VZCZCXRO5669
RR RUEHDA
DE RUEHAK #1272/01 1441306
ZNR UUUUU ZZH
R 241306Z MAY 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 2255
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 2752
RUEHDA/AMCONSUL ADANA 1976
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 001272 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE 
 
SENSITIVE 
SIPDIS 
 
REF: ANKARA 685 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: IMF Board Approval Amid Local Debate 
 
¶1.  (SBU) Summary:  The IMF Board's May 18 review of Turkey's 
stand-by program focused on the risk of fiscal slippage during an 
election, a risk also identified by many local analysts.  Approval 
of the $1.1 billion IMF tranche also coincides with a rekindled 
debate about what form Turkey's future relationship with the IMF 
should take.  Nationalist and "secular" opposition parties have been 
the most vociferous opponents of the IMF program.  But 
debate about the IMF role is not limited to the opposition -- former 
Central Bank Governor Serdengecti notes a weakening of the IMF 
"anchor" but stresses the need for a strong domestic policy anchor 
following the end of the current stand-by arrangement next year. 
End Summary. 
 
------------------------- 
Fiscal Slippage, Populism 
------------------------- 
 
¶2. (SBU) So far, election-year spending has not been significant 
enough to cause problems with the IMF, as the IMF has firm 
commitments from the government both to block excess 2007 spending 
and make up for any shortfall after the fact.  Nevertheless, as 
election-day approaches, there are press reports about populist GOT 
steps that would cause fiscal slippages.  Among the measures 
reported in the press are: amnesties to 400,000 farmers who 
reportedly owe YTL 400 million to the State; payments to Imar Bank 
bond holders that will cost about YTL 1.6 billion to the budget; 
opening more universities; converting 218,000 temporary workers to 
permanent employment status; broadening  regional investment 
incentives;  supplemental allocations for highway construction; 
increased health expenditures through usage of private hospitals; 
and pre-election government wage hikes. 
 
¶3. (SBU) These reports need to be taken with a grain of salt, since 
reported policies are often not implemented.  We understand the 
government has assured the IMF it will not add $1.5 billion in 
highway spending, despite press reports.  Nevertheless, the obvious 
election-year pressures lend the reports some credibility to the 
concerns of the IMF.  Prime Minister Erdogan's call for VAT rate 
reductions in his May 23 speech to TUSIAD is an obvious concern. 
 
¶4. (SBU) Monthly budget results also raise questions about a 
possible election-year fiscal loosening. January-April data show an 
8.3% increase in spending in real terms.  VAT receipts are down 12% 
from last year's level.  Special Consumption tax receipts are also 
down but non-tax revenues -- mostly profits from state-owned 
enterprises -- overperformed.  Still, the overall deficit and 
primary surplus seem to be broadly in line with achieving the 
year-end targets: the January-April primary surplus is 37.8% of the 
full-year target. Nevertheless, IMF rep calculates a shortfall from 
the primary surplus target of about 0.3% of GDP for the first four 
months of the year, i.e. a 1% of GDP shortfall on an annual basis. 
 
---------------------------------------- 
Local Debate about Sticking with the IMF 
---------------------------------------- 
 
5 (SBU) Despite the political uncertainties, Turkey's finances seem, 
on their face, stronger than ever.  Investor inflows have driven the 
lira to a level higher than before last spring's sell-off.  Debt and 
reserve ratios are the strongest they have been since before the 
2001 crisis, the elections have also rekindled the debate about the 
necessity of the IMF "anchor."  With investors still pouring into 
Turkey, many Turks wonder why the IMF is still needed. 
 
¶6. (SBU) The political opposition to AKP is the most vocal anti-IMF 
voice.  The secularist crowds in Ankara, Istanbul, Izmir and Samsun 
featured signs critical of the AKP government's perceived bowing to 
the EU, the U.S., and -- equally prominently -- the IMF. 
Speech-makers at these rallies decry sales of state assets and the 
IMF-supported privatization program. 
 
¶7. (SBU) Rahsan Ecevit, the widow of former Prime Minister Bulent 
Ecevit, recently volunteered a set of economic policy prescriptions 
as she blessed the election alliance of the leftist CHP and DSP 
parties.  Ecevit called for an end to "submission" to EU and IMF 
demands, as well as termination of land sales to foreigners and an 
end to Turkey being "an open market for U.S. and EU agricultural 
products" (sic).   The radicalism of this agenda reveals the 
economic policy cluelessness of many opposition political figures, 
as reflected in the courts' and President Sezer's frequent 
derailment of economic reform measures, especially privatizations. 
 
¶8. (SBU)  For his part, CHP leader Deniz Baykal suggests that the 
terms of Turkey's EU accession framework need to be renegotiated and 
that AKP-era privatizations would be questioned if CHP came to 
 
ANKARA 00001272  002 OF 002 
 
 
power.  He characterized as "nut money" the $6.5 billion a Saudi 
investor paid for control of Turk Telekom.  Baykal has stressed the 
need to emphasize local "production" and the "real economy" rather 
than "demand."  This emphasis on local production, echoed by the 
center-right DYP's economic policy expert, has long been a theme of 
statist Turkish economic thinking. 
 
--------------------------------------------- --- 
Even Reformers are Debating the post-IMF Program Environment 
--------------------------------------------- --- 
 
¶9. (SBU) Readineess to discuss a lessened IMF role is not confined 
to the opposition.  Even economic reformers are talking about it, 
although they frame the debate differently.  Former Central Bank 
Governor Surreyya Serdengecti, a supporter of the IMF program, said 
he believes the IMF anchor had weakened.  He said Turkey needed to 
develop its own "anchor" if the IMF anchor is to be reduced in 
importance.  Similarly, Garanti Bank CEO Ergun Ozgen recently talked 
about the need for a strong IMF surveillance program if the IMF will 
no longer be in a lending role once the current Standby Arrangement 
runs its course.  That people like Serdengecti and Ozen are 
discussing these issues, combined with market bullishness and 
Turkey's reduced vulnerabilities, suggest that even a single-party 
AKP government might consider moving to a reduced IMF role even 
before the existing program ends in spring 2008.  With Turkey's 
traditional dislike of foreign-imposed constraints, if the next 
government thinks it can reduce the IMF's role without being 
punished by markets, it is likely to do so. 
 
Wilson