TURKEY'S ECONOMY: CONCERN WITH GOT INDECISIVENESS

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TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S ECONOMY: CONCERN WITH GOT INDECISIVENESS

Sensitive but Unclassified. Not for internet distribution.



1. (SBU) Summary: IMF resident rep briefed us on the results
of the ten-day IMF mission which finished December 20. The
IMF is concerned with the new GOT's slowness in taking
decisions - it has not yet committed to the 6.5 percent of
GNP primary budget surplus for 2003 (and the first quarter
2003 budget came in over $1 billion short of that target);
different ministers have issued contradictory statements on
implementing a key piece of reform legislation (the public
procurement law); there has been no progress on outstanding
banking sector measures. The IMF Mission will return in
early January to finalize the Fourth Review and push for
meeting these and other outstanding conditions. A big part
of this slowness on the economic reform front is owing to the
new government's overwhelming agenda of urgent issues, rather
than to ill intentions. But sharp market declines this week
may serve to energize the new GOT on the IMF program agenda.
End Summary.


"Lots of Work to Be Done"
--------------



2. (SBU) An IMF mission was in Ankara December 10-20 to
review progress on meeting outstanding conditions under the
Fourth Review, and to work with the GOT on the 2003 budget.
IMF resrep gave us a brief readout December 20 as he was
heading into the wrap-up sessions with GOT. He concluded
that there's lots of work to be done, especially on budget
and several structural issues. Monetary policy is not a
major problem for the moment.


Fiscal Policy
--------------



3. (SBU) Provisional Budget. The parliament must pass a
budget before year-end to keep the GOT functioning, and the
government submitted to parliament on December 19 an interim
budget to cover the first quarter (in January it will submit
a full-year 2003 budget). IMF resrep said this first
quarter budget falls short of meeting the 6.5 percent of GNP
primary surplus target: it targets a TL 3.2 quadrillion
primary surplus, versus the TL 5 quadrillion that the IMF
would prefer.



4. (SBU) Resrep said the IMF understood the GOT was under
time pressure to pass a budget but that the result was not
good. The GOT was looking at taking some measures in the
first quarter (increasing employers' social security
premiums, cutting health spending) to make up some of the
shortfall.


-- Comment: The first quarter primary surplus shortfall
(over $1 billion) is a problem for two reasons. First, the
primary surplus is used to help meet immediate debt service
payments, so the shortfall could become a financing issue.
At the minimum, it involves borrowing more in the first
quarter than initially anticipated. Second, this first
quarter shortfall, together with the approximately $1.5
billion shortfall in the 2002 primary surplus, puts the GOT
further behind in meeting year-end 2003 budgetary goals -
again this has GOT financing implications.



5. (SBU) Primary Surplus. Resrep said the GOT has yet to
commit to a 6.5 percent of GNP primary surplus for 2003.
Deputy PM Sener said in private meetings, and again on
December 18 to the press, that the GOT would support a 6.5
percent target, but in a subsequent meeting, PM Gul told the
IMF Mission Chief that the GOT had not yet decided.



6. (SBU) Tax and Public Sector Reforms. Resrep said the IMF
can live with the tax package passed by parliament December

19. It included cancellation of the Financial Year Zero Law
(ref a),extension of a temporary earthquake tax, extension
of the tax exemption for income from T-bills (a Dervis
initiative),and a lump sum transfer of income from the
independent regulatory boards o the central government
budget. Resrep commented that canceling the Financial Year
Zero law (a law intended to boost tax compliance) would make
meeting tax revenue goals more difficult, but by itself was
not a deal-breaker.


-- The new government's second tax measure - a tax amnesty
on unpaid back taxes - was, per IMF resrep, a deal-breaker.
The problem was that this amnesty was part of AK's election
platform and the party was committed to it. The IMF is
working with the Finance Ministry to come up with some form
of amnesty that meets the ruling party's need, while not
damaging the GOT's ability to collect taxes (perhaps
re-scheduling back tax payments, or lessening some of the
accrued penalties for late payments).


-- There has been no progress on meeting other Public Sector
reform conditions. The IMF has not yet seen a draft of the
proposed direct tax reform legislation. The end October
condition of reducing redundant public sector jobs by 30,500
is still about 10,000 jobs short.


