IMF Warns Asia Against Abrupt Ending of Stimulus Measures

The International Monetary Fund (IMF) on Tuesday warned Asian countries that economic recovery could stall if private demand does not pick up after stimulus programs have been stopped. Policy support, therefore, should remain in place until a durable recovery is secured, says the IMF.


Speaking at the Federal Reserve Bank of San Francisco Conference in Santa Barbara, California, John Lipsky, First Deputy Managing Director of the International Monetary Fund, says that some Asian countries--particularly advanced and export-dependent economies--are planning to withdraw fiscal stimulus over the course of 2010 in response to signs of recovery. "However, these plans should proceed cautiously until the recovery seems assured," he stresses.


Lipsky says that fiscal credibility could be enhanced by announcing concrete medium-term consolidation plans. He notes that such plans will be particularly relevant for those countries starting from relatively high debt levels, such as Japan, India, and Malaysia; and those facing looming age-related fiscal pressures, such as Japan and the Newly Industrialized Economies of Korea, Singapore, Hong Kong SAR, and Taiwan Province of China. But even for the average Asian country, without fiscal adjustment, Lipsky says debt-to-GDP ratios are projected to remain above pre-crisis levels through 2014.


For the bulk of the region, monetary conditions should remain supportive for longer than has been the case in previous cycles, says Lipsky.


"With the recovery still tentative, inflation risks currently low, and limited asset price increases so far, a near-term tightening of monetary policy would be premature for most countries," notes Lipsky.


But there are a few exceptions where action may be appropriate sooner then elsewhere. Lipsky cites Australia where the recovery is advancing rapidly and output gaps are starting to close, prompting the Reserve Bank to become the first major country central bank to raise interest rates since the onset of the crisis. In India, core inflation and inflation expectations are rising as industrial production has recovered rapidly. And in China, growth is accelerating and the extraordinary pace of loan growth in the first half of 2009 raises the risk of future loan quality problems.


"Over the longer horizon, there are significant risks of anemic global demand if the policy choices are not mutually supportive," says Lipsky. Lipsky explains that achieving sustained healthy growth for all countries will depend critically on rebalancing the pattern of global demand—not just from public-sector supported growth to private sector-supported growth but also from relative reliance on external demand to domestic demand in surplus countries, and the reverse in deficit countries.


This rebalancing process will involve strengthening consumer confidence and facilitating a pick-up in private investment in industries geared toward domestic markets. At the same time, improvements in corporate governance, financial intermediation, the quality of public investment, and social safety nets will help to continue improving productivity and support growth.

"Improvements in corporate governance and continued financial sector reform have the potential to bring down the high levels of corporate savings in Asia and contribute to global rebalancing," says Lipsky.


According to Lipsky, Asia is expected to grow by 2.75% this year and by 5.75% in 2010. Strikingly, the three fastest growing economies in the G-20 are all from Asia—China, India, and Indonesia—with China projected to grow 8.5%, India 5.5%, and Indonesia 4% this year.

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