GOT PREPARING THREE-YEAR ECONOMIC PROGRAM

UNCLAS SECTION 01 OF 02 ANKARA 004455

SIPDIS

SENSITIVE

STATE FOR E, EUR/SE, AND EB/IFD
TREASURY FOR INTL AFFAIRS - MMILLS ANS MSCHWARZMAN
NSC FOR MBRYZA AND TMCKIBBEN

E.O. 12958: N/A
TAGS: EFIN ECIN TU
SUBJECT: GOT PREPARING THREE-YEAR ECONOMIC PROGRAM

REF: ANKARA 3688


1. (Sbu) Summary: Earlier this summer, the Turkish
Government began work on a 3-year economic program. An
outgrowth of previous and existing policy planning vehicles,
the 3-year program is a GOT economic policy program being
developed with input from--but independently of --the IMF.
According to post contacts, it is fairly broad in scope,
encompassing the macro economic framework, budget planning
and structural reforms but with particular focus on fiscal
issues such as the debt stock and composition of expenditure.
Its formulation is a coordinated interagency effort
involving consultations with other non-governmental
stakeholders. The GOT has not yet released its specific
content or explained the modalities of its implementation.
By working on its own program, prior to beginning
negotiations with the Fund, the GOT may be attempting to
demonstrate ownership of its medium-term framework. End
Summary.

Antecedents
--------------


2. (U) Turkey,s State Planning Organization (SPO) has been
crafting 5-year economic development plans since the 1960,s.
The 8th such plan, running from 2001-2005, is currently in
implementation. Since 2001 the EU has required Turkey to
develop and update a Pre-accession economic program (PEP)
that lays out the policy program that will be implemented to
bring Turkey in compliance with both the Maastricht and
Copenhagen economic criteria for EU membership. On August
4th, State Minister for Economy Ali Babacan made a statement
reiterating the three-year program goal of meeting EU
criteria. Finally, in December 2003 the Turkish parliament
passed the Public Financial Management and Control (PFMC)
law. This law requires that the GOT adopt a three-year
planning framework in budget formulation beginning in 2006.
The GOT,s new 3-year program is an outgrowth of all these
elements.

Focus of the program
--------------


3. (Sbu) Turkish U/S of Treasury Ibrahim Canackci told
visiting US Treasury officials that the program would be a
&full program8, covering the macro framework, domestic and
external financing, and structural issues. Others inside the
GOT, however, have noted that the program will be focused on
fiscal issues and the debt-to-GNP ratio in particular.
Memduh Akcay, Treasury Director General for International
Economic Relations revealed that under the program the
government would target a specific ratio to be achieved and
then implement policies to reach the target. The end goal is
to bring debt-to-GNP in line with EU standards (60% of GNP).
Officials at the Ministry of Finance and SPO focus more on
the fiscal aspects, highlighting the three-year planning
framework for the budget required by the PFMC law, and/or the
potential for increasing investment expenditure in light of
high unemployment.


4. (Sbu) In describing the three-year program as a &full
program8, Canakci remarked that the &PEP to the EU must be
a part of the three-year framework8. The PEP does have a
heavy structural reform component covering issues such as
privatization, the financial sector and rural development,
among others. The structural reform agenda of the World
Bank,s new Country Assistance Strategy (CAS) will also be
coordinated with the program.

Process
--------------


5. (Sbu) The formulation of the three-year program is an
interagency process coordinated and led by State Minister for
Economy Ali Babacan. Treasury, Ministry of Finance, SPO and
the Central Bank have worked together at a technical level to
develop it. Canakci and SPO Deputy Under Secretary, Birol
Aydemir, both noted the high quality of intergovernmental
cooperation (a frequent theme of GOT economic technocrats).
Aydemir even claimed that it was the best instance of
interagency cooperation he,d seen in his 17 years of working
for the Turkish government. In addition to the interagency
process Canakci explained that Babacan had consulted with
outside labor and business groups, stating that, &Minister
Babacan is consulting with all stakeholders8. He also
outlined two other processes involved in the development of
the program, the Council of Ministers process and the IMF
process. At the ministerial level, Babacan is in an ongoing
dialogue with other ministers, including Prime Minister
Erdogan. On the IMF, Canakci said that completion of the 8th
review of the Stand-By arrangement would &accelerate8 the
three-year program.

Timing
--------------


6. (Sbu) It is unclear precisely when the GOT plans to
present the new program. Turkish Treasury states that
refinements are still ongoing in the context of the 2005
budget formulation process. The PFMC law calls for three
year budgeting beginning in 2006 but Canakci explained that
with the expiration of the IMF program in early 2005, this
was moved up a year. The PEP is to be submitted to Brussels
in November and will be attached as an addendum to the 2005
budget. (Note: technically the 2005 budget must be finalized
by October 17th, 2004, but this does not preclude changes
occurring after that date.)

IMF involvement
--------------


7. (Sbu) The Fund has had some, but not major, involvement
the three-year program process. In fact IMF staff expressed
concern that the program may be announced without them first
being consulted. SPO Deputy U/S Aydemir told econoffs that
the GOT presented a general view of a medium term
macroeconomic framework to the IMF during the 8th review
mission in June. He said the Fund was surprised and pleased
with the work the GOT had done and that negotiations on the
program would continue in September. This is in contrast to
the GOT's initial approach. At an earlier stage, (reftel)
GOT officials had started by asking the IMF how much
financing might be available rather than first coming up with
a program. The change in the GOT approach may be an attempt
to demonstrate ownership of their medium-term framework prior
to entering into negotiations with the Fund. In a recent
meeting with US Treasury officials and econoff, World Bank
Country Director Andrew Vorkink praised the GOT's development
of its own program, precisely because it showed ownership.
IMF Turkey mission chief Reza Moghadam led an IMF delegation
visit to Ankara the first week of August, ostensibly to
assist the GOT in preparing the PEP. In fact, the
discussions were probably centered on a on a possible
follow-on IMF Standby program.. Statements to the press in
the past few days by Prime Minister Erdogan and Minister
Babacan suggest that the GOT has decided to pursue a new IMF
program. Post will report on the IMF program septel.

.
EDELMAN