Istanbul: Turkey should urgently pass fiscal reforms intended to govern spending, the International Monetary Fund (IMF) said in a report Wednesday, warning the government risks weakening its fiscal credibility otherwise.
Turkey has postponed the ‘fiscal rule' legislation, which is designed to reduce the budget deficit and debt-to-GDP ratio, in a move dashing investor expectations that it would be introduced in time for the 2011 budget.
Rating agencies have warned that the delay may result in deficit reduction plans being diluted.
The IMF's comments had little impact on Turkish financial markets which closed early yesterday for a two-and-a-half day public holiday. Shares closed 0.2 per cent lower, the lira was flat at 1.51 to the dollar and bonds were slightly firmer.
The IMF said in its Article IV Consultation report on Turkey that the fiscal rule, postponed by the government last month until after the 2011 election, would introduce needed enhancements to transparency and public financial management.
"Staff consider that the fiscal rule is considerably superior to the 2009 medium-term plan and urge passage of the draft rule without further delay," the IMF report said.
"Failure to pass the rule quickly may forfeit the window of opportunity that could close ahead of the approaching election cycle, and risk weakening the credibility of the authorities' commitment to fiscal discipline," it said.
Strong recovery
A parliamentary election is due in Turkey by July 2011. The Turkish economy is rebounding strongly from a contraction of 4.7 per cent last year and is expected to grow around 6 per cent this year.
Financial markets are also closely watching a referendum on constitutional changes being held on Sunday, with a ‘no' vote expected to be a blow to the AK Party government.
The rejection of these constitutional reforms could encourage the government to increase spending to boost its support ahead of the election.
The introduction of the fiscal reforms had been expected after Turkey chose not to enter a stand-by loan agreement with the IMF earlier this year.
Past IMF agreements had acted as policy anchors, and investors had wanted reassurance about fiscal discipline after a spending splurge last year to help rescue the economy from recession.
