IMF CAUTIOUSLY OPTIMISTIC THAT NEW PROGRAM CAN BE

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006594

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: DECL: 11/26/2009
TAGS: EFIN TU
SUBJECT: IMF CAUTIOUSLY OPTIMISTIC THAT NEW PROGRAM CAN BE
AGREED BY MID-DECEMBER

REF: ANKARA 6426

Classified by DCM Robert S. Deutsch. Reasons 1.5 (b) and (d).


1. (C) Summary: A third and hopefully final IMF mission
negotiating a new 3-year stand-by program will return to
Turkey November 30 with hopes of concluding discussions
before EU leaders meet December 17. The IMF's return follows
what both the IMF and Turks view as substantial progress on
Turkey's part (including in dropping a push for a VAT rate
cut) since the second mission failed to reach agreement in
October. The Fund's work has been more difficult than
expected, and the Turks may still seek to use the December 17
meeting to leverage new concessions, such as on the size of
IMF financing. End Summary.

Mission coming in hopes of a deal by mid-December
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2. (SBU) The IMF announced November 24 the return of a
"mission" November 30. According to the Fund's resident
representative, IMF staff is cautiously optimistic of
reaching broad agreement on a new program in a couple of
weeks although, as was the case with several reviews under
the current program, a few actions may remain to be taken
after the mission departs before a Letter of Intent (LOI) can
be signed. (The resrep did not rule out the possibility that
a LOI could be signed by mid-December.) Although the resrep
said the Fund does not feel any deadline pressure, Minister
Babacan and other Turkish officials are keen to be able to
announce agreement with the IMF before the EU Council decides
on Turkey's application for EU membership on December 17.

Significant Progress on Outstanding Issues
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3. (SBU) The resrep confirmed Turkish officials' comments
(ref) that they have made significant progress on issues left
open after the October mission:

--VAT rates: The GOT dropped its proposed broad rate cut, as
well as narrower rate cuts for sensitive sectors. There may
be some very minor changes but no significant rate cut.

--Tax Administration: The IMF believes the current draft of
the tax law takes into account everything the Fund was
looking for. For example, responsibility for tax policy
would be in the Ministry of Finance rather than in the Tax
Administration.

--Social Security Reform: While there is not yet unequivocal
political commitment to either push back retirement ages or
increase social security payroll taxes, IMF staff believes
the progress the World Bank has made on the technical level
supports a belief that agreement can be reached during the
mission.

--Banking Law: Fund staff has not seen the latest draft from
the bank regulatory agency (BRSA) which is in the process of
being transmitted to Deputy Prime Minister Sener and the
Prime Minister. The Resrep believes that Turkish Treasury
will help get the GOT to overrule the BRSA's continued
insistence that sworn bank auditors retain their monopoly of
on-site inspection.

--2004 fiscal overperformance: The IMF and GOT are moving
towards a solution, helped by the fact that special revenue
receipts have been lower than the IMF and Turks had thought
in October would be the case.

--State Banks: With the World Bank having begun to rethink
this issue in October, the IMF may limit itself at the
beginning of a program to "damage-limitation actions" rather
than agreement on a comprehensive privatization strategy.
For example, the program could initially include removing
State Banks' privileges and constraining the use of their
capital, with more far-reaching actions implemented over the
course of the program.

Privatization and Asset Sales
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4. (SBU) The resrep said the new program would likely not
include enforceable privatization targets. The IMF is
reluctant to make targets other than indicative ones given
the ability of the courts to block privatizations. Fund
staff will be closely monitoring progress in 2005, however,
particularly regarding any GOT hesitancy to sell SEE's below
an artificial "reserve price" The program will also include
indicative targets on SDIF asset sales from intervened banks.
SDIF has already proposed legislation indemnifying buyers of
these assets from lawsuits.
Size of Facility
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5. (SBU) Fund staff continues to believe the Turks will
seek IMF financing greater than the parameters the Executive
Board set before the first mission. Babacan reportedly did
not raise the issue in his meeting with IMF Managing Director
Rato on the margins of the G-20 meetings in Berlin. The
resrep thinks Minister Babacan has taken to heart Fund staff
advice that it would be better to wait until they are closer
to agreement before the GOT weighs in with Fund management.
Comment
--------------

6. (C) The failure of a third mission would be
unprecedented for Turkey and send a very negative signal to
markets. Yet the Fund's work has been more difficult than
either it or the Turks anticipated, and we are not yet at the
end of the road. The Fund's difficulties demonstrate the
lack of high-level political will on difficult but
unavoidable structural reforms, even in what would seem to be
a conducive macro environment (GDP growth double initial
forecasts and lower than expected inflation and unemployment
rates.) While Babacan and the technocrats feel a need to
announce agreement before the EU meeting, we do not exclude a
last minute Turkish push for new IMF concessions -- such as
on the size of the financing -- that would seek to leverage a
December 17 "deadline."
EDELMAN