4. (SBU) As during all recent IMF reviews, Fund staff was 
concerned about controlling the growth of health spending. 
The IMF's fear is that spending will exceed the 2007 budgeted 
allocation due to insufficient controls.  In the end, an 
understanding was reached after a 14-hour overnight meeting 
with four ministers including the Health Minister Recep 
Akdag.  On the one hand, the Government, including the Health 
Minister personally, committed not to exceed the budget.  To 
give credibility to this commitment, additional work is being 
done on mechanisms to better control spending by hospitals. 
Among these are monitoring of individual invoices submitted 
by hospitals to the Social Security Administration, 
instituting partial reimbursement to hospitals when they go 
over hospital-specific spending limits, auditing 5-10% of 
bills submitted, and keeping bonus payments to doctors at the 
2006 level. 
 
----------------------------- 
State Energy Company Finances 
----------------------------- 
 
¶5. (SBU) Beyond the central government, achievement of the 
overall public sector's primary surplus target could be 
threatened by financial weakness at state energy companies, 
particularly the electricity distribution company TEDAS and 
the gas company BOTAS.  The root of these companies' 
financial problems is the Government's refusal to raise 
electricity prices which have remained constant since 2002 
despite a doubling of world oil prices.   Although Babacan 
and some other minsiters agreed in principle to electricity 
price increases in November, the politics of increasing 
electricity prices in an election year have trumped other 
considerations.   In the end, this was the only area in which 
the mission and the Government could not reach agreement. 
Discussions are continuing, with the IMF pushing both for 
electricity price increases and for a structural fix to take 
pricing decisions out of the hands of politicians, by passing 
a law with an automatic formula.  In the short run, however, 
Babacan stated publicly that the Government will not agree to 
price increases, and will seek to make up for the state 
company's financial weakness through spending cuts or 
efficiencies, which the IMF told us they may have to accept, 
at least until after the elections.  If cuts at the companies 
themselves are insufficient, the IMF will demand cuts 
elsewhere in the public sector. 
 
-------------------------------- 
Social Security Reform Postponed 
-------------------------------- 
 
¶6. (SBU) Following the Constitutional Court's invalidation of 
the Social Security reform law, the Government had announced 
it would submit revised legislation by July 1.  When the IMF 
mission came, however, the Government argued that trying to 
push through legislation by July 1 was unrealistic and ran 
the risk that parliamentarians -- even from the ruling party 
-- would water down the reform under electoral pressure. 
There is also a very narrow window in which the legislation 
could be considered:  parliament will be entirely focused on 
presidential elections from April 15 to May 15, after which 
parliamentarians will be distracted by upcoming parliamentary 
elections, widely expected to be called earlier than 
November. 
 
¶7.  (SBU) In the end, the IMF team was persuaded by the 
Government's argument.  The IMF believes the Government is 
committed to the reform since they have passed it twice.  The 
Government's plan is to issue a new white paper, with several 
options that come close to achieving the savings in the 
original plan but still have a good chance of being 
acceptable to the Constitutional Court.  After consultation 
with labor unions and other stakeholders, the Government 
would submit legislation, but only after elections. 
 
------------------------ 
Other Structural Reforms 
------------------------ 
 
¶8. (SBU) The IMF was frustrated with the Government's 
decision to privatize Halk Bank in two stages, with a 
minority share IPO first, since the goal of privatization is 
to move control to the private sector rather than just raise 
money.  IMF officials told us that the outside advisors had 
recommended a block sale up front as the preferred option. 
The one advantage of the IPO-first strategy that the IMF 
acknowledged was that it would set a market price for Halk 
Bank, thereby undermining critics who might claim that the 
Government was selling Halk at a fire sale price. 
 
¶9. (SBU)  President Sezer's veto of the second stage of the 
personal income tax reform was because of a clause on tobacco 
and alcohol taxes that was of no importance to the IMF.  The 
Government has removed the offending clause and will 
reportedly re-submit the legislation in the coming week or 
two. 
 
¶10. (SBU) The IMF's Financial Sector Assessment team was also 
in Ankara to wrap up its work. The FSAP is expected to go to 
the board along with the Article IV document, either 
simultaneous to the Sixth Review or sooner, if the Sixth 
Review document is not ready.  A Turkish Treasury official 
told us there were no significant concerns about the banking 
sector raised in the FSAP and the IMF officials did not 
mention it.  This tracks with a widespread view that the 
banking sector has strengthened considerably over the last 
two or three years. 
 
----------------- 
Board Vote in May? 
----------------- 
 
¶11. (SBU) The plan now is for a Letter of Intent Signature in 
early May and a board vote in late May.  Given the necessity 
of Government follow-up actions and the track record, we 
would be inclined to bet this will slip a bit, especially in 
the context of presidential elections. In the end, however, 
the IMF and the Government both have a big stake in keeping 
the program alive. 
 
 
 
 
 
Visit Ankara's Classified Web Site at 
http://www.state.sgov.gov/p/eur/ankara/ 
 
MCELDOWNEY