TURKEY/IMF: PROGRESS ON BUDGET, OTHER ISSUES REMAIN

UNCLAS SECTION 01 OF 02 ANKARA 005835

SIPDIS

SENSITIVE

STATE FOR E, EUR/SE, EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS
NSC FOR MBRYZA AND TMCKIBBEN

E.O. 12958: N/A
TAGS: EFIN ECON PGOV TU
SUBJECT: TURKEY/IMF: PROGRESS ON BUDGET, OTHER ISSUES REMAIN

REF: ANKARA 5637


1. (Sbu) Summary: In an important sign of progress in
discussions of a new Standby program, the GOT has publicly
agreed to a 6.5% primary surplus target for 2005. Local IMF
staff privately confirm that the GOT's primary surplus target
accords with the IMF definition and that the GOT can now move
forward with a budget the broad outlines of which meet IMF
approval. While the highest profile issue seems to have been
satisfactorily addressed, myriad other issues remain to be
worked out before agreement is reached on a letter of intent
for a new Standby, including 2006-7 fiscal targets, progress
on the banking law, and specific tax measures. End Summary.

Surprise Concession on the 2005 Primary Surplus:
-------------- --


2. (Sbu) In a surprise to markets and the IMF staff, the GOT
agreed to accept a 6.5% primary surplus target for 2005.
Whereas GOT officials had been pressing the IMF mission
(reftel) to accept a primary surplus of only 5 or 5.5%, the
GOT announced late Tuesday that the 2005 target would be
6.5%. The announcement was made October 13 by Deputy Prime
Minister Sener, following a meeting of the High Planning
Council and confirmed by Economy Minister Ali Babacan. At
the same time, Sener announced the broad outlines of the
budget including other, less controversial targets: 5% for
GDP growth, 8% for inflation, and TL 156 Quadrillion ($104
billion) for total expenditure.


3. (Sbu) According to the IMF Deputy Resrep, the announcement
represented GOT acceptance of the IMF staff's push for a
primary surplus of at least 6.5%. Whereas Fund staff had
been concerned the GOT might try to fudge the numerical
target by altering the definition, he confirmed that the 6.5%
number announced Tuesday followed the standard IMF
definition. He also confirmed that the 2005 draft budget --
or at least its principal targets and broad outlines -- was
the result of consultation with the Fund team currently in
Ankara. Having reached general agreement on next year's
budget, the GOT can move ahead to submit the budget to the
Parliament on October 17.


4. (Sbu) The GOT reversal left observers scratching their
heads about the internal dynamics of GOT decision-making.
The Deputy Resrep was mystified about what had caused the
turnaround, since the GOT had been pushing hard on the need
for a lower target. A well-informed private sector observer
commented that this was another demonstration of the weight
Babacan's and Sener's views carry in AK Party decision-making
circles.

Myriad Issues Remain:
--------------


5. (Sbu) The IMF staffer cautioned that many issues remain to
be resolved before a letter of intent could be signed. Even
the 2005 budget, for example, needs to be fleshed out with
details of how the primary surplus target will be achieved.
He pointed out that the agreed budget outlines mostly concern
the central government, whereas the 6.5% target is for the
entire public sector, leaving many of the detailed policies
relating to the rest of the public sector to be worked out.
Nor have fiscal targets been agreed for 2006 or 2007.


6. (Sbu) Specific tax measures -- another contentious issue
with the IMF -- also remain on the table. The Deputy Resrep
said that GOT technocrats' earlier ideas about cutting
Value-added Taxes and compensating with increases in the
Special Consumption Tax on certain products, did not meet the
approval of Prime Minister, who reportedly was less than
enthused at the prospect of compensating a VAT cut with other
taxes. The Deputy Resrep admitted the Fund might be able to
accept a very slight reduction in VAT taxes but that the
devil will be in the details. Moreover, he did not rule out
that VAT cuts could reemerge as a GOT proposal after the
budget process is completed.


7. (Sbu) On the banking law, he said much work remained to be
done, though the GOT had agreed on a process that Fund Staff
felt was encouraging. After the BRSA finishes its re-write,
the draft law will go to the government. Since the BRSA,
most of whose leaders are "sworn auditors," is unlikely to
make the necessary compromises relating to the privileged
power these auditors, the GOT has agreed to establish an
interagency drafting committee. The committee would be
dominated by GOT officials, though the BRSA would be
represented. The Deputy Resrep said the key is GOT political
will to change the draft, the technical work itself should
not be that time-consuming.

Tricky Timing for a Board Vote:
--------------


8. (Sbu) Now that the pressure of the budget deadline is off,
the Deputy Resrep said the Fund staff was in no rush to reach
agreement on the many outstanding issues. Given that the
negotiations are over a three-year program, rather than a
review, and there is no immediate financing need, Fund staff
are inclined to take their time and make sure the issues are
carefully worked out. While he thought the current mission
might have to stay longer than their planned departure date
of October 26, he was hopeful they could wrap things up
without an additional mission.


9. (Sbu) Once all the issues are worked out, the Deputy
Resrep said the timing of a board vote could be tricky. On
the one hand, the Fund staff may want to be sure the
parliament passes the budget before going to the board. On
the other hand, the Fund might be reluctant to let the board
vote get too close to the EU's December 17 decision on
Turkish Accession, or to be perceived as overly skeptical of
GOT commitments to pass its budget.



EDELMAN