Structural Reforms
--------------



7. (SBU) Public Procurement Law implementation. The GOT has
issued conflicting statements on this issue, as on the
primary surplus issue. Deputy PM Sener announced after the
December 18 Council of Ministers meeting that it would be
implemented on schedule January 1. However, shortly
thereafter the Public Works Minister Zeki Ergezen said there
needed to be at least a six-month delay for technical
reasons. The IMF still didn't know where this issue stood,
though the IMF, World Bank and EU Commission were united that
this law needed to be implemented on time.


-- Comment: There may be technical reasons for delaying
implementation of the law - and we heard from the
Privatization Administration that they don't want their
consultancy contracts to be subject to the law - but the IMF,
World Bank and EU are not convinced. Nor are we. Local
construction firms are lobbying the GOT for the delay (just
as they lobbied against passage of the law last January),
because they don't like new rules that allow more
transparency and foreign competition in public procurement.
End Comment.



8. (SBU) Banking Sector. There has been no progress on two
outstanding Fourth Review conditions: (i) BRSA resolution of
PamukBank and control of Yapi Kredi Bank (ref b); (ii) sale
of an initial $250 million in assets from bankrupt banks now
owned by BRSA. IMF resrep said IMF staff would not take the
Fourth Review to the IMF Board before the Pamuk, Yapi Kredi
issues were resolved. He said BRSA staff were balking at
selling bankrupt bank assets, because they knew they would
only get 7-8 percent of face value of these assets (mainly
non-performing loans) and were afraid of public criticism for
selling on the cheap.


-- Comment: There is some urgency on the Yapi Kredi problem,
since the bank's equity is deteriorating rapidly. IMF resrep
confirmed that this large bank is now under the 8 percent
capital adequacy ratio. BRSA Chairman Akcakoca separately
told us he is continuing to negotiate over Pamuk with former
owner Mr. Karamehment of the Cukurova Group; they haven't
gotten close on the larger Yapi Kredi issues. Karamehmet
wants BRSA to return Pamuk to him with the $2 billion
injected by the BRSA. BRSA cannot do that legally. Akcakoca
said he would appreciate a strong statement of support from
the Government, which has not yet been forthcoming.



9. Privatization. Resrep said the government "hasn't yet
come to grips with privatization." The IMF had approved the
draft privatization plan for alcohol and tobacco monopoly
TEKEL; the ministerial level Higher Privatization Council
must adopt this plan as part of the Fourth Review.


-- Privatization Administration Chairman Bozkurt separately
confirmed to us this lack of attention to date on
privatization. Bozkurt said he is ready to proceed with
privatizing TEKEL, state petrochemical giant PETKIM and
several other major projects, but needs political level
approval. Furthermore, in October and early November he
auctioned off a series of smaller state companies, and is
sitting on successful bids amounting to about $200 million.
He is awaiting GOT approval to announce these sales.
Bozkurt's agency comes under Deputy PM Sener, who has asked
Bozkurt for the names of the members of state company boards
of directors under the PA (there are 257 positions). Bozkurt
understands Sener is under some pressure to give jobs to AK
supporters, but "first let him do approve some
privatization."


Comment on Market Reaction
--------------

10. (SBU) The new government's honeymoon in the financial
markets has ended, though not solely or even mainly because
of the economic reform issues discussed above. Local markets
dropped sharply this week - the lira depreciated about 7
percent; the stock market lost 14 percent; rates on
lira-denominated Treasury bills rose by 5 percentage points.
But analysts tell us this was mostly driven by concerns over
Iraq. News on lack of progress on economic reforms will
further depress the markets here; conversely, good news on
this front would help offset the Iraq concerns in the
markets.



11. (SBU) The IMF Mission plans to return in early January
to continue the Fourth Review and focus on the full year
budget. A major part of the new GOT's slowness on economic
reforms appears related to its overwhelming agenda rather
than ill intentions. But this week's market reactions may
serve as a wake-up call. The AK party leadership may have
grown a bit complacent on the econ front after the big
rallies following their election in November.
PEARSON