IMF cautions Asia against ending stimulus measures

WASHINGTON – The International Monetary Fund on Tuesday cautioned Asian economies against prematurely withdrawing fiscal stimulus measures, saying the current fragile global recovery may stall.

Some Asian nations – particularly advanced and export-dependent economies that have experienced a relatively large cyclical weakening of their fiscal positions – plan to withdraw stimulus next year amid recovery signs, the Washington-based IMF said.

“However, these plans should proceed cautiously until the recovery seems assured,” deputy IMF managing director John Lipsky warned.

He asked them to enhance “fiscal credibility” by announcing “concrete medium-term consolidation plans.”

Such plans will be particularly relevant for those countries starting from relatively high debt levels, including Japan, India, and Malaysia, he said.

It was also applicable to those facing looming age-related fiscal pressures, such as Japan and the newly industrialized economies of South Korea, Singapore, Hong Kong, and Taiwan, he said.

“But even for the average Asian country, without fiscal adjustment, debt-to-GDP ratios are projected to remain above pre-crisis levels through 2014,” he said at a Federal Reserve Bank of San Francisco conference in Santa Barbara, California.

The debt-to-GDP ratio is a measure of a country’s federal debt in relation to its gross domestic product, a basic measure of its economic performance.

Lipsky said “the principal near-term risk” was “the global recovery could stall.

“This could occur if private demand does not pick up and replace the policy stimulus and inventory re-stocking that have recently been the key drivers of growth.

“Policy support therefore should remain in place until a durable recovery is secured.”

Although Asia was not directly exposed to financial assets at the epicenter of the global crisis last year, the region was severely affected by the sharp downturn in the United States and Europe.

Trade fell, capital flowed out of the region, and trade finance stalled.

Asia is set to emerge from the downturn both sooner and stronger than any other region, and some have argued that the region’s remarkable recovery reflects a decoupling from the rest of the world, Lipsky said.

“However, the rebound so far reflects largely a return towards normalcy of trade and finance flows following their abrupt collapse at the end of 2008,” he said.

In fact, those economies with some of the largest initial contractions were South Korea, Singapore and Hong Kong, with large shares of high tech and other manufacturing trade with advanced economies, he said.

“And, just as the US downturn triggered an outsized fall in Asia’s GDP because international trade and finance froze, the normalization process is generating a rapid and strong Asian upturn,” he added.

The IMF’s most recent World Economic Outlook forecasts global economic contraction of about one percent this year and expansion of around three percent next year.

At the same time, Asia is expected to grow by 2.75 percent this year and by 5.75 percent in 2010. –Agence France-Presse