ISTANBUL – Newly freed from the strictures of an International Monetary Fund (IMF) deal, Turkey is loosening its fiscal policy, worrying investors who see signs of electioneering as the ruling party fights for its survival in court. A top prosecutor has launched a case to close down the pro-business, reformist Justice and Development Party (AKP) for Islamist activities and, if he succeeds, one likely scenario would be an early parliamentary election in which a successor party would stand. A verdict in the closure case could take months but senior AKP sources told Reuters last week the party expects to be closed down and is looking ahead to how it might keep power. Moves to loosen fiscal policy which are already worrying investors include a cut to the primary surplus target and an amnesty for unpaid social security payments. Budget discipline tends to suffer in elections, as it did during a parliamentary election as recently as last year. «If they start believing the party will be closed down… then they don’t have much incentive to keep budget discipline,» said Mehmet Besimoglu, chief economist at Oyak Securities in Istanbul. «In addition, they want to invest in voters, in case the party is closed they want to invest in the new period.» Finance Minister Kemal Unakitan has repeatedly said Turkey will stick to fiscal discipline. Investors say the main danger is that fiscal loosening will fuel inflation – long a weak spot of the Turkish economy – which could in turn lead to higher interest rates. Because of political uncertainty and a large, oil-swelled current account deficit, sentiment is already fragile and fiscal loosening would undermine it further. «I think the key concern is on sentiment and sentiment toward the lira,» said American Express economist Sarah Hewin. The lira has weakened as much as 13 percent this year but has since rebounded to stand about 6 percent weaker year-to-date yesterday. The closure case coincides with the end of a $10 billion IMF loan program which helped Turkey recover from a 2001 crisis to post five years of 7 percent growth. Economists say the new measures would not be compatible with a new IMF deal. Five days after the deal expired on May 10, parliament passed a law to allow most of the interest due on 23.4 billion lira ($18.8 billion) of late social security payments to be forgiven. In its last letter of intent to the IMF, Ankara had said it was improving social security revenue collection but made no mention of the amnesty, the like of which had been precluded by the IMF. «This move is surely not a positive signal about the prospects of government policies in the coming months,» said JP Morgan’s chief Turkey economist, Yarkin Cebeci. «Further populist moves might be introduced as the AKP strives to preserve its popular support in an environment of deepening political uncertainty and worsening growth performance.» IMF deal less likely Growth is expected to slow to around 4 percent this year, according to market forecasts, while inflation is close to 10 percent, prompting the central bank to hike Turkey’s already high interest rates by 0.5 percent this month to 15.75 percent. The inflation-targeting central bank has called for tight fiscal policy, and its governor was quoted as saying that the reduction to the primary surplus target amounted to a fiscal easing. That surplus target, which measures a country’s ability to service its debts, was a major plank of the IMF program. Another measure causing concern is a move to increase annual transfers to municipalities by a 4 billion lira, while Vatan newspaper said at the weekend the government was looking at an 800-million-lira debt forgiveness plan for farmers. Some economists argue that state finances are in good shape, especially as Ankara will continue to cut its debt, and stimulus is logical as the economy slows. A plan to invest billions in the poor, violent southeast is also widely seen as a wise move. But they also argue that the recent measures make it look less likely the government will make a new deal with IMF, which some investors had said could have provided a useful anchor, particularly in a year of political uncertainty at home and market turbulence worldwide. «Looking at the latest steps taken in the area of fiscal loosening, it doesn’t look like the government will go into a new deal with the IMF unless it is really pushed,» said Haluk Burumcekci, chief economist at the Turkish arm of Fortis Bank. Turkey has yet to announce what kind of follow-up deal it will seek with the lender, facing the choice between a standby arrangement, which is the strictest deal and seen as unlikely, a precautionary standby arrangement and compulsory post-program monitoring.