By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The international monetary fund (IMF) Wednesday advised the group of twenty (G-20) nations to avoid premature withdrawal of monetary accommodation as fiscal balances continue consolidating.
This is contained in a staff report for finance ministers and central bankers in the upcoming G-20 meeting scheduled for February 22-23, 2014 in Sydney Australia.
The IMF’s staff report said global outlook remains broadly as projected in the January world economic outlook (WEO), it said global growth is projected to increase to about 3.75 percent in 2014 (from 3 percent in 2013) and 4 percent in 2015, similar to the January 2014 WEO Update.
“Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern and a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities. A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity,” the note said.
However, the IMF said further action and cooperation are needed to promote financial stability and robust recovery.
It specifically advised the G-20 economies to avoid premature withdrawal of monetary accommodation as fiscal balances continue consolidating.
‘’Given still large output gaps, very low inflation, and ongoing fiscal consolidation, monetary policy should remain accommodative in advanced economies. There is scope for better cooperation on unwinding UMP, including through wider central bank discussions of exit plans. In the euro area, repairing bank balance sheets remains critical to monetary policy transmission. Finally, fiscal consolidation should proceed at a measured pace, while preserving the long-run growth potential of the economy,’’ the IMF said.
While it advised the emerging market economies to further tightening its monetary policies in the context of strengthened policy frameworks necessary where inflation is still relatively high or where policy credibility has come into question.
‘’Priority should also be given to shoring up fiscal policy credibility where it is lacking; subsequently buffers should be built to provide space for counter-cyclical policy action. Exchange rate flexibility should continue to facilitate external adjustment, particularly where currencies are overvalued, while FX intervention—where reserves are adequate—can be used to smooth excessive volatility or prevent financial disruption,’’ the IMF said.
The fund also said key policies to boost potential include competition-enhancing product market reforms, infrastructure investment, and labour participation reforms, while further action is needed to avoid a resurgence of global imbalances as the recovery proceeds and ensure sustainable medium-term growth.
