TURKEY'S ECONOMY: IMF STAFF SEE LITTLE TO NO

UNCLAS ANKARA 001033 SIPDIS SENSITIVE STATE FOR E, P, EB AND EUR/SE TREASURY FOR U/S TAYLOR STATE PASS USTR - NOVELLI AND MOWERY E.O. 12958: N/A TAGS: ECON EFIN PREL TU SUBJECT: TURKEY'S ECONOMY: IMF STAFF SEE LITTLE TO NO PROGRESS ON FOURTH REVIEW Sensitive but unclassified. Not for internet distribution. ¶1. (SBU) On February 12, IMF resrep told us the IMF Mission currently in Ankara has achieved little to no progress on the Fourth Review. On the budget side, there was agreement on technical adjustments to the draft baseline that decreased the primary surplus shortfall to about 2.25 percent of GNP (about $4.6 billion),but no GOT acceptance of new measures. There has been no progress on the structural reform conditions (principally: overstaffing in the public sector workforce; privatization plan for TEKEL; direct tax reform; banking sector reforms.). ¶2. (SBU) 2003 budget. IMF staff returned to Ankara to complete the Fourth Review based on two understandings: that the GOT agreed to the IMF assessment of a 3.1 percent of GNP primary surplus shortfall in the draft 2003 budget (which was reduced to 2.5 percent through additional measures); and that the GOT was committed to identifying further measures, from an IMF list of suggested measures, to close the shortfall. Resrep told us there has been no progress on identifying new measures. Instead, the GOT officials led by Treasury U/S Oztrak are arguing over definitions of primary spending, trying to cut out of the baseline certain expenditures (the main issue here is over foreign-financed in-kind supplies, for instance, dam building equipment, which amounts to about 0.75 percent of GNP.) IMF staff has agreed to several technical adjustments to the baseline that bring down the shortfall to 2.25 percent of GNP (about TL 8 quadrillion or $4.6 billion). ¶3. (SBU) Letter of Intent. The GOT gave IMF staff a revised LOI on February 10, drafted by Treasury and State Planning staff without political level clearance. IMF staff is now re-drafting it. State Minister Babacan told IMF Mission Chief Kahkonen on Feb. 10 that he hadn't yet read the entire LOI. Resrep opined that this lack of cabinet-level approval belies the AK claim of political ownership of the reform program. ¶4. (SBU) Comment: IMF resrep believes the GOT is stalling in the hope that State Minister Babacan, now en route to Washington, will obtain USG understanding (and consequent pressure on IMF staff) to agree to "water down" the Fourth Review conditions. PEARSON