Identifier
Created
Classification
Origin
03ANKARA1131
2003-02-20 17:27:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

TURKEY'S ECONOMY: BUDGET IMPASSE WITH IMF

Tags:  ECON PREL TU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001131 

SIPDIS


STATE FOR E, P, EUR AND EB
TREASURY FOR U/S TAYLOR


E.O. 12958: DECL: 09/02/2006
TAGS: ECON PREL TU
SUBJECT: TURKEY'S ECONOMY: BUDGET IMPASSE WITH IMF


Classified by Econ Counselor Scot Marciel for reasons 1.5
(b,d).


C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001131

SIPDIS


STATE FOR E, P, EUR AND EB
TREASURY FOR U/S TAYLOR


E.O. 12958: DECL: 09/02/2006
TAGS: ECON PREL TU
SUBJECT: TURKEY'S ECONOMY: BUDGET IMPASSE WITH IMF


Classified by Econ Counselor Scot Marciel for reasons 1.5
(b,d).



1. (C) Summary: Market analysts predict the market's current
positive sentiment will reverse quickly by Monday, in the
absence of news of a deal on U.S. troop deployments.
Meanwhile, the GOT has reached an impasse with the IMF staff
over the 2003 primary budget surplus - the IMF staff see a
$3.4 billion shortfall towards the 6.5 percent of GNP target.
The GOT is not offering to undertake any new fiscal measures
in their talks with the IMF, per resrep. One senior
MinFinance contact told us he is concerned that the GOT will
submit the budget to the parliament without IMF approval.
Deputy PM Sener's surprise announcement February 19 of a new
draft bill - to guarantee government jobs to all workers in
privatized enterprises - sparked another IMF protest letter.
End Summary.


Markets Positive for Now
--------------



2. (U) On February 20 Turkish financial markets remained
positive, believing in a scenario of several more days of
tough bargaining between the U.S. and Turkey before the two
sides strike a deal on a U.S. troop deployment. However,
market analysts such as Cem Akyurek, chief economist for
Global Securities (Turkey's largest stock brokerage) tell us
markets expect positive news by Monday.


-- The lira depreciated slightly to TL 1,633,000 to the
dollar (from TL 1,626,000); T-bills were stable at 56.5
percent compounded; the Istanbul Stock Exchange closed up 0.5
percent in continued heaving trading.


2003 Budget Impasse
--------------



3. (SBU) Both Ministry of Finance and IMF staff sources tell
us the two sides have reached an impasse on the primary
surplus target: the GOT believes their draft 2003 budget
exceeds 6.5 percent of GNP; while IMF staff calculate the
measures in the draft budget which are acceptable to them as
yielding only about 4.8 percent of GNP. This 1.67 percent of
GNP difference amounts to TL 5.9 quadrillion or $3.4 billion.
Ahmet Kesik, MinFinance Deputy DG for the budget, told us
the gap could largely be closed if IMF accepted two GOT
positions.


-- First, the GOT has proposed postponing the 2003 "Direct

Income Support" payments for poor farmers into 2004 (nearly
$1 billion). IMF staff, bolstered by the World Bank, cannot
accept what they see as reversing a key agricultural reform,
while the GOT engages in new agricultural spending under the
price support system (e.g., on hazelnuts and tobacco).


-- Second, the GOT wants to exclude from the definition of
primary surplus "foreign in-kind contributions" (amounting to
$1.5 billion, these are goods - including military equipment
- imported by the line ministries using long-term foreign
export agency credits rather than cash). IMF staff want
these purchases included as primary spending (and in fact
Kesik agrees that this would be an effective way of limiting
ministries' ability to import such goods).


-- IMF staff see the $3.4 billion primary surplus gap as
largely related to their more realistic assessment of the
GOT's fiscal measures. For instance, the GOT claims its tax
amnesty will result in TL 2.4 quadrillion ($1.4 billion) in
revenue, based on a 75 percent participation rate by
delinquent taxpayers. But IMF experience indicates a much
lower participation rate, resulting in likely revenue closer
to TL 0.7 quad ($400 million). IMF staff have asked MinState
Babacan and MinFinance Unakitan to adopt more of the fiscal
measures proposed by IMF staff in order to close the gap,
which they have refused to do.



4. (C) Kesik, the GOT's main budget expenditure expert, told
us in confidence he is concerned that the GOT may decide to
submit the 2003 budget to the parliament without IMF
approval. Kesik said his contacts with Finance Minister
Unakitan "scare" him. "These guys just don't understand the
issues." (Note: Kesik is a strictly observant Muslim from
the AK stronghold of Konya. Unlike some other senior
bureaucrats, he has no ideological problems with AK. His
problem is he thinks they're incompetent.) MinFinance
Unakitan told the press late February 20 that the GOT would
send the 2003 budget to the parliament "shortly, probably
next week."



5. (SBU) Budget Note: One of Kesik's constant themes is the
need for social security reform. In the late 1980's, when he
started at the Finance Ministry, the state's social security
funds were self-financing. Now the central government budget
includes an annual appropriation of TL 16 quadrillion (nearly
$10 billion) to keep these pension funds solvent. The chief
villain, per Kesik, is former President Demirel, who lowered
the civil service retirement age to 39. This was the first
step in bankrupting the social security system in Turkey, per
Kesik. End Note.


A Negative Surprise On Privatization
--------------



6. (SBU) Following the February 19 Cabinet meeting, Deputy PM
Sener announced that the GOT had agreed to submit to
parliament a "privatization job law." The law would
guarantee continued public sector employment for state
enterprise workers who lose their jobs through privatization.
The daily Milliyet estimates that the law could establish as
many as 70,000 new civil service positions (there are
currently 62,000 unionized workers and 10,000 civil servants
in the SEEs scheduled for privatization). Sener said the
following:


-- "In a country with a serious unemployment problem like
Turkey, a privatization program that ignores the need to
provide jobs to those who lose them through privatization is
unacceptable."


-- "The core of the new law provides that workers who are
likely to lose their jobs can apply for a new civil servant
position within three months, and can continue to work for
the government."



7. (SBU) IMF resrep told us February 20 that IMF mission
chief sent a written note to Treasury U/S Oztrak that the new
law, which came as a surprise to the IMF mission, was
"unacceptable."



8. (SBU) Comment: Sener has a point about the unemployment
problems of privatization. The solution is to work with the
World Bank, which has offered the GOT loan programs to
support severance payments and job retraining for privatized
SEE workers. Instead, Privatization Administration officials
have complained to us that the World Bank's conditions make
these loan programs unworkable. Now the GOT is taking the
counter-productive path of keeping everyone in the public
sector, reducing much of the potential efficiency gains of
privatization.
PEARSON