IMF CLOSE TO AGREEMENT ON SIXTH REVIEW

UNCLAS ANKARA 006422 SIPDIS SENSITIVE STATE FOR E, EUR/SE, EB/IFD TREASURY FOR OASIA - MMILLS AND JLEICTHER NSC FOR BRYZA AND MCKIBBEN E.O. 12958: N/A TAGS: EFIN TU SUBJECT: IMF CLOSE TO AGREEMENT ON SIXTH REVIEW REF: A. ANKARA 6241 ¶B. ANKARA 6342 ¶1. (SBU) Summary: IMF Resident Representative Odd Per Brekk told econoff the IMF mission is close to agreement with the GOT on a Letter of Intent. The budget issues have been worked out and Brekk believes the Prime Minister has accepted a version of the direct tax reform the Fund can live with. The GOT will need to take a series of actions between now and when the Sixth Review goes to the IMF board, most likely in early November. End Summary ¶2. (SBU) In a brief telephone conversation October 14, IMF ResRep Odd Per Brekk told econoff the IMF mission believes it is close to a deal with the GOT. Assuming last-minute details can be wrapped up this evening, there may be an announcement as early as the morning of October 15. ¶3. (SBU) Brekk did not provide a detailed description of each issue but, in sum: --Budget: The Council of Ministers approved a budget October 13 that Brekk said was in line with what had earlier been worked out between Fund staff. Brekk said the staff had held a series of long meetings with Ministers Unakitan and Babacan in recent days. Though IMF staff had yet to see the final version approved by the Council, they understand it was what they had earlier approved. --Direct Tax Reform: Babacan and Unakitan reportedly convinced Prime Minister Erdogan to curtail some of the regional tax incentives the PM had publicly advocated to a point that the IMF could accept. On Economic Free Zones, the law will eliminate the exemption on personal income tax for employees of newly-established companies and phase out the personal tax exemption for employees of already-established companies. --SEE Staff Reduction: The GOT and Fund Staff, with World Bank concurrence, have now agreed to increase the incentive for SEE employees to retire before the end of 2003 and to extend the coverage in the World Bank project for laid-off employees of privatized companies to include employees of not-yet privatized SEE's. Separately, though the IMF did not agree to change its definition of redundant employees, GOT agreement to abolish the positions at individual state companies' that reduced staffing over their company-specific targets provides some encouragement that the GOT is making an effort to reduce SEE staffing. --Banking issues: The only outstanding issue is a detailed strategy to deal with Pamuk Bank. Pamuk Bank is losing money and the GOT urgently needs to make a decision how to deal with it, according to Brekk. To plug the hole will cost Treasury approximately USD 1.1 billion, which Brekk believes was the reason for GOT slowness in coming to a decision. Brekk believes the GOT now understands the need for a detailed plan before the Sixth Review comes to a vote in the IMF Board. ¶4. (SBU) In addition to the Pamuk Bank issue, Brekk said there are a number of actions the GOT will need to take before the date of the IMF Board vote on the Sixth Review: --BRSA Strengthening Legislation: The law will need to be passed by Parliament. --Public Financial Management and Control Law: Also needs parliamentary passage. --Direct Tax Reform: Approval by Council of Ministers. ¶5. (SBU) Finally, Brekk said there were a number of (unspecified) implementation issues. Brekk now expects the Board vote to take place in early November rather than in October. EDELMAN EDELMAN