MEETING WITH IMF RESIDENT REPRESENTATIVE

UNCLAS SECTION 01 OF 03 ANKARA 007494 SIPDIS SENSITIVE STATE FOR E, EB/IFD, AND EUR/SE TREASURY FOR OASIA - JLEICTHER AND MMILLS NSC FOR MBRYZA AND TMCKIBBEN E.O. 12958: N/A TAGS: EFIN ECON PGOV TU SUBJECT: MEETING WITH IMF RESIDENT REPRESENTATIVE REF: A. ANKARA 7417 ¶B. ANKARA 7145 ¶C. ANKARA 7140 ¶1. (Sbu) IMF Resrep Odd Per Brekk told econoffs it is still possible the IMF Board could meet to approve the Sixth Review this year, but it will require expedited parliamentary action on the required legislation the week of December 8-12. The GOT seems to be making a serious effort to get the board vote in December. The IMF has acquiesced in the GOT's plan to create a separate deposit insurance fund board from the bank regulatory board, thereby enabling the GOT to assert greater control. End Summary. Push for Completion of Prior Actions to Allow a December Board Date: -------------- --- ¶2. (Sbu) In a meeting December 4 with econoffs, IMF Resident Representative Odd Per Brekk and his deputy Christoph Klingen explained that a December board date for the Sixth Review is still possible, provided the GOT makes a big push to get the necessary legislation passed the week of December 8-12. At the December 1 Council of Ministers meeting, the GOT reportedly agreed to clear the parliamentary agenda to deal with legislation required for the Sixth Review. According to Brekk, Prime Minister Erdogan has made calls to key parliamentarians to move things forward. 3 (Sbu) Brekk explained that the Board's last meetings of the year are on December 19, and Board policy is that prior actions need to be completed 5 days prior, with rare exceptions. If the Board date slips into 2004, this would complicate the schedule for the Seventh Review and make it more difficult to comply with strict IMF rules about completing standby programs within 36 months. ¶4. (Sbu) Passage of the Public Financial Management and Control Law, a key requirement, has become more controversial because it includes a provision reducing the power of the Financial Inspection Board in the Ministry of Finance. With the legislation decentralizing the audit function to line ministries, the long powerful Financial Inspection Board--an elite body dating from Ottoman times and modelled on the French Financial Inspectors--would lose its powers to investigate other ministries. The influential Financial Inspection Board is fighting back and Brekk noted that several key parliamentarians are former financial inspectors themselves. ¶5. (Sbu) Although Fund staff reached a compromise with the GOT on regional incentives and Free Trade Zones in the indirect tax reform package, the draft legislation needs to be approved by the Council of Ministers. Brekk hoped the Council would act on December 8. Banking Sector issues: -------------- ¶6. (Sbu) As U/S Canakci had told econoffs (ref c) the draft law to strengthen the hand of the BRSA had expanded to include elements not originally envisioned by the IMF. Brekk said that the Ministry of Justice, without consulting the Fund, had added the new provisions. He explained that one new element was to include draconian provisions on seizure of bank owners' and their relatives' assets. Brekk and Klingen said that the Fund staff believe the new provisions are impractical in their harshness--and are being resisted by the Bankers' Association--but that the Fund staff cares much more about the other new provisions relating to bank regulatory institutions. ¶7. (Sbu) Brekk said the legislation includes provisions that would allow a new board to be appointed for the deposit insurance fund (SDIF),with board members differing from the members of the bank regulatory agency (BRSA) board. This would be a significant departure from the current arrangement, whereby the two agencies, though legally distinct, are run by boards with identical membership. Though the new SDIF board--like the BRSA board--would be independent, by creating a new, separate board, the current Government will have the opportunity to appoint all new members, thereby asserting control--for now--over this nominally independent body. Brekk said the issue had become politicized because Justice Minister Cicek had gone public. The IMF had succeeded in getting the GOT to drop a provision that would have transferred asset collection for failed banks from SDIF to the Ministry of Finance, but Fund staff had opted to go along with the creation of a new SDIF board. The Fund had agreed out of pragmatism, according to Brekk, but also because it had originally advocated separating SDIF from BRSA at the institutions' inception. Finally, Brekk claimed that the Fund accepted the change on condition the new board members be qualified, and would scrutinize selections carefully. ¶8. (Sbu) In the end, the draconian collection provisions had also been softened a litte bit, according to Brekk. The law is still in