IMF calls for global pact to address recovery risks

22 Apr, 2004

The International Monetary Fund on Wednesday revised up its 2004 world economic forecast and called for a global pact of its 184 members to reduce government imbalances threatening the recovery.
In its semi-annual World Economic Outlook, the IMF boosted its forecast for global growth to 4.6 percent in 2004 from a September projection of 4.1 percent, and said growth should slow to 4.4 percent in 2005.
Formed in 1945, the IMF is considered the guardian of the international financial system, encouraging sound policies and alerting members when economies get out of whack.
In the Spring outlook, the lender offered pointed advice for fixing global economic imbalances - something it has warned could pose a threat to growth.
"To support an orderly resolution of the global imbalances ... directors called for the membership to adopt a credible and co-operative strategy that would facilitate the medium-term re-balancing of demand across countries and region," the global lender said.
The strategy would include a "credible" effort by the United States to cut its budget gap, faster structural reforms to spur sluggish euro area growth, more banking and corporate reforms in Japan, and a loosening of exchange rates combined with reforms to spur domestic demand throughout most of Asia.
The fund will soon get new leadership, with European Union finance ministers saying on Tuesday they backed Spain's Rodrigo Rato for the job. Acting Managing Director Anne Krueger will preside over the spring meetings in Washington this week.
The IMF said the global recovery has been supported by a rally in financial markets and business spending which had solidified in most regions.
But it warned that global current account deficits were still too big - despite a fall in the US dollar - and could cause disorderly currency movements and an abrupt rise in interest rates from current low levels.
As the recovery gains steam, interest rates in most countries will need to rise toward a more neutral stance, it said. Managing the transition to higher rates will be a challenge for policy-makers, it noted.
The fund urged central bankers such as the US Federal Reserve to communicate their policy intentions clearly to financial markets so that there are no surprises.
The fund recommended a gradual increase in interest rates in tandem with an expected pickup in investment demand - a move it suggested should not harm the recovery.
But the IMF said the March 11 train bombings in Madrid that killed 191 people and the wars in Iraq and Afghanistan were stark reminders of global political uncertainties that could quickly douse the economic cheer.
It said stability in oil prices would only come with less global political uncertainty coupled with closer co-operation between oil producer and consumer countries.
"The priority should now be given to pressing ahead with the medium-term policy measures that will help underpin the sustainability of the recovery going forward, while rebuilding room for manoeuvre to respond to possible future shocks," the IMF said.
The IMF said the 12-member eurozone should be prepared to cut rates further if the region's economy continued to struggle. For the moment, though, the fund supported current monetary policy.
In the developing world, the IMF said growth had picked up on the back of improved fundamentals, strong private capital flows and historically low interest-rate spreads.
But it warned countries with high public debts to be on guard for a sudden rise in interest rates that could make their assets less alluring for investors.

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