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IMF Outlines Principles For Stