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Crisis requires large fiscal stimulus: IMF’s Lipsky

  A large-scale global fiscal stimulus is needed to counter the financial crisis, which has blunted the impact of interest rate cuts, a senior International Monetary Fund official said on Monday.


IMF studies had determined that a global fiscal stimulus in the region of 2% of gross domestic product was justified, said John Lipsky, the IMF’s first deputy managing director. “With inflation receding, many advanced and emerging economies can ease monetary policy. Generally speaking, however, monetary easing is likely to be less effective at stimulating demand while financial conditions remain disrupted,” he told students at Johns Hopkins University.

The global financial crisis, emanating from the collapse of the US housing market, has prompted major central banks -- including the Federal Reserve and the Bank of England -- to slash rates in a futile bid to avoid a recession. Economic data have already shown that Japan and the euro zone economies are in a recession, with the British and US economies heading in a similar direction.

Lipsky said it was imperative that fiscal expansion should play a role in sustaining global demand, a view that was endorsed by leaders at the G20 summit last Saturday. “Our research suggests that global fiscal stimulus on the order of 2% of GDP is justified. Moreover, fiscal policy action would be more effective if it were implemented in key trading partner countries more or less simultaneously,” he said.

Based on data from the IMF’s World Economic Outlook released in October, world output this year will probably be around $62 trillion, so 2% of that would be a little over $1.2 trillion. The United States has already paid out much of the $168 billion stimulus plan it passed this year, and Congress is considering another round. China has approved $586 billion in government spending, while Germany has announced about $64 billion and Spain $50 billion.

So far, there has been little coordination in the crafting and announcing stimulus packages by the various governments. While pushing for more government funds to deal with the crisis, Lipsky acknowledged that fiscal action might not be appropriate in countries with great vulnerabilities or those where debt sustainability is a major concern. “Regardless, emerging economies will likely remain under pressure for some time from global financial deleveraging, even under the most favorable plausible scenarios,” he said. “As a result, liquidity provision will continue to be critical to emerging markets’ ability to weather this storm.”

The IMF, through its short-term liquidity facility, would provide substantial liquidity support to emerging nations with good policies and track record that are experiencing a squeeze because of the global credit crisis, Lipsky said. “If it proves useful, this facility will become a regular part of the Fund’s policy tool kit,” he said.

The IMF forecast advanced economies would contract by a quarter percent on an annual basis in 2009, the first annual contraction in the postwar period for these countries as a group. Emerging economies will expand 5%, it said. (Reuters)