IMF calls on US to reduce fiscal deficits

Mr Rodrigo Rato, managing director of the International Monetary Fund (IMF), yesterday called on the US to make "active efforts" to reduce its fiscal and current account deficits, and for Europe and Japan to pursue structural reforms to promote growth.

Speaking at a forum organised by the Council on Foreign Relations, the New York-based think-tank, Mr Rato repeated the IMF's call for the countries to take advantage of the relatively benign world outlook to address global current account imbalances.

The IMF has identified the unbalanced pattern of global growth, and in particular US fiscal and current account deficits, as a key risk to the stability of the global economy, warning of the possibility of a disorderly and destabilising fall in the dollar if foreign investors become less willing to buy US assets.

Stronger growth in Europe and Japan will aid global adjustment after a period in which world growth has relied on demand growth generated in the US.

The IMF has trouble getting the large economies, which are unlikely ever to borrow from the fund, to listen to its advice.

Last month, in its annual report on the US economy, the IMF said the Bush administration's plans to halve the US fiscal deficit over four years were too modest and called for tax increases to tackle longer-term fiscal problems.

Mr Rato said that emerging market countries had made significant progress in addressing the vulnerabilities that led to the crises of the 1990s, including building foreign reserve levels to provide greater insurance against external shocks and reducing fiscal imbalances.

He said predictable fund lending was critical, but stressed that "large support packages cannot, and indeed should not, be ruled out" when there was a possibility that a large IMF programme would contribute to a rapid turnaround in confidence, citing Brazil and Korea.

The US Treasury has stressed the importance of formal limits on IMF lending, to provide greater predictability for investors.