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Viewing cable 03ANKARA7494, MEETING WITH IMF RESIDENT REPRESENTATIVE

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Reference ID Created Released Classification Origin
03ANKARA7494 2003-12-08 06:34 2011-08-24 01:00 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.

080634Z Dec 03
UNCLAS SECTION 01 OF 03 ANKARA 007494 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD, AND EUR/SE 
TREASURY FOR OASIA - JLEICTHER AND MMILLS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV TU
SUBJECT: MEETING WITH IMF RESIDENT REPRESENTATIVE 
 
 
REF: A. ANKARA 7417 
     B. ANKARA 7145 
     C. ANKARA 7140 
 
 
1. (Sbu) IMF Resrep Odd Per Brekk told econoffs it is still 
possible the IMF Board could meet to 
approve the Sixth Review this year, but it will require 
expedited parliamentary action on the 
required legislation the week of December 8-12.  The GOT 
seems to be making a serious effort to 
get the board vote in December.  The IMF has acquiesced in 
the GOT's plan to create a separate 
deposit insurance fund board from the bank regulatory board, 
thereby enabling the GOT to assert 
greater control. End Summary. 
 
 
Push for Completion of Prior Actions to Allow a December 
Board Date: 
--------------------------------------------- --- 
 
 
2. (Sbu) In a meeting December 4 with econoffs, IMF Resident 
Representative Odd Per Brekk and 
his deputy Christoph Klingen explained that a December board 
date for the Sixth Review is still 
possible, provided the GOT makes a big push to get the 
necessary legislation passed the week of 
December 8-12. At the December 1 Council of Ministers 
meeting, the GOT reportedly agreed to clear 
the parliamentary agenda to deal with legislation required 
for the Sixth Review. According to 
Brekk, Prime Minister Erdogan has made calls to key 
parliamentarians to move things forward. 
 
 
3 (Sbu) Brekk explained that the Board's last meetings of the 
year are on December 19, and Board 
policy is that prior actions need to be completed 5 days 
prior, with rare exceptions.  If the 
Board date slips into 2004, this would complicate the 
schedule for the Seventh Review and make it 
more difficult to comply with strict IMF rules about 
completing standby programs within 36 months. 
 
 
4. (Sbu) Passage of the Public Financial Management and 
Control Law, a key requirement, has become 
more controversial because it includes a provision reducing 
the power of the Financial Inspection 
Board in the Ministry of Finance.  With the legislation 
decentralizing the audit function to line 
ministries, the long powerful Financial Inspection Board--an 
elite body dating from Ottoman times 
and modelled on the French Financial Inspectors--would lose 
its powers to investigate other 
ministries.  The influential Financial Inspection Board is 
fighting back and Brekk noted that 
several key parliamentarians are former financial inspectors 
themselves. 
 
 
5. (Sbu) Although Fund staff reached a compromise with the 
GOT on regional incentives and Free 
Trade Zones in the indirect tax reform package, the draft 
legislation needs to be approved by the 
Council of Ministers. Brekk hoped the Council would act on 
December 8. 
 
 
Banking Sector issues: 
--------------------- 
 
 
6. (Sbu) As U/S Canakci had told econoffs (ref c) the draft 
law to strengthen the hand of the BRSA 
had expanded to include elements not originally envisioned by 
the IMF.  Brekk said that the 
Ministry of Justice, without consulting the Fund, had added 
the new provisions.  He explained that 
one new element was to include draconian provisions on 
seizure of bank owners' and their relatives' 
assets.  Brekk and Klingen said that the Fund staff believe 
the new provisions are impractical in 
their harshness--and are being resisted by the Bankers' 
Association--but that the Fund staff cares 
much more about the other new provisions relating to bank 
regulatory institutions. 
 
 
7. (Sbu) Brekk said the legislation includes provisions that 
would allow a new board to be 
appointed for the deposit insurance fund (SDIF), with board 
members differing from the members of 
the bank regulatory agency (BRSA) board.  This would be a 
significant departure from the current 
arrangement, whereby the two agencies, though legally 
distinct, are run by boards with identical 
membership.  Though the new SDIF board--like the BRSA 
board--would be independent, by creating a 
new, separate board, the current Government will have the 
opportunity to appoint all new members, 
thereby asserting control--for now--over this nominally 
independent body.  Brekk said the issue had 
become politicized because Justice Minister Cicek had gone 
public.  The IMF had succeeded in getting 
the GOT to drop a provision that would have transferred asset 
collection for failed banks from SDIF 
to the Ministry of Finance, but Fund staff had opted to go 
along with the creation of a new SDIF 
board.  The Fund had agreed out of pragmatism, according to 
Brekk, but also because it had 
originally advocated separating SDIF from BRSA at the 
institutions' inception.  Finally, Brekk 
claimed that the Fund accepted the change on condition the 
new board members be qualified, and would 
scrutinize selections carefully. 
 
