IMF AND MARKET UPDATE, MARCH 7 AM

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SUBJECT: IMF AND MARKET UPDATE, MARCH 7 AM


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1. (SBU) Summary: IMF Mission Chief told us morning of
March 7 that his team and the GOT could in theory close on
the LOI in a couple of days, but actual closure depends on
GOT political will. Outstanding issues remain World Bank
objections to GOT-proposed spending cuts in agriculture and
social programs, GOT efforts to delay key elements of direct
tax reform, and the lack of progress on reducing the number
of redundant workers in state enterprises. Similarly, timing
on parliamentary approval of the budget depends on political
will. Also on morning of March 7, Finance Minister Unakitan
told the Ambassador that the budget would pass parliament in
March; Unakitan assured the AMB he would "be tough on budget
implementation." Turkish markets were stable in morning
trading, continuing to rely on the prospect of a U.S.
financial package. End Summary.


Ambassador Raises Budget with MinFinance
--------------



2. (SBU) In an office call on MinFinance Unakitan March 7,
the Ambassador asked Unakitan about timing of passage of the
budget. The Ambassador further noted the need for strict
implementation of this budget, which would be key to market
confidence in the GOT's ability to realize the 6.5 percent of
GNP primary surplus.



3. (SBU) In reply, Unakitan said the GOT was committed to
passing the full-year 2003 budget in March rather than seek a
second interim budget. He didn't predict when in March it
would pass. Unakitan assured the Ambassador of complete and
full implementation of the fiscal saving measures. "The
Minister of Finance is expected to be the tough guy, and as
long as you accept the role, there's no problem," he said.
Unakitan added that no GOT agency would be allowed to spend
over its allocated amount (though he noted that overspending
had been common in the past.)


IMF Update
--------------



4. (SBU) IMF Mission Director Juha Kahkonen provided us with
an update March 7 on his discussions with the GOT on the
Fourth Review. Kahkonen said there were three main issues
remaining:


-- Budget: As noted reftel, the IMF thinks the draft budget
provides for the necessary 6.5 percent of GNP primary
surplus, but World Bank staff object to the budget's cuts in
direct income support payments to farmers and social
spending. Stressing that it was the GOT, not the Fund, that
proposed these cuts, Kahkonen said he was waiting for the GOT
to resolve this with the Bank. If the GOT restored the
spending, it would have to identify offsetting fiscal
measures.


-- Direct Tax Reform: The GOT wants to delay several
sensitive elements of the tax reform. Fund staff have agreed
to delay one -- related to Free Trade Zones -- but not the
others.


-- Redundant State Enterprise Employees: Per Kahkonen, the
GOT has made no progress in determining how to achieve the
program target. He said GOT bureaucrats raised the issue
March 5 with Deputy PM Mehmet Ali Sahin, who is responsible
for this issue, but the meeting produced nothing.



5. (SBU) Kahkonen said that these issues could in theory be
resolved in a couple of days, but all depended on whether the
GOT mustered the political will to make the necessary
decisions. Similarly, timing of parliamentary approval of
the budget depended on political will. Parliament could
approve the budget quickly (maybe 7-10 days) if the GOT chose
to limit debate; alternatively, it could drag out until the
end of the month. If the GOT made the necessary political
decisions to move ahead rapidly, Fund Staff could take the
Fourth Review to the Board in early April.


Markets in Waiting Mode
--------------



6. (U) Morning trading March 7 in Turkish financial markets
was fairly light, with TL 536 trillion or $320 million in
transaction volume in the domestic T-bill market (versus
double that amount in morning sessions earlier in week.)
T-bill yields were unchanged at 57.5 percent compounded. The
lira depreciated 0.5 percent from yesterday' close, to TL 1,
615,000 and the Istanbul Stock Exchange was unchanged in
morning trading.
PEARSON