Washington: The global economy might have avoided the worst but it is by no means out of the woods, the International Monetary Fund said on Saturday adding that emerging markets face the risk of avoiding potential financial excesses and as such they should rebuild macroeconomic policy space and further strengthen financial regulation and supervision.
"Emerging markets face the new risk of avoiding potential financial excesses. They should rebuild macroeconomic policy space and further strengthen financial regulation and supervision. The Fund will advise on how to manage volatile capital flows and limit financial stability risks, including through macro-prudential policies," IMF Managing Director's Global Policy Agenda (GPA) said.
Many emerging market economies should begin to recalibrate policies to guard against financial excesses, to rebuild macroeconomic policy space, and to make their financial systems more resilient against the eventual policy tightening in advanced economies, it said. "Country circumstances, including the need to rebalance demand and the adequacy of policy buffers, will determine the pace of fiscal consolidation and monetary policy tightening," the IMF said.
The 13-page agenda released during the annual Spring meeting of the International Monetary Fund and the World Bank, said that the global economy has avoided the worst, but it is by no means out of the woods, and prospects may be diverging. "A three-speed global recovery is emerging. Sentiment has improved, but growth and jobs are still lagging in many places, some old risks remain and could rekindle tail risks, and new risks are arising," it said adding that policymakers must, to varying degrees, continue to nurse the recovery, repair systems damaged by the crisis, strengthen defences against a recurrence, and anticipate new challenges from stronger expansion.
The IMF said major advanced economies need to balance supporting activity and grappling with old risks from structural weaknesses that weigh on growth. A slow but fairly steady private sector-led recovery is in the making in the US, while recovery remains elusive in the euro area and Japan, it said.
While sentiment has improved, the top priority for the US is to raise the debt ceiling in a timely manner and agree on a credible medium-term fiscal roadmap to bring down debt, the IMF policy agenda said. In the euro area, monetary policy should remain accommodative and fiscal consolidation be properly paced. The foundations of monetary union should be made more secure, it added.
Also, Japan needs to balance upfront stimulus with more ambitious plans to bring down debt and structural reforms to put growth on a permanently higher plane, the IMF said. According to the IMF Global Policy Agenda, many emerging market economies have taken measures to support slowing demand and have averted a hard landing.
"But in some cases these measures have given rise to new vulnerabilities and stability concerns that need to be addressed," it said. "Emerging markets have also continued their efforts to strengthen policy frameworks, including macro-prudential, to deal with volatile capital flows and potential financial excesses," the IMF paper said.
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