POSSIBLE DELAYS IN IMF REVIEW

UNCLAS SECTION 01 OF 02 ANKARA 003354

SIPDIS

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

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON TU IMF
SUBJECT: POSSIBLE DELAYS IN IMF REVIEW

Ref: Ankara 3033

1.(SBU) Summary: The first review under Turkey's new IMF
program may run into delays, as the GOT struggles to get the
social security and banking reform laws through parliament
before summer recess. The only substantive disagreement is
on other legislation providing favorable repayment terms for
social security arrears. On State Bank privatization, the
GOT and IFI's are looking to move more quickly than
originally foreseen by the program. End Summary.

Social Security and Banking Reform Legislation Held Up:
-------------- ---

2.(SBU) Turkish Treasury Undersecretary Canakci and IMF
Deputy Resrep separately confirmed press reports of possible
delays in IMF approval of the first review under the
recently-approved $10 billion Standby Arrangement. Passage
of two major pieces of legislation -- the banking reform law
and the pension reform law -- are "structural performance
criterion" for the first review. Parliamentary approval of
these two laws looks increasingly problematic by July 1,when
the legislature is due to go on summer recess. The Deputy
Resrep explained that, despite GOT efforts -- including by
Prime Minister Erdogan -- to push through the legislation as
quickly as possible, the process is slow. Both laws are
long and complicated and normal legislative procedure
requires parliament to go through them article by article.
The Deputy Resrep said the GOT may try to work out an
expedited procedure, or keep the parliament in session past
July 1, as it did both last year and the year before. For
now, both the Deputy Resrep and Canakci said that parliament
is working flat out, having worked through the weekend, for
example. The Deputy Resrep did not seem overly concerned
about the delay, noting that the timetable built into the
program was tight and recognizing there was no substantive
problem. From the standpoint of GOT finances, he agreed
there was no urgency about the disbursement. On the other
hand, if the review is delayed too long, it will throw off
the schedule of reviews and disbursements foreseen under the
program.

Sustantive Differences over Social Security Premia:
-------------- --------------


3. (SBU) Unlike the banking and pension reform legislation -
- the draft law on public receivables, which provides
concessions for late payments of social security premia --
does involve substantive differences between the IMF and the
GOT. As reported in reftel, objectionable clauses remain
despite the GOT having backed off and dropped some of the
provisions that the IMF found most objectionable. The
Deputy Resrep said that a version with these objectionable
bits had been approved in committee and was before the
general assembly. He explained that the IMF mission
currently in Ankara was trying to convince the GOT to put
aside the legislation and work with the IMF over a longer
period to take a more comprehensive look at the set of
issues associated with arrears to the social security
institutions. The IMF would send out a technical team
focused just on these issues. He elaborated that most of
the arrears--YTL 21 billion (about $15.4 billion)--are at
Bag-Kur (the social security institution for the self-
employed) and it is impossible to know how much of this
amount represents real arrears and how much is simply due to
poor-record-keeping. He added that there was another YTL 6
billion ($4.4 billion) at the main social security
institution (for non-civil servant employees). The problem
facing the GOT is the political embarrassment of being seen
to withdraw the legislation under IMF pressure.



State Bank Privatization Accelerated?
--------------

4.(SBU) The other key structural reform ("structural
benchmark") before the IMF will agree to a Letter of Intent
and go to a board vote, is GOT approval of a revised
strategy to privatize the State Banks. Both Canakci and the
Deputy Resrep said that the World Bank, which has the lead
on this issue, is moving with the GOT economic technocrats
in an unexpected direction. Instead of merely agreeing on a
strategy, as required under the program, the IFI's and the
GOT might agree to hire a privatization advisor very quickly
and to more much faster than originally planned towards
privatization. The privatization advisor would be an
international investment bank which would be compensated
largely on the basis of the proceeds of sales of assets or
shares from the state banks. The Deputy Resrep confirmed
that the privatization process would be handled by Turkish
Treasury, and not by the Privatization Administration (which
has a poor track record with large privatizations). Canakci
said the strategy only needed to be adopted by the state
bank boards and by Minister Babacan, though he left the door
open to eventual Council of Ministers approval.

5.(SBU) The Deputy Resrep said that there had recently been
a notable shift in GOT and IFI thinking about how quickly
the state banks could move towards privatization. Both had
long thought privatization would take several years due to
the need to find a solution prior to privatization for the
massive portfolios of government securities on the banks'
balance sheets. Neither the IFI's nor the GOT thought it
likely there would be a market for these banks as long as
they held so many government securities, and there were
concerns about the market impact if these securities were
added to the supply of traded government debt. However,
given the recent surge both in purchases of government
securities and in foreign bank interest in acquiring Turkish
financial institutions, the IFI's and GOT now believe there
may be a market for these banks, whether in whole or broken
up in pieces. Canakci thought the current climate was right
to move ahead.

But No Macro Issues:
--------------


6. (SBU) As for the program's macroeconomic (as opposed to
structural) targets, Canakci pointed out that Turkey seemed
to be meeting all its fiscal and monetary policy projections
and targets. Not wanting to appear complacent, Canakci
insisted they were carefully monitoring fiscal performance.
The only yearend macro projection which may need a slight
adjustment was the current account deficit which looks to
come out slightly larger than projected. Aside from
adjusting the projection, however, Canakci pointed out that
the IMF mission had not raised the risk associated with the
current account deficit this time, which he took to mean the
IMF was not overly concerned. Canakci said the composition
of the financial account seems to be improving (presumably
he meant increased FDI).

Timing/Next Steps:
--------------

7.(SBU) Going forward, the Deputy Resrep expected the
mission to go over the state of play with Minister Babacan -
- who was in the U.S. the week of June 6-10 -- and then the
IMF would decide whether to stay longer in hopes of reaching
agreement, or to return to Washington without a signed LOI,
leaving the GOT with a list of needed actions.

Comment:
--------------


8. (SBU) There was a glass half-full/glass half-empty
quality to these two conversations. U/S Canakci expressed
pleasure that there was only one substantive disagreement
(over the social security arrears) and no need for waivers.
The Deputy Resrep lamented that the IMF staff spend 90
percent of their time on damage control and only 10 percent
on thinking about what reforms Turkey needs and how to
implement them.