Identifier | Created | Classification | Origin |
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05ANKARA1335 | 2005-03-11 15:15:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ankara |
This record is a partial extract of the original cable. The full text of the original cable is not available. 111515Z Mar 05 |
UNCLAS SECTION 01 OF 02 ANKARA 001335 |
1. (SBU) Summary: A Turkish Treasury official responsible for external borrowing claims that the proposal to expand municipalities' powers and responsibilities will not lead to uncontrolled borrowing. He cited caps on municipal borrowing and approvals required from the central government as key constraints, and stressed Treasury's keenness to avoid Argentina-style local government profligacy. Separately, a new law will allow Treasury to honor its guarantee to U.S. Eximbank of a long overdue commitment fee on a local company's unutilized borrowing. End Summary. Municipalities to Get Increased Financial Autonomy: -------------------------- -------------------------- 2. (SBU) In a meeting with visiting U.S. Eximbank officer Margaret Kostic, Turkish Treasury officials Memduh Akcay and Serdar Guzey discussed the financial provisions of a long-awaited decentralization law. The law, which was vetoed in 2004 by Presdient Sezer, has been revised, removing politically-sensitive devolution of responsibility for education, and the GOT is re-submitting it to parliament. With new responsibilities, such as management of local health services, devolved to municipalities, the law increases from the current level of 5% the share of central government revenue to be allocated to municipalities. Municipalities will also be allowed to borrow directly from financial institutions. 3. (SBU) Akcay described constraints on the municipalities' ability to borrow, which he claimed would prevent municipalities from getting into financial difficulty. A key provision caps the total stock of municipality debt at the level of the municipality's prior year allocation from the central budget. In order to borrow from sources outside of Turkey, the municipality would have to get Treasury approval. For domestic borrowings, according to Akcay, only Ministry of Interior approval will be required. Borrowings for public investment projects would only be permitted if the projects were budgeted for and included in the national public investment program drawn up by the State Planning Organization. 4. (SBU) Akcay said municipalities will be required to report all borrowings to Treasury, and that Treasury will closely monitor municipality indebtedness, reporting any concerns to the Ministries of Finance and Interior. "We want to avoid Argentina," he added. Large Municipalities: -------------------------- 5. (SBU) Akcay said that large municipalities (Istanbul, Ankara and Izmir) will have a separate law. Though the above-cited provisions will still apply, there will be scope for exceptions for large projects. Note: Istanbul municipality, which has a credit rating, has a track record of borrowings, including external borrowings. End Note. Akcay said the huge (over $2 billion) Marmaray project to expand Istanbul's subway system with a tunnel under the Bosphorus, is managed by the central government, not Istanbul municipality. JBIC of Japan has financed the first phase--nearly $1 billion--with a 40-year loan with 10 years grace at 0.75% interest rate. When asked about Ankara municipality, Akcay and Guzey chuckled. They revealed that Ankara owes Treasury money under guarantees but has yet to pay, despite the municipality having the financial wherewithal to do so. They noted that the Ankara metro, one of high-profile Ankara mayor Melih Gokcek's pet projects, continues to expand to new suburbs. Central Government Guarantees of Public Sector Institutions: -------------------------- -------------------------- 6. (SBU) In recent years, following numerous problems with Treasury-guaranteed debt, the GOT has pursued a much stricter policy in granting Treasury guarantees of public institutions' debt. Akcay said the budget law now puts a cap on central government (i.e. Treasury) guarantees. The cap, which was $1 billion dollars in 2004 was increased to $2 billion in the 2005 budget law. When loans are guaranteed, the central government has the authority to seize the guaranteed entity's assets, or, in the case of municipalities, to garnish the municipality's budgetary allocation. Imminent Resolution of Commitment Fee Impasse with U.S. Eximbank: -------------------------- -------------------------- 7. (SBU) Guzey confirmed that the GOT hoped to resolve the issue of overdue commitment fee payments to Eximbank very soon. Note: The non-payment of a commitment fee on an unused borrowing facility that Treasury had guaranteed had been an irritant in Eximbank's relationship with the Turkish public sector. End Note. Guzey said that recently-submitted legislation included a provision allowing Treasury to pay out on this guarantee, and that the funds had been included in the 2005 budget. Separately, Akcay told us Treasury is pursuing collection from the borrower in the courts. Comment: -------------------------- 8. (SBU) Though the officials' comments suggest Treasury will be vigilant to head off uncontrolled municipal borrowing, the issue bears watching. Although public expectations have been raised by the success of the economic program and the high eocnomic growth rate, the mayors elected in last March's municipal elections are financially constrained from delivering new services or projects to their constituents. Pressure from mayors on the GOT could create pressures to abuse the expansion of the financial responsibilities under the draft decentralization law. EDELMAN |