committee, however. Separately from the institutional framework, Brekk said the biggest problem with SDIF is that no official is willing to sell assets of failed banks for fear they will later be accused of selling below the assets' notional value. ¶9. (Sbu) Though the Government announced its plan to finance the payments to Imar Bank depositors with great fanfare several weeks ago, Brekk said the enabling legislation is still in committee. The IMF also wants the GOT to announce a Government investigation of the Imar Bank case and the Fund insists that the individual chosen to lead the investigation have credibility with the financial community in Istanbul. Brekk noted with a wry smile that the GOT is having difficulty coming up with an appropriate person. Regarding former BRSA Chairman Engin Akcakoca, who is now being prosecuted for having taken documents from BRSA when he was forced out, Brekk said the IMF has been supportive of Akcakoca, including a Krueger letter noting his achievements at BRSA. ¶10. (Sbu) Though not a formal condition for the Sixth Review, the IMF also wants to see Treasury write a letter to the SDIF committing to fund the recapitalization of Pamuk Bank. Brekk revealed that the GOT has two prospective buyers for assets of Halk Bank, Finansbank and a Libyan-Italian- Canadian businessman. Brekk said the GOT seems uncomfortable with these potential buyers. State Enterprise Redundant Positions/Privatization/Fiscal Targets: -------------- ¶11. (Sbu) One law that has been passed is the legislation sweetening early retirement incentives for state enterprise employees who retire before the end of ¶2003. The legislation was designed to help the GOT meet its target to reduce redundant SEE employees by 25,000 between February 1, and December 31, 2003. To garner the enhanced retirement incentives, employees would have to apply by December 8. Among the Sixth Review required actions, the GOT has also approved in Council of Ministers the plan to privatize Turk Telecom. ¶12. (Sbu) Brekk said that Fund staff have no particular issues with the proposed 2004 budget but that there still may be a gap in performance on the 2003 fiscal target. The problem, according to Klingen, is not with the Central Government but with the total public sector budget performance. Turkey had missed the October prior condition by 1 Quadrillion TL. Though their fiscal expert is coming to get a clearer fix, Klingen said it appears there may still be a gap of between 1.5 and 2 Quadrillion TL or about 0.6-0.7 percent of GDP for all of ¶2003. If the gap is confirmed and the Board vote slips into 2004, the fiscal issue could get become very difficult between the Fund and Finance Minister Unakitan. When it looked like the Board vote would take place before the numbers were clear, the GOT had requested a waiver of applicability. But if the vote takes place after the numbers are known and there is a gap it would require a waiver of the GOT's performance on the fiscal target, which would be much more controversial. Outlook for the future: -------------- ¶13. (Sbu) Brekk agreed when Econcouns outlined some of the potential vulnerabilities in the outlook: in the absence of aggressive structural reforms, Turkey's growth could be closer to 4 percent than to 6 percent and the country remains vulnerable to risks relating to the Current Account Deficit. Brekk agreed that the on-again off-again pattern of reform was worrisome. Brekk said the Current Account Deficit is not a problem in the same way that it was in 2000. Instead, it is linked to the debt problem, since a decline in the lira would quickly exacerbate debt service problems. The CA Deficit is current being financed by large errors and omissions, which are a "black box." Though the IMF considers that dollars flowing from Iraq are part of the explanation for Errors and Omissions, they do not fully account for the phenomenon. Note: Central Bank statistics for the first nine months of 2003 show Errors and Omissions of USD 3.6 billion. End Note. ¶14. (Sbu) For 2004, the IMF staff have not had detailed discussions about their priorities. Brekk expected a lot of focus on implementation issues. Though fiscal issues will retain their importance, the Fund will probably devote more attention to the quality--rather than the quantity--of adjustment. In this regard, Klingen noted that, following an initial visit earlier in the fall, a larger Fund team including experts is coming back to do more work on how to broaden the tax base and capture the unregistered economy. He explained that the experts' idea is not only to try to capture the revenue base from small businesses currently avoiding taxes, but also to target larger corporations' tax evasion schemes. For 2004, privatization will be important, as well as the GOT's plans for reform of Public Administration and Decentralization. A Seventh Review mission is scheduled to come in early January. EDELMAN