INCOMING GOVERNMENT'S ECONOMIC ACTION PLAN

UNCLAS SECTION 01 OF 02 ANKARA 008379

SIPDIS


SENSITIVE


STATE ALSO FOR E, EB, AND EUR/SE
TREASURY FOR OASIA - MILLS
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO


E.O. 12958: N/A
TAGS: ECON EFIN PGOV EINV TU
SUBJECT: INCOMING GOVERNMENT'S ECONOMIC ACTION PLAN



1. (SBU) Summary: The economic elements of the incoming
government's action plan, announced by Party leader Tayyip
Erdogan on November 16, reflect AK's efforts to balance its
desire to boost the "real economy" and help the poor with its
need to reassure markets and maintain fiscal discipline.
Erdogan pledged that the new government would cut unnecessary
government spending, accelerate privatization and energy
sector liberalization, implement tax reform, provide
incentives to small and medium-size enterprises, and sell the
assets of failed banks. He said the government would engage
quickly with the IMF but would seek to address "deficiencies"
in the current program in supporting the real sector,
agriculture, and social problems. The action plan contains a
number of positive things but also raises questions,
particularly on the budgetary impact of some AK proposals.
Analysts are generally withholding judgment until they see
the details. End Summary.



2. (SBU) On November 16, AK Party leader Tayyip Erdogan
announced the incoming government's "Emergency Action Plan,"
with measures to be implemented in its first month, first
three months, first six months, and first year. The plan
gives a sense of AK's priorities, but is short on details.
Highlights include:


First Month
--------------


-- establish a strong Economy Ministry to oversee
macroeconomic/financial policy.


-- Rapidly complete an interim budget and expedite
preparations for the 2003 budget and program.


-- While maintaining the overall framework of the IMF
program, work to address "deficiencies" in the current
program regarding the real sector, social policy, and
agriculture.


-- Begin work on tax reform and abolish the Financial Year
Zero law (which would have required people/corporations to
explain, beginning in January 2003, the source of their
money).


First Three Months
--------------


-- Simplify and reform the tax structure with the aim of
broadening the tax base, and establish a "tax truce" (which,
as we understand it, would be designed to facilitate
long-term payment of overdue taxes).


-- Expedite privatization by grouping state enterprises and
developing privatization strategies for each group.


-- Promote the "real sector" by creating a better investment
environment, providing free land to investors, and
"reformulating" incentive measures.


-- Promote exports by strengthening the Export-Import Bank,
working with the private sector on a strategic plan to boost
exports, and lowering input costs to exporters.


-- Open the energy market to competition, and eliminate the
Turkish Radio and Television Administration part of
electricity prices.


First Six Months
--------------


-- Begin construction on a 15,000 kilometer dual highway
system.


-- Pass a new law on public finance administration that
introduces internal financial controls, enhances the
efficiency of budget preparation, and increases financial
transparency.


-- Accelerate collection of debts owed to the SDIF and the
sale of assets of failed banks.


-- Enact unspecified measures to support small and
medium-size enterprises and to facilitate the recovery of
those companies hardest hit by the crisis.


-- To support farmers, reduce taxes on fuel oil and eliminate
deficiencies in the direct income support program (to direct
it more toward poorest farmers).


-- Ease restrictions on foreign investment in the tourism
sector.


First Twelve Months
--------------


-- Complete Transfer of Operating Rights energy projects, and
reduce electricity waste and theft.


-- Bring the public tender law fully in line with EU
standards.



3. (SBU) Incoming Prime Minister Abdullah Gul supplemented
Erdogan's announcement in an interview November 17. He said
the new government would shrink the state, strengthen
independent regulatory boards, improve the environment for
foreign direct investment, and maintain the Central Bank's
independence (no printing of money).



4. (SBU) Analysts have welcomed AK's efforts to lay out an
ambitious agenda, but generally are withholding judgment due
to the lack of details in the action plan. Lehman Brothers,
for example, welcomed AK's emphasis on privatization and
improving the foreign direct investment environment, but
wondered about the budgetary impact of other proposals,
including possible tax cuts. Lehman also noted that the plan
does not address many of the outstanding conditions for the
fourth IMF review, such as laying off of state enterprise
workers. IMF ResRep expressed similar views, and noted that
his staff was preparing written comments on the plan.



5. (SBU) Comment: This plan reflects AK's efforts to
balance strong pressure to help small-medium size business
and the poor with the need to reassure financial markets and
maintain fiscal discipline. The emphasis on privatization
and improving the investment environment is good news. More
troubling are the various proposals to cut taxes and/or
provide additional "incentives" for the real economy. AK
appears overly optimistic that it will be able to fund these
out of savings gained by squeezing waste and fraud out of
government spending. A key question will be whether it
delays any new spending or tax cuts until it demonstrates its
ability to achieve such savings. Abdullah Gul, pressed on
this question in a Sunday interview, said AK would start off
with a primary surplus target of 6.5 percent of GNP, but
might renegotiate that if interest rates declined
sufficiently to ease Turkey's fiscal constraint.
PEARSON