DAS KENNEDY HIGHLIGHTS REFORM AT TURKISH TREASURY

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 004127

SIPDIS

STATE FOR E, EUR, EB
TREASURY FOR OASIA - LOEVINGER, MILLS, ADKINS
NSC FOR BRYZA, MCKIBBEN

E.O. 12958: DECL: 07/23/2009
TAGS: EFIN ECON PREL TU
SUBJECT: DAS KENNEDY HIGHLIGHTS REFORM AT TURKISH TREASURY


Classified By: Robert Deutsch, Charge d'Affaires, ai. Reasons 1.4 (b,g
)


1. (C) Summary. EUR DAS Kennedy highlighted to the Turkish
Treasury chief the importance of Turkey keeping its economic
recovery on track by continuing and intensifying reforms and
attracting long-term investment. Although the GOT has not
yet decided on what form its relationship with the IMF will
take when the current stand-by program expires early next
year, the government is discussing the subject with the IMF
and is simultaneously developing its own new three-year
economic framework program. The Treasury expects 2004 GDP
growth to reach as high as 6%. End Summary.


2. (C) Meeting with EUR DAS Laura Kennedy on July 20,
Turkish Treasury Under Secretary Ibrahim Canakci said that
Turkey's current stand-by agreement with the IMF had been
"very successful" in meeting its goals of sustained growth,
inflation reduction, debt reduction, structural reform in the
public and banking sectors, and investment climate
improvements. He said he expected 2004 GDP growth to exceed
the 5% IMF target and perhaps reach 6%. Thanks to tight
fiscal policy, the debt to GDP ratio, which peaked at 91% in
2001, had declined to 71% at the end of 2003 and should fall
to 55% by the end of 2007.


3. (C) On the structural side, numerous reforms had
enhanced discipline, transparency, and accountability in the
public sector. These included social security reform,
elimination of agricultural supports, rationalization of
public sector financial management -- including
implementation of three-year budgeting, elimination of 56,000
positions in public enterprises and closing 2,000
unproductive government investment schemes. In the banking
sector, EU regulation and supervision standards had been
established and an independent regulator created. Three
state banks had been closed and two were in the process of
being privatized. Private banks had been restructured, with
over 20 "intervened" by the deposit insurance fund since 1997.


4. (C) Canakci described efforts to improve the foreign
investment climate. A 2003 law ended prior approval and
minimum capital requirements for foreign investments. Red
tape had been reduced, cutting the number of steps to
establish a business from 19 to 3. An investment promotion
agency and a National Investment Council chaired by the Prime
Minister, which held its first meeting in March, had been
created. (Note: The Council has yet to produce concrete
reforms.) Canakci noted that there had been an upsurge in
the number of new companies established, although higher FDI
inflows were not yet visible in the macro numbers. He also
acknowledged that Turkey receives far less FDI than similar
economies of its size and potential. This "makes us hopeful"
of increased inflows for the future, Canakci said.


5. (C) Asked by Kennedy about Turkey's relationship with
the IMF once the current stand-by program expires in February
2005, Canakci said there were three options: 1) post-program
monitoring that would not include new IMF financing, 2) a
"precautionary" agreement that would provide financing in the
case of need, and 3) a new stand-by. He said that none of
these could be ruled out and that Turkey had started
discussing a follow-on relationship with the Fund. At the
same time, he said that the GOT is developing its own
three-year economic framework that would include government
spending, revenue, debt, inflation and other macroeconomic
targets. This program would be announced in the coming
months.


6. (C) Kennedy concluded the meeting by praising the
efforts Turkey has made to put its economy on a sound
footing. She understood the difficulties and the sacrifices
had been made and were being made to reach this objective.
Nonetheless, Kennedy said it was vitally important that the
reform policies described by Canakci continue and intensify
as necessary. She noted United States support, including
making available $8.5 billion in credits, which remained at
Turkey's disposal.


7. (C) Comment: In highlighting Turkey's achievements,
Canakci glided over the large amount of difficult work that
Turkey still needs to do. DAS Kennedy's call delivered a
strong signal of U.S. interest in and support of Turkey's
continuing economic reform process. The achievements Canakci
described are indeed impressive and real. However, Turkey
has far more to do -- particularly in reducing its government
debt and reforming its government, financial, corporate,
legal and financial sectors -- before it will be able to
attract the large amounts of foreign and domestic investment
it needs to achieve sustained growth and improved living
standards.
DEUTSCH