MEETINGS WITH TREASURY UNDERSECRETARY AND CENTRAL

UNCLAS SECTION 01 OF 02 ANKARA 007140

SIPDIS


SENSITIVE


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


E.O. 12958: N/A
TAGS: EFIN ECON PREL PGOV TU
SUBJECT: MEETINGS WITH TREASURY UNDERSECRETARY AND CENTRAL
BANK GOVERNOR


REF: A. ANKARA 6886

B. ANKARA 7096



1. (Sbu) Treasury U/S Canakci told Econoffs that the IMF
Sixth Review is unlikely to come to a Board vote before
mid-December, since the Turkish parliament will need some
time to pass the required legislation. Canakci also
confirmed that the GOT will probably have to get
parliamentary approval for the U.S. Financial Agreement, if
the GOT decides to move forward on it. Separately, the
Central Bank Governor defended the Central Bank's foreign
exchange regime. He said the Central Bank is implicitly
targeting inflation, but will not move to formal inflation
targeting until it conditions are right. End Summary.


Meeting with Treasury U/S Canakci
--------------



2. (Sbu) Econoffs met with Treasury Undersecretary Ibrahim
Canakci November 14. Regarding the U.S. Financial Agreement
(FA),Treasury legal experts have still not provided their
formal opinion. Informally, however, Canakci said they are
coming to the conclusion that the FA would have to go to
Parliament for approval--a conclusion shared by MFA lawyers
and the Director General of the Prime Ministry. Econcouns
summarized the Ambassador's most recent conversation with MFA
U/S Ziyal on the political conditionality (ref b). Canakci
wryly noted that the political conditions were always public
information on the U.S. Congress' web site and that no one
ever raised this issue during the negotiations.



3. (Sbu) Canakci explained the current status of the
legislation strengthening the effectiveness of the BRSA.
According to Canakci, the GOT and the IMF were in agreement
on the two articles in the law which are required for the
Sixth Review. These articles establish a special chamber in
the courts to handle BRSA-related cases and put time limits
on appeals of BRSA decisions. The recent controversy arises
from other articles in the law, about which the IMF and the
Bankers' Association have concerns. According to Canakci,
the controversy stems from the transfer of asset collection
powers from the BRSA to the Finance Ministry, and from the
extension of penalties to a wide range of people. Canakci
said that if the GOT cannot reach an understanding with the
IMF, the two articles needed for the Sixth Review may be made
into a separate law and passed without waiting for resolution
of the other issues. The legislation is currently in the
Justice Committee of Parliament.



4. (Sbu) Canakci said the Public Financial Management and
Control Law was under discussion in the Budget committee and
would most likely be considered by the General Assembly after
the Bayram holiday. The budget was also moving out of
commmittee to the General Assembly, most likely the week of
November 17. With all this IMF-required legislative work
still ongoing, Canakci predicted that the IMF Board would not
consider Turkey's Sixth Review before mid-December.



5. (Sbu) On the macroeconomic targets, Canakci remains
confident that Turkey will have no difficulty meeting the 6.5
percent primary surplus target for 2003, as well as the 5
percent GDP growth target and the 20 percent inflation
target.



6. (Sbu) In contrast with the good macro performance,
Econcouns expressed concern about the lack of momentum on
structural reforms, noting the slowness of the privatization
program and problems with the investment climate that will be
an important theme at the upcoming Economic Partnership
Commission meetings. Econcouns also commented on the need to
maintain a strong, independent BRSA. In reply, Canakci only
noted the GOT's desire to make progress in these areas and
cited the GOT's intention to re-engage with the World Bank on
structural reforms. On privatization, Canakci claimed the GOT
gave a higher priority to developing the private sector than
to maximizing the receipts from privatizations. On the
failed Tekel tobacco tender, Canakci pointed out that the
Finance Minister had made a mistake by raising expectations
beforehand, since it is always better to have a positive
surprise.


Meeting with Central Bank Governor Serdengecti
-------------- -



7. (Sbu) In a meeting November 13, Central Bank Governor
Serdengecti worried about developments at the BRSA, saying
that if the BRSA has a boss who follows the government, then
"we have a problem." Serdengecti also referred to problems
at the BRSA unrelated to Akcakoca's departure: staff that
came from Treasury were ultra-conservative and the sworn
auditors were sometimes suspected of corruption.



8. (Sbu) Serdengecti predicted that November price inflation
might be above markets' expectations but that the 20 percent
year-end inflation target would still be met. In early 2004,
the inflation numbers will benefit from a base effect;
however, the Governor thought that predictions of
single-digit inflation by mid-year were too optimistic.
Given the lag in monetary policy, the Central Bank is
currently focused on 2004.



9. (Sbu) Serdengecti characterized the Central Bank's current
approach as "implicit inflation targeting," a concept he
attributed to former IMF Deputy Managing Director Stanley
Fischer. The Governor cautioned that the Bank does not want
to move to formal inflation targeting until it is certain it
will work. He described the necessary pre-conditions as: 1)
a more certain fiscal situation with lower interest rates;
and 2) labor union wage restraint including unions tying wage
demands to expected--not historical--inflation rates.



10. (Sbu) In reply to concerns raised by former Economy
Minister Kemal Dervis and others regarding the current
account deficit, Serdengecti, with characteristic bluntness,
said that Dervis never understood the floating exchange rate
regime. The Governor emphasized that the Bank was targeting
inflation--not the exchange rate--and would not use its
foreign exchange reserves to stabilize the currency because
it needs the reserves to service the GOT's external debt and
to manage the Central Bank's own costly foreign
exchange-denominated liabilities. In reply to those who
worry about the overvaluation of the Lira, he pointed out
that the currency would have appreciated even more had the
Central Bank not bought USD 10 billion over 6 months. The
Bank had stopped buying foreign exchange in October because
market participants were confused and had begun to speculate
against the Lira. But the Bank was not targeting a
particular level for the currency.



11. (Sbu) The Governor expressed some concerns about the way
in which the GOT was handling the planned elimination of six
zeroes in the currency. He emphasized that much preparation
was needed, and that the draft legislation was already late.
In his view, the currency change should take place at the
beginning of a calendar year.



12. (Sbu) Serdengecti agreed with Econcouns on the importance
of reforms to attract more foreign direct investment. He
recounted how, when questioned at public events about the
desirability of foreign investment, the Governor responded:
"Do you want 3 percent growth or 6 percent?" Serdengecti
said the Turkish savings rate was too low to achieve strong
growth without foreign investment. He also suggested that
the Turkish Treasury should be more vocal on FDI issues.




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