MEETING WITH DEPUTY IMF RESREP

UNCLAS SECTION 01 OF 02 ANKARA 002261

SIPDIS

SENSITIVE

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

E.O. 12958: N/A
TAGS: EFIN KTFN TU
SUBJECT: MEETING WITH DEPUTY IMF RESREP

REF: A. ANKARA 2161


B. ANKARA 2070

C. ANKARA 1559

D. ANKARA 1318

E. ANKARA 1093

F. ANKARA 812


1. (SBU) Summary: IMF Deputy Resrep confirmed press reports
that all three prior actions are now completed and reiterated
the expected timing for finalizing the new IMF program:
signed Letter of Intent by end of April, board meeting
mid-May. IMF staff expects the final version of the Regional
Investment Incentives Law to be substantially scaled down in
cost from earlier versions, and claims to have the Prime
Minister's agreement on this. The Deputy Resrep said Turkey
has become less financially vulnerable in recent years and
said IMF staff will conduct a Financial Sector Assessment
later this year, including looking at terrorism finance
issues. End Summary.

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Prior Actions Completed:
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2. (SBU) In a April 19 meeting, IMF Deputy Resrep confirmed
that April 14 passage of the Tax Administration Reform Law
meant that all three prior actions for the IMF program had
been completed. Though the President has not yet signed the
bill into law, this was not a requirement under the program
and the President is expected to sign. The other two prior
actions--submission to parliament of the Banking Reform Law
and the Social Security Reform Law--took place earlier.
Actual passage of these two laws will not be required until
the Second Review under the Program later this year.


3. (SBU) In terms of timing, the program is now going through
the IMF's internal approval process and the Letter of Intent
(LOI) should be ready for signature in time for Managing
Director Rato's visit to Istanbul for the April 29 Investors
Advisory Council. Though Minister Babacan has publicly
stated there will be a board vote May 12, the Deputy Resrep
said a date could not be fixed until the program document is
ready. Nevertheless, he expects a board vote around May 12.

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Regional Investment Incentives:
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4. (SBU) On the contentious issue of expanded Regional
Investment Incentives, the Deputy Resrep said that Fund staff
expected the final version to be substantially scaled back in
cost, such that the additional cost over what was budgeted
for 2005 would only be between 100 and 200 million YTL
($73-$146 million). He claimed that the Prime Minister
himself had agreed to this. Given the sensitivity of the
Prime Minister appearing to have climbed down under IMF
pressure, and parliamentary sensitivities, required GOT
action on the Regional Investment Incentives will not be
mentioned in the LOI, which is made public. On the other
hand, the continual resurrection on the Turkish side of the
idea of cutting VAT tax rates for the textile sector, has
induced the IMF to put an explicit prohibition of such a move
in the LOI. Last week, Minister Unakitan re-floated this
idea, only to have the Resrep state publicly that this would
be contrary to the GOT's commitments to the Fund.

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Compensating Measures:
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5. (SBU) The Deputy Resrep explained that the GOT does need
to take compensating fiscal measures because of a combination
of the additional costs of the Regional Investment Incentives
and some other items. Pensions were increased more than
assumed in the program, costing an additional 400 MM YTL
($291 million). Also, since electricity prices have not been
increased (despite higher fuel prices) there has been less
VAT collected than assumed in the program. These three items
add up to about 1.2 or 1.3% of GDP--hence the need for
compensating measures. The GOT has opted to find this money
by cutting the revolving funds that state hospitals use to
pay bonuses to doctors and nurses.
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Reduced Financial Vulnerabilities:
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6. (SBU) The Deputy Resrep said that Turkey had significantly
reduced its vulnerability to a financial crisis over the past
two years. He focused in particular on the fall in real
interest rates : from 38.2 percent in 2002, to 34.8 percent
in 2003 to 16.6 percent in 2004 and currently around 9
percent. On the risk that corporates were taking on
excessive foreign exchange risk he pointed out that Turkish
corporates tended to have low leverage, thereby increasing
the likelihood they could withstand the shock of a sharp fall
in the exchange rate. Treasury continues to have large
rollover needs in the domestic market but the Deputy Resrep
considered Treasury reserves to be adequate.

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Financial Sector Assessment/Terror Finance:
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7. (SBU) The Deputy Resrep said that the IMF had been
awaiting passage of the new Banking Law before conducting a
Financial Sector Assessment, one component of which was to
look at controls on financial crime, including terrorism
finance. He was not aware of Turkey's deficiencies on
terrorism finance. The Financial Sector Assessment is now
expected to take place later this year.



EDELMAN