Identifier
Created
Classification
Origin
03ANKARA6623
2003-10-22 16:06:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

MEETINGS WITH GOT AND IMF ON SIXTH REVIEW, BUDGET

Tags:  EFIN TU 
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221606Z Oct 03
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 006623 

SIPDIS


STATE FOR E, EB/IFD, EUR/SE
TREASURY FOR OASIA - MMILLS AND JLEICHTER
NSC FOR MCKIBBEN AND BRYZA


E.O. 12958: DECL: 10/21/2008
TAGS: EFIN TU
SUBJECT: MEETINGS WITH GOT AND IMF ON SIXTH REVIEW, BUDGET


REF: A. ANKARA 6448

B. ANKARA 6442


Classified by Acting Economic Counselor Andrew Snow for
reasons 1.5 (b) and (d).


C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 006623

SIPDIS


STATE FOR E, EB/IFD, EUR/SE
TREASURY FOR OASIA - MMILLS AND JLEICHTER
NSC FOR MCKIBBEN AND BRYZA


E.O. 12958: DECL: 10/21/2008
TAGS: EFIN TU
SUBJECT: MEETINGS WITH GOT AND IMF ON SIXTH REVIEW, BUDGET


REF: A. ANKARA 6448

B. ANKARA 6442


Classified by Acting Economic Counselor Andrew Snow for
reasons 1.5 (b) and (d).



1. (C) Summary: The GOT needs to take several
actions--mostly submission of legislation to
parliament--before signature of a Letter of Intent, expected
by early next week. Additional actions will be needed before
the IMF Board vote, expected mid-November. The GOT is making
fiscal adjustments of 0.65 percent of GNP for the remainder
of 2003, and of 2 percent of GNP for 2004 in order to meet
the 6.5 percent of GNP primary surplus target for each year.
Half of the 2004 adjustment stems from making permanent the
temporary Special Communications Tax and Special Transaction
Tax. According to the IMF Deputy ResRep Finance Minister
Unakitan played an important role in convincing the Prime
Minister to make concessions on the Direct Tax Reform. End
Summary.



2. (Sbu) In a series of meetings with GOT officials and IMF
Deputy Resident Representative Christoph Klingen (protect),
Econoff discussed the IMF Sixth Review and the Budget
submitted to parliament October 17.


IMF State of Play:
--------------



3. (Sbu) The Fund Mission left October 15 without a Letter
of Intent and with a series of actions the GOT needs to take
before a Letter of Intent is signed, with additional actions
needed by the date of the Board Vote. According to Klingen,
before the Letter of Intent, the GOT needs to:


--Submit budget to parliament in line with IMF agreement
(done but IMF reviewing details)


--Submit BRSA and Financial Mgmt and Control law to
parliament (not sure if done but about to be, if not)


--Submit legislation creating additional incentives for SEE
employees who retire before year-end.


--Approve in Council of Ministers the Turk Telekom
privatization plan


--Announce the clean-up plan for Imar Bank


Before the IMF Board vote, the GOT needs to:


--Approve in Council of Ministers the Direct Tax reform


--Pass BRSA and Financial Mgmt and Control laws


Klingen was not aware of any particular problems with these
issues, but the GOT has a lot of work to do. On Pamuk Bank,

Klingen believed it was just a problem of getting the Turkish
Treasury to focus on the unpleasant task of transferring
funds to BRSA.



4. (C) On the Direct Tax Reform, Klingen said that Finance
Minister Unakitan had played a key role, by joining forces
with Babacan in convincing the Prime Minister to accept a
significantly-watered down version of the geographic tax
incentives. According to Klingen, the incentives would only
apply in the poorest regions, whereas the P.M. had earlier
spoken of a much larger area. The chief incentive is that
employers will not have to pay Social Security premia for new
employees, and that new employees will also get a tax
exemption. Since the poorer regions concerned account for a
negligible portion of current tax revenue, and few new jobs
are being created there, the IMF is not too concerned about
granting these modest incentives.



5. (Sbu) On the Free Trade Zones, Klingen confirmed that the
GOT agreed to eliminate the personal income tax exemption on
employees of newly-established companies in the FTZ's, and
that exisiting manufacturing companies' employees would lose
their personal income tax exemption in five years.



6. (Sbu) Klingen said the Fund had no issues with monetary
policy. Turkey had easily exceeded all monetary targets. The
only one that was a bit "tight" was base money but that this
was understandable because of the reverse currency
substitution in recent months. Klingen reiterated earlier
Fund staff comments about not wanting the disbursements under
the U.S. loan to be used to repay domestic debt, since these
inflows would have to be sterilized, exacerbating losses at
the Central Bank. Klingen was not concerned about the
Current Account Deficit (Former Economy Minister Dervis had
raised concerns about the Current Account in a speech last
week). Klingen felt that Turkey appeared to have adequate
access to financing, and it's exports remain strong despite
the currency appreciation.


Budget:
--------------



7. (C) Finance Ministry budget official Ahmet Kesik
(protect),State Planning Organization Deputy Undersecretary
Birol Aydemir (protect) and Klingen, in separate meetings,
provided additional details on the fiscal situation. To
achieve the 6.5 percent primary surplus target for 2004, the
GOT has agreed with the IMF to take adjustment measures
amounting to TL 8.4 Quadrillion, about 2 percent of GNP.
According to Aydemir, about TL 4.5 Quadrillion of this
adjustment derives from making permanent the "temporary"
Special Communications Taxes and Special Transaction Taxes.
Much more modest amounts were derived from the more
controversial measures on the Special Consumption tax rates
for autos, alcohol and tobacco: TL 170 m Trillion from
alcohol and tobacco and TL 200 Trillion from autos. The
rates for the Special Consumption Tax on autos were increased
only slightly at the low end, and substantially increased for
luxury vehicles. On alcohol, Aydemir claimed that the rates
were not increased. Instead, the GOT set a floor for a
minimum tax per unit of each product. The reason, according
to Aydemir, is that imports were coming in at very low
prices. Since the taxes are calculated as a percentage of
the price, the more cheaply priced imports were paying a
lower tax per unit than local producers.



8. (Sbu) Most of the adjustment came from revenue rather
than spending measures. According to Aydemir, the only
spending measure was to hold Social Security Spending
constant in nominal terms. Broadly speaking, all other
categories were allowed to increase in line with projected
inflation, such that non-interest expenditure remained at the
same percentage of GNP in 2003 and 2004. Kesik provided the
exact percentages projected: 22.6 percent of GNP (TL 94
Quadrillion) in 2004 and 22.9 percent (TL 82 Quadrillion) in

2003. Kesik noted the wage restraint: a 13.8 percent increse
for public sector workers, roughly in line with inflation.
The public sector wage bill will remain 8.4 percent of GNP in
2004, as in 2003. Kesik contrasted this discipline on wages
with the exorbitant, fiscally-damaging wage increases under
the Ecevit Government. According to Kesik, no significant
fiscal savings will be realized from the reduction in SEE
employees until 2005, since there will be severance payments
in 2004 and many retirements take place near the end of the
year.



9. (C) According to Kesik, the 2003 fiscal adjustment is 0.65
percent of GNP or TL 2.33 Trillion. The most significant
items were: 0.28 percent from cuts in investment spending,
0.16 percent from restrictions on expenditures to be financed
from special revenues (sic),.07 percent from tobacco and
alcohol, and .06 percent from the Special Transaction Tax and
Education Levies. Klingen confirmed that the GOT now really
does seem committed to the 6.5 percent primary surplus target
for both 2003 and 2004. In the negotiations, the GOT
officials did not try to push back on the overall target, the
necessity of which they seemed to recognize. Aydemir pointed
out that both in 2003 and 2004, the 6.5 percent primary
surplus breaks down as 5 percent from the Central Government,
and 1.5 percent from the rest of the public sector: SEE's,
municipalities, Social Security funds and other special
funds. Aydemir saw little risk of not meeting the 2003
primary surplus target. For 2004, the main risk area
continues to be Social Security. In his view, the IMF reform
of Social Security is not working well.


Monthly Primary Surplus Data:
--------------



10. (Sbu) According to Kesik, the August primary surplus was
TL 5.5 Quadrillion, versus an expectation of TL 4.5
Quadrillion. Klingen, on the other hand, said the IMF still
does not have a final August primary surplus number,
according to the Fund's definition. Klingen explained that
although the Central Government reports its data fairly
quickly, there is a huge lag in getting detailed data for the
consolidated public sector, including the SEE's and the
Social Security Funds. Nevertheless, Klingen is fairly
confident that the target was missed, but only by about TL
200-300 Trillion. Kesik and Treasury official Tulay Arslan
stressed the seasonality in the fiscal data, with tax
payments inflating the May, August, and November data. The
seasonality can be seen in the preliminary September primary
surplus of only TL 1.2 Quadrillion. Klingen said the
expectation had been around TL 1.5 Quadrillion.


























EDELMAN