EMBASSY PRESSES AK ON ECONOMIC POLICY

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000301

SIPDIS


STATE FOR E, EB/IFD/OMA AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 01/13/2008
TAGS: ECON EFIN PREL TU
SUBJECT: EMBASSY PRESSES AK ON ECONOMIC POLICY


REF: SECSTATE 7987


Classified by DCM Robert Deutsch. Reasons: 1.5 (b,d).



1. (C) Summary: Ambassador delivered reftel points to Prime
Minister Gul January 9, emphasizing that any possible U.S.
financial assistance was conditional on continued
implementation of the economic reform program. Embassy
delivered the same message January 9 and 13 to Treasury U/S
Oztrak and two influential AK parliamentarians. PM Gul
assured the Ambassador that he understood the need for
reform, and that the government was not "populist." Treasury
U/S Oztrak told us he had raised the need for "actions, not
promises" in his January 7 meeting with PM Gul, who
"completely understands." Oztrak admitted, however, that
others in AK, including Party leader Erdogan, still needed
convincing. Reflecting that, parliamentarians Reha Denemec
and Nazim Ekren agreed on the need to commit to a 6.5 percent
primary surplus now, but also said they hope to find
opportunities to reduce the surplus in the near future,
albeit "in consultation with the IMF." They pointed to
Deputy PM Sener's January 11 statement of support for bank
reform as a positive step, but at the same time defended
amendments to the Public Procurement Law aimed at gutting the
authority of the procurement regulatory body. We, the IMF,
and the markets will need to maintain steady pressure on AK
to implement sound policies. End Summary.



2. (C) Ambassador delivered reftel points to Prime Minister
Gul on January 10, noting that the U.S. -- as a friend of
Turkey -- was concerned about economic policy slippage.
Ambassador reiterated that any potential U.S. financial
assistance would also require Turkish implementation of the
economic reform program. The Prime Minister said his
government was committed to reform, would not succumb to
populism, and wanted to put Turkey's "house in order."



3. (C) On January 10, we presented reftel points to Treasury
Undersecretary Faik Oztrak, who said he agreed fully with
them. "This is the message I gave to PM Gul. The PM called a
meeting with economic ministers and agency heads on January 7
after the disappointing Treasury auctions. It was my first
meeting with him; I said the time for promises is over, we
need to show actions. On the budget, we need to decide now
what to cut, and which taxes to raise in order to pay for the
increased social spending already announced and to reach the
6.5 primary surplus target. "



3. (C) Oztrak continued that PM Gul understood right away,
and pushed for the fiscal savings measures announced January
8 (ref b). "The PM's decision marks a decisive move towards
implementing the program. He is concerned about the economy
as I am." However, Oztrak noted that this message still
needed to go to others in the Party, including Chairman
Erdogan and AKP parliamentarians.



4. (C) Oztrak's other key points:


-- Following Oztrak's January 7 meeting with the PM, Gul had
telephoned the Danistay (administrative court) to urge
acceleration of deliberations on the pending Pamukbank case;


-- On the IMF Fourth Review, "we have a ways to go both on
finalizing the Letter of Intent for the 2003 program, and on
completing the outstanding conditions. It will not be an
easy IMF review, but we have to finish the Review in
February." Oztrak said he had told the GOT he need the
Fourth Review tranche ($1.7 billion) in February.


--The Treasury had drawn down its cash balance to meet the
January 8 debt redemptions to its domestic market. Treasury
had then raised the cash balance through the $750 million
dollar-denominated external bond offering. "if we proceed to
meet the outstanding Fourth Review conditions, and deliver a
credible LOI to the IMF, then we should have no problem in
our next big T-bill auctions on January 22. Then our cash
balance should be restored to the TL 2.5 quadrillion level
(about $1.8 billion)."



5. (C) We also delivered the same message to AK
Parliamentarians Nazim Ekren and Reha Denemec, both of whom
are close to AK Party Chairman Erdogan, in January 9 and
January 13 meetings. (Both are accompanying Erdogan on his
trip to China this week.) On fiscal policy, Ekren said AK
wanted to fulfill its pre-election promises to the
electorate, but now the Party understands that some of its
promises will have to be delayed. Denemec said that State
Minister Babacan had over the weekend fully confirmed the
GOT's adherence to the 6.5 percent of GNP primary surplus. He
added, however, that this figure was not "the word of God,"
and that it might be reduced in the near future, in
consultation with the IMF. We stressed that announcing the
6.5 percent target, while progress, was insufficient; the GOT
also needed to announce further credible measures to achieve
it. Denemec said much of the savings would be achieved by
reducing the outstanding public investment projects from
4,400 to 2,000.



6. (C) On banking reform, Ekren said former bank owners were
lobbying Chairman Erdogan. "Halis Toprak calls the Chairman
every week, trying to get permission to start a new bank. We
listen only because he is important to the real sector"
(note: Toprak formerly owned Toprak Bank and still owns
several factories, including a paper factor in SE Turkey.)
But Ekren also said he understood the importance of cleaning
up the banking sector and not giving new banking licenses to
persons who not only bankrupted their institutions at public
expense, but also owed the banking board substantial sums of
money. Denemec called attention to Deputy PM Sener's January
11 statement calling on the Cukurova Group (former owner of
Pamukbank and majority owner of Yapi Kredi Bank) to pay its
debt to the banks in full. Sener said the banking board's
actions were fair and legal.



7. (C) Denemec defended AK's plan to amend the public
procurement law, saying the law as originally passed was
unworkable. He agreed that there is a damaging public
perception that the changes are intended to benefit AK-relate
firms, but he blamed this perception on media misinformation.
He also added that "laws themselves cannot change peoples'
behavior" (implying that the construction firms lobbying for
GOT contracts would not be deterred by legal changes.)
Comment: The IMF and World Bank say the proposed amendments
would reduce the law's scope from nearly 100 percent of GOT
procurement to about one-third, and would limit the Public
Procurement Agency's independence



8. (C) Separately, the Central Bank issued a statement (not
yet available in English) stressing the necessity of
implementing all aspects of the GOT's economic reform
program. The statement notes that reduction of political
uncertainty in 2003 (compared with 2002) as a positive
factor. It also notes negative factors: an Iraq operation
which could depreciate the lira and drive up oil prices; and
increases in domestic demand, stimulated by fiscal spending.
The statement concludes that, despite the negative factors,
"it is not impossible to attain the targeted 2003 inflation
rate, if the GOT establishes fiscal discipline and implements
structural reforms in line with the program." Note: IMF
resrep (protect) told us January 10 that State Minister
Babacan had called Central Bank Governor Serdengecti to
complain about this statement, per Serdengecti. End Note.



9. (C) Comment: Although market developments have served
as a useful wake-up call, AK as a whole remains
less-than-fully-committed to sound economic policy. In the
weeks and months ahead, we, the IMF, and the markets will
need to maintain constant pressure.
PEARSON