IMF MISSION BEGINS TALKS

1. (SBU) IMF ResRep briefed us late October 1 on the
mission's first few days of talks in Ankara. Although the
talks are going well, he cautioned that there is still much
work to do, and it is too early to say whether the mission
will be able to wrap things up during this visit, which ends
October 10. He promised a further read-out on October 3, but
warned that the team probably would not be able to make a
meaningful assessment on progress until early next week.




2. (SBU) Initial talks have focused on direct tax reform,
the Public Financial Management and Control bill, and issues
related to the banking sector, particularly Imar Bank.


-- On direct tax reform, the mission is trying to convert the
recommendations of a Fund technical advisory team into draft
legislation, but continues to run into political resistance.
Specifically, they still have to work around Prime Minister
Erdogan's public commitment to maintain or even add to tax
incentives in poor regions, as well as State Minister
Tuzmen's strong opposition to phasing out tax breaks in
economic free zones.


-- The IMF, World Bank, and the GOT are close to agreement on
the Public Financial Management and Control bill, but it
still needs to be finalized, sent to Parliament, and then
approved by Parliament (which went back into session today).


-- Although there is no formal conditionality on this
(because it was an unanticipated development), the Fund wants
the GOT to take measures to address concerns arising from the
Imar Bank scandal. Specifically, the Turks need to determine
how they are going to cover depositors, manage the resulting
increase in public debt, and deal with the blow to the
credbility of both the BRSA and the Capital Markets Board.
ResRep said the GOT has good ideas on these issues, but will
need to see them put into practice by the time of the Board
review.




3. (SBU) ResRep said the mission would discuss these issues
late today with State Minister Babacan, who is expected to
take proposals to Prime Minister Erdogan tomorrow. Fund
staff hopes to have feedback by October 3. Meanwhile, they
continue to work on other key issues, including:


-- SEE employment: The GOT definitely will miss the
end-September target of reducing redundant state enterprise
workers by 19,000; however, ResRep said Turkish officials are
working on measures that could enable them to accelerate the
process.


-- Legislation to strengthen BRSA's hand in court cases
involving taken-over banks: The process leading to
submission of legislation to Parliament has gone a bit
astray, as Deputy Prime Minister Sener has referred it to
Justice Minister Cicek for study and comment. ResRep said
there "could be be problems here that we hadn't anticipated."


-- Fiscal issues: ResRep expressed optimism that any budget
gap for this year would be small -- less than 0.5 percent of
GNP -- and easily managed. The bigger question is the 2004
budget, where the GOT will have to introduce new meaures to
take the place of one-off measures implemented to meet this
year's primary surplus target. Although Turkish technocrats
say they expect to come to agreement with the Fund on the
budget by the October 10 mission end-date, ResRep noted the
possibility that the political leadership would choose to
wait until after the October 12 AK party meeting to finalize
the budget (which must be presented to Parliament by October
17).




4. (SBU) Comment: We will meet senior Treasury and State
Planning Organization officials over the next two days to get
the GOT take on developments, and will touch base with Fund
staff again October 3 before sending in our assessment of
progress.
EDELMAN