IMF chief urges caution over recovery

Published on Monday 15 June 2009 22:47

THE head of the International Monetary Fund said yesterday governments and banks still had much to do to ensure the global economy begins to recover at the start of next year.

IMF managing director Dominique Strauss-Kahn appealed for caution in assessing the state of the global economy.

Speaking during a visit to Kazakhstan following agreement over the weekend by finance ministers of the Group of Eight nations that the global economy was showing encouraging signs of stabilisation, he said: "Their (G8] stance is that we are beginning to see some green shoots, but nevertheless we have to be cautious."

The IMF has raised global growth estimates for 2010 to 2.4 per cent from 1.9 per cent, and confirmed its April forecast for a 1.3 per cent contraction in 2009.

But credit must start flowing more freely and the banking sector must ensure its finances are secure if the global economy were to recover, Mr Strauss-Kahn said.

"The (credit] markets are not as frozen as they were one year ago, or eight months ago, but they are still nor functioning normally. And the recovery needs markets functioning correctly," he said. "One of the constants of (banking] crises is that you never recover before the cleansing of the balance sheets of the financial sector."

Pressure has been building in the G8 for plans to wind down economic stimulus as soon as it is no longer needed – "exit strategies" that would prevent market interest rates from climbing high enough to threaten economic recovery.

Mr Strauss-Kahn said the IMF had already begun work on an "exit strategy", which needs to take place in three spheres – monetary liquidity, state deficits that funded stimulus plans and the return of partially or fully nationalised companies to the private sector.

"But it's to early… to talk about an exit strategy which would give the impression that we are already at the end of the crisis," he said. "We first have to exit the crisis before we can implement an exit strategy and we haven't exited the crisis yet."