 
8. (Sbu) In the end, the draconian collection provisions had 
also been softened a litte bit, 
according to Brekk.  The law is still in committee, however. 
Separately from the institutional 
framework, Brekk said the biggest problem with SDIF is that 
no official is willing to sell assets 
of failed banks for fear they will later be accused of 
selling below the assets' notional value. 
 
 
9. (Sbu) Though the Government announced its plan to finance 
the payments to Imar Bank depositors 
with great fanfare several weeks ago, Brekk said the enabling 
legislation is still in committee. 
The IMF also wants the GOT to announce a Government 
investigation of the Imar Bank case and the Fund 
insists that the individual chosen to lead the investigation 
have credibility with the financial 
community in Istanbul.  Brekk noted with a wry smile that the 
GOT is having difficulty coming up 
with an appropriate person.  Regarding former BRSA Chairman 
Engin Akcakoca, who is now being 
prosecuted for having taken documents from BRSA when he was 
forced out, Brekk said the IMF has been 
supportive of Akcakoca, including a Krueger letter noting his 
achievements at BRSA. 
 
 
10. (Sbu) Though not a formal condition for the Sixth Review, 
the IMF also wants to see Treasury 
write a letter to the SDIF committing to fund the 
recapitalization of Pamuk Bank.  Brekk revealed 
that the GOT has two prospective buyers for assets of Halk 
Bank, Finansbank and a Libyan-Italian- 
Canadian businessman.  Brekk said the GOT seems uncomfortable 
with these potential buyers. 
 
 
State Enterprise Redundant Positions/Privatization/Fiscal 
Targets: 
--------------------------------------------- 
 
 
11. (Sbu) One law that has been passed is the legislation 
sweetening early retirement incentives 
for state enterprise employees who retire before the end of 
2003.  The legislation was designed 
to help the GOT meet its target to reduce redundant SEE 
employees by 25,000 between February 1, and 
December 31, 2003.  To garner the enhanced retirement 
incentives, employees would have to apply by 
December 8.  Among the Sixth Review required actions, the GOT 
has also approved in Council of 
Ministers the plan to privatize Turk Telecom. 
 
 
12. (Sbu) Brekk said that Fund staff have no particular 
issues with the proposed 2004 budget but 
that there still may be a gap in performance on the 2003 
fiscal target.  The problem, according to 
Klingen, is not with the Central Government but with the 
total public sector budget performance. 
Turkey had missed the October prior condition by 1 
Quadrillion TL.  Though their fiscal expert is 
coming to get a clearer fix, Klingen said it appears there 
may still be a gap of between 1.5 and 2 
Quadrillion TL or about 0.6-0.7 percent of GDP for all of 
2003.  If the gap is confirmed and the 
Board vote slips into 2004, the fiscal issue could get become 
very difficult between the Fund and 
Finance Minister Unakitan.  When it looked like the Board 
vote would take place before the numbers 
were clear, the GOT had requested a waiver of applicability. 
But if the vote takes place after 
the numbers are known and there is a gap it would require a 
waiver of the GOT's performance on the 
fiscal target, which would be much more controversial. 
 
 
Outlook for the future: 
---------------------- 
 
 
13. (Sbu) Brekk agreed when Econcouns outlined some of the 
potential vulnerabilities in the outlook: 
in the absence of aggressive structural reforms, Turkey's 
growth could be closer to 4 percent than 
to 6 percent and the country remains vulnerable to risks 
relating to the Current Account Deficit. 
Brekk agreed that the on-again off-again pattern of reform 
was worrisome.  Brekk said the  Current 
Account Deficit is not a problem in the same way that it was 
in 2000.  Instead, it is linked to the 
debt problem, since a decline in the lira would quickly 
exacerbate debt service problems.  The CA 
Deficit is current being financed by large errors and 
omissions, which are a "black box."  Though 
the IMF considers that dollars flowing from Iraq are part of 
the explanation for Errors and 
Omissions, they do not fully account for the phenomenon. 
Note: Central Bank statistics for the first 
nine months of 2003 show Errors and Omissions of USD 3.6 
billion. End Note. 
 
 
14. (Sbu) For 2004, the IMF staff have not had detailed 
discussions about their priorities.  Brekk 
expected a lot of focus on implementation issues.  Though 
fiscal issues will retain their importance, 
the Fund will probably devote more attention to the 
quality--rather than the quantity--of adjustment. 
In this regard, Klingen noted that, following an initial 
visit earlier in the fall, a larger Fund 
team including experts is coming back to do more work on how 
to broaden the tax base and capture the 
unregistered economy.  He explained that the experts' idea is 
not only to try to capture the revenue 
base from small businesses currently avoiding taxes, but also 
to target larger corporations' tax 
evasion schemes.  For 2004, privatization will be important, 
as well as the GOT's plans for reform 
of Public Administration and Decentralization.  A Seventh 
Review mission is scheduled to come in 
early January. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EDELMAN