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03ANKARA5641 2003-09-05 13:06:00 CONFIDENTIAL Embassy Ankara
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1. (C) Summary: In a September 3 courtesy call, Ambassador
urged State Minister Babacan to wrap up talks on the U.S.
financial package quickly, stick to the economic reform
program, and take concrete steps to resolve problems facing
U.S. investors. Babacan said he had instructed his staff to
communicate to U.S. Treasury his acceptance of the 18 month
disbursement schedule for U.S. assistance, which should pave
the way for early congressional notification and signing of
the agreement. He agreed on the need to continue
implementing economic reforms, and specifically emphasized
the importance of meeting primary surplus targets for 2003
and 2004. Babacan acknowledged that foreign investment
inflows were "negligible," and highlighted the government's
efforts to streamline the foreign investment approval
process. End Summary.

2. (C) Ambassador opened his September 3 courtesy call on
State Minister Babacan by urging the Minister to accept the
18-month disbursement schedule for our financial assistance,
so that the agreement could be notified to Congress and
possibly signed during the September 22 Snow-Babacan meeting
in Dubai. Babacan said he had just instructed his staff to
inform U.S. Treasury that Turkey accepted both the
disbursement schedule and the four-year grace period. With
these issues resolved, he expressed hope the Administration
could notify Congress right away. Babacan added that signing
the agreement this month would send a positive signal, and
would help ease continuing public concerns about whether the
money was linked to Turkey's decision on contributing troops
to the stabilization force. At the Minister's request,
Ambassador agreed to advise Turkish Treasury once the
notification went forward, and to ask Washington if we could
provide the Turks with a copy.

3. (C) Ambassador noted that, despite disappointment over
the March 1 vote on troops, the U.S. had a major interest in
the success of Turkey's economic reform program. Although in
the end the costs of the war to Turkey had been much less
than some had anticipated, the announcement of the U.S.
package had played a critical role in stabilizing Turkish
financial markets.

4. (SBU) The key now, the Ambassador continued, was for
Turkey to take advantage of the current "window of
opportunity" by pressing ahead with the reform program. If
the GOT completed the 6th IMF review on time, hit the 6.5
percent primary surplus target (here Babacan interjected "for
2004 as well as 2003"), moved ahead with scheduled
privatizations, and resolved some of the problems affecting
foreign investors, it would have a very good story to tell at

5. (SBU) Babacan said the program had achieved a lot, though
there had been some delays. He explained that the 4th review
had been delayed due to uncertainty over Iraq and
difficulties due to the fact that a new government had just
taken office. The 5th review had been delayed several weeks
because the Turkish Parliament had insisted on studying and
debating every piece of proposed legislation. This, the
Minister asserted, was actually healthy, and resulted in
better legislation. Aware of Parliament's interest, the GOT
and IMF had set more "reasonable" deadlines for legislative
action for the 6th review, leaving Babacan hopeful it would
not be delayed.

6. (SBU) Babacan said the biggest issue for 2003 and 2004 is
the budget. Fortunately, the Prime Minister fully supports
hitting the fiscal targets, which is critical given that
there are "at least 15 ministers who want to spend more."
The Minister cited as an example of the government's fiscal
steadfastness its refusal to offer public workers a wage
inrease greater than 12 percent, which has tentatively been
set as next year's CPI target. With Turkey's huge public
debt stock, the Minister added, "we have no choice."

7. (SBU) Ambassador warned Babacan that he likely would
encounter skepticism from U.S. companies during his U.S.
roadshow next week. Although businesses are looking with
interest at Turkey's economic progress, they remain concerned
over the numerous business climate issues they see. As the
Vice President used to tell foreign visitors, the first thing
that U.S. executives are asked when they go to their boards
with foreign investment proposals is "how are other U.S.
investors faring?" In the case of Turkey, the answer to that
question is that Motorola had been swindled out of $2
billion, cola companies face discriminatory taxes, other
companies face problems with sugar quotas and zoning
questions, and our pharmaceutical companies suffer from the
lack of data exclusivity. While these problems cannot all be
fixed immediately, Turkey needs to begin resolving them. If
it can do this, while continuing to make progress on the
macroeconomic fundamentals, there should be lots of interest
from foreign investors.

8. (SBU) Babacan acknowledged that FDI inflows were
"negligible." The government, he said, specifically the
Committee for Enhancing the Investment Environment (which he
chairs), is working with the private sector to change things.
The Committee meets regularly to discuss problems and
propose solutions. Already it has drafted or partly drafted
21 pieces of legislation. Parliament has approved 7 of them,
including a new FDI law and legislation that streamlines the
process for establishing a new company. Babacan recalled
that, several years ago, he had needed 10 weeks to gain
Treasury approval for his European joint venture partner to
transfer capital to Turkey. Under the new law, the number of
steps needed to establish a new company had been reduced from
19 to 3, and the process could be accomplished in just one
day. Fortunately, there is a consensus within the government
on reducing bureaucracy and improving regulation.

9. (SBU) Another big issue, said Babacan, is taxation.
Because Turkey has a huge informal economy that does not pay
taxes, the government has had to impose a slew of additional
taxes to raise revenue. This has contributed to Turkey
having the most expensive gas and the 3rd or 4th most
expensive industrial electricity in Europe. The GOT is now
working with the IMF to determine how to shift at least some
of the informal economy into the formal sector. so it can
reduce tax rates, further improving the investment

10. (SBU) Picking up on Babacan's reference to sound
regulation, Ambassador stressed the importance of strong
government backing for Turkey's independent regulatory
boards. He reiterated the need for the GOT not only to pass
new laws, but to take concrete steps to resolve problems
facing existing investors. If, he said, the government began
to address these problems, he would be prepared to travel to
the U.S. to make the case for investing in Turkey. At this
point, however, it would be hard to make that case, given the
problems affecting so many major U.S. companies.