U/S TAYLOR'S DISCUSSIONS WITH GOT ON ECONOMIC

UNCLAS SECTION 01 OF 02 ANKARA 000033

SIPDIS


STATE FOR E, EB/IFD/OMA AND EUR/SE
TREASURY FOR OASIA - LOEVINGER, MILLS AND LEICHTER
USDOC FOR 4212/ITA/OEURA/CDP/DDEFALCO
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: U/S TAYLOR'S DISCUSSIONS WITH GOT ON ECONOMIC
REFORM AND ECONOMIC OUTLOOK, DECEMBER 27-28

Sensitive but unclassified, and not for internet distribution.



1. (SBU) Summary: In his talks in Ankara December 28 and 29,
Treasury Under Secretary Taylor several times stressed the
need for the GOT to implement economic reform, specifying the
2003 primary budget surplus, resolution of two large banks,
and implementation of the Public Procurement Law as three key
issues. In response, Deputy Prime Minister Sener, State
Minister in charge of Treasury Babacan and Finance Minister
Unakitan separately confirmed that the GOT was committed to
continuing the existing IMF-backed economic reform program.
However, implementation of the program is stalled, and there
are no indications that the GOT is preparing necessary
actions to implement key program conditions. U/S Taylor's
interlocutors did not commit to the 6.5 percent of GNP
primary budget surplus target for 2003. Babacan said the
Public Procurement Law would be implemented on time in
January, but that the GOT would also seek to amend the law.
Taylor also discussed the general economic outlook with GOT
officials. Year-end 2002 growth forecasts now range between
6.5 - 6.8 percent; the GOT and Central Bank have agreed on
2003 targets of 20 percent CPI increase and 5 percent GNP
growth. End Summary.


Concern with Policy Slippage
--------------



2. (SBU) Treasury Under Secretary Taylor, during his
December 27-28 meetings in Ankara with Deputy Prime Minister
Sener, State MInister Babacan and Finance Minister Unakitan,
raised the importance of Turkey's economic reform program.
Fully implementing this IMF-backed program is a key element
to maintaining market confidence. Taylor stressed these
areas of concern over possible slippage:


-- Fiscal policy, especially the 6.5 percent of GNP primary
surplus, which Taylor noted is part of the government's
agreement with the IMF for 2003;


-- Banking sector reform, and in particular the banking
board's resolution of two undercapitalized banks (Pamuk and
Yapi Kredi); and


-- The Public Procurement Law, passed in January 2002 and
scheduled to come into force in January 2003. This law will
establish more transparent rules for, and allow foreign
participation in, bidding on government tenders.



3. (SBU) Babacan, Unakitan and Sener, in separate meetings,
said the new government was committed to continuing the
existing IMF program. Babacan said the government agreed in
principle with the economic reform strategy of both the IMF
and World Bank, though there were disagreements over details
with both agencies.



4. (SBU) On fiscal policy, Babacan blamed the prior GOT
government for over-spending and creating a primary surplus
shortfall for 2002. Treasury U/S Oztrak added that, while
the markets were expecting a 2002 primary surplus of 5 to 5.5
percent of GNP, his latest estimates were that it would be
less - perhaps 4.5 percent of GNP. Asked about the GOT's
commitment to the 6.5 primary surplus target for 2003,
Babacan said "we'll try." He added that the 2003 budget
would increase social expenditures, given that 20 percent of
the population was below the official poverty line, but he
didn't specify expenditure cuts in other areas to pay for
these increases. U/S Taylor noted the GOT's less than full
commitment to the 6.5 percent surplus, and said a full
commitment was needed.



5. (SBU) Treasury U/S Oztrak said the GOT would generate
savings in 2003 through reforming health care expenditures.
Finance Minister Unakitan further specified that cuts would
come from deferral of non-urgent investment projects,
reducing the fleet of state-owned vehicles, controlling
pharmaceutical costs, and a performance-based program for
overall government downsizing.



6. (SBU) On structural reforms in the banking sector,
Babacan stressed that the GOT was committed to independence
of the banking board (BRSA) and "has empowered this agency to
do its job." Of course, he continued, there is a need to
improve the BRSA's operations, but any changes made would be
in the direction of increasing the agency's transparency and
its reporting to the public. He added that that the
resolution of two banks was in the courts system, the GOT
could not interfere. On the Public Procurement Law, Babacan
said there were "some problems in implementation." Unakitan
said bureaucrats were claiming that the law might interfere
with basic government operations. But the GOT had decided to
implement it on time in January 2003, and at the same time to
seek several "technical amendments to correct the law's
flaws." (Comment: World Bank contacts tell us the 16
amendments proposed by the GOT, if passed by parliament,
would in effect gut the law by excluding procurement by
municipalities and state economic enterprises. End Comment.)



7. (SBU) Babacan described two economic policy initiatives
of the new government - in privatization and foreign direct
investment (FDI). He stressed that no government in Turkey
had ever had such strong political support for privatization:
the GOT was committed to accelerating privatization and would
release its 2003 program in January to implement this vision.
Furthermore, the new GOT sees FDI as crucial. The GOT
would soon submit five separate laws to parliament aimed at
encouraging FDI; it has also established an inter-agency
coordinating committee to enhance the investment climate,
staffed at the undersecretary (i.e., agency head) level,
which includes private sector representatives and which
Babacan will chair.



8. (SBU) Taylor welcomed this focus on privatization and
FDI, in addition to the other IMF program conditions. He
stressed, however, that markets will focus on the budget and
on the banking sector issues as well as FDI. He warned that
the 2002 primary budget shortfall will require a IMF board
waiver, and he noted that the IMF board will question what
the GOT has done to reduce this shortfall.


Economic Outlook for Year-End 2002 and 2003
--------------



9. (SBU) Taylor also discussed Turkey's economy with State
Minister Babacan, Central Bank Governor Serdengecti, Treasury
U/S Oztrak, and State Planning Undersecretary Tiktik over
lunch December 28. Taylor began by asking Governor
Serdengecti his view of the recent declines in Turkish
financial markets.



10. (SBU) Serdengecti said there were two main reasons:
first, conflicting statements from various politicians had
caused worries in the markets over the GOT"s commitment to
economic reform; and second, talk of an imminent war in Iraq
had added to the volatility.



11. (SBU) On prospects for growth, SPO head Tiktik said his
agency estimates year-end 2002 growth will be 6.8 percent,
while Treasury U/S Oztrak puts the figure at 6.5 percent.
Central Bank Governor Serdengecti commented that this strong
performance shows the Turkish economy's resilience - this
sort of rebound also happened after the 1994 crisis. The
rebound this time has been broad-based: agricultural
production helped, but so did tourism and industry.
Exporters showed their adaptability in the face of slow
growth in Europe which is the main export market. But,
Serdengecti continued, Turkey needs stable, sustainable
growth. By the third quarter of 2003, Turkey reached the
industrial production levels of 1997 and 2000 - the two peaks
of the past decade. Further growth will only come from
productivity gains through private sector investment, he
concluded.



12. (SBU) Serdengecti and Oztrak affirmed that the GOT and
Central Bank had agreed on several key macro-economic targets
for 2003: the 20 percent CPI increase, and the 5 percent GNP
growth target.



13. (SBU) Treasury has cleared this message.
PEARSON