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Unwinding public intervention too early could jeopardize progress in securing a sustained economic recovery, the International Monetary Fund said in a paper released Tuesday. At the same time, maintaining intervention for too long could distort private incentives and pose risks to price, financial, and fiscal stability, it added.
The Washington-based body said financial restructuring and balance sheet repair, which includes bank recapitalization, remain priorities to underpin a resumption of strong economic growth.
The paper by IMF chief economist Olivier Blanchard said countries should draw up plans for a major improvement in fiscal balances in light of the large increases in government debts. "If fiscal consolidation gains sufficient traction once recovery is entrenched, a slower withdrawal of monetary stimulus than during past recoveries may be possible if inflation expectations remain anchored," the paper said. "If fiscal consolidation is not sufficiently ambitious, somewhat greater monetary tightening may be needed to anchor inflation expectations."
Further, the Fund said current conditions in the global economy, with the exception of some countries, do not justify a significant rolling back of macroeconomic stimulus or financial policies in 2010. It noted that recovery remained sluggish compared to previous standards and output gaps are likely to remain large for next few years. Consequently, unemployment would stay high in the advanced economies in 2010 and inflationary pressures are expected to remain subdued.
"Notwithstanding the recent pick-up in growth momentum, there is little evidence as yet that private demand is self-sustaining," IMF said. "Hence, fiscal and monetary stimulus may need to be maintained well into 2010, although if developments proceed as expected, withdrawal could begin in 2011," it added.
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