IMF prompts G-20 nations for crisis management

International Monetary Fund (IMF), on Thursday warned G-20 nations to revitalise the weakening financial system to tide over the current global economic crisis. 

An IMF paper prepared for the G-20 finance ministers said "Even in countries where banking sectors still appear resilient, the deepening global financial crisis is likely to imply greater stresses,".

The G-20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK, the US and the European Union which represent 90 per cent of gross global national product and 80 per cent of world trade.
 
A meeting of G-20 political leaders and financial ministers is scheduled on 2 April in London to discuss the world economic crisis and recovery plan.
 
IMF said that the world economy is in a worst ever recession since the second world war and forecast a grim 0.5 to 1 per cent contraction this year with developed economies shrinking in the range of 3 to 3.5 per cent (See: IMF portrays gloomy global scenario).

The paper warned G-20 nations not to underestimate the severity of the crisis which can lead to addressing only the symptoms of the issue, while the real economy continues to slump due to the underlying problems. Policies to govern purchases of toxic assets from banks - a necessary step to prepare them for new lending - were developing slowly, the paper said.

"Measures have not stemmed the market-driven deleveraging process, and lending surveys point to a continued deterioration for the next year in the United States, Europe, Canada and Japan," the IMF paper said.

IMF was critical of the financial stability plan proposed by Timothy Geithner, US treasury secretary last week urging biggest industrialised countries to commit 2 per cent of their GDP during the next 2 years in an effort to stimulate global economy. IMF said the proposal needed more clarity on how distressed financial assets should be valued and how insolvent banks will be resolved.

The paper highlighted the urgency to develop a crisis management strategy by G-20 nations, "that does not shrink from government takeovers of nonviable institutions."

''Policy-makers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalising viable institutions,'' it urged.

''Delays in implementing comprehensive policies to stabilise financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial system, leading to an even deeper and prolonged recession'' the paper warned.

''Turning around global growth will depend critically on more concerted policy actions to stabilise financial conditions as well as sustained, strong policy support to bolster demand,'' the paper said. It predicted a modest recovery beginning next year if countries succeeded in stabilising the financial system and provided sufficient fiscal support.

''Restoring confidence is key to resolving the crisis, and this calls for tackling problems in the financial sector head-on,'' the IMF said.

Emerging economies
IMF projects emerging and developing economies growth between 1.5 per cent and 2.5 per cent in 2009 which would recover up to 4.5 per cent next year.

An IMF report on Kyrgyztan predicted a mere 1 per cent growth for the economy in 2009 after an imposing 7.5 per cent in 2008, following the spread of the global crisis. It said that the monetary policies of the government has brought down the inflation from 30 per cent in mid-2008 to 16 per cent currently. If inflation falls to 10 per cent, there is scope for easing interest rates, it added.

IMF forecasts a slow down in Indian economy to 6.25 per cent growth this fiscal year and 5.25 per cent in 2009-2010 after and average growth of 8.75 per cent during the past 5 years.

An IMF statement released in Washington on Tuesday following a visit of an IMF team to India concedes that the ''uncertainty surrounding the forecast is unusually large with significant downside risks''

The primary concerns raised in the statement include high ratio of public debt to GDP which is about 80 per cent, and high government deficit rising nearly to 10 per cent.

IMF advised that any further short-term stimulus should be combined with fiscal reforms to safeguard medium-term debt sustainability. The fund called for ''comprehensive expenditure reforms and measures to broaden the tax base''.

While commending India's financial system for its strength and resilience, IMF cautioned about the escalating credit risk and liquidity pressure and urged India to take additional preventive action and improve banking efficiency.

The statement said that inflation is likely to fall to 3 per cent year-on-year by March 2009 and to 2 per cent on an average in 2009-10.

The current account deficit projected is around 3 per cent for the current fiscal year which is expected to drop to 1.5 per cent in 2009-10 due to lower oil prices and fall in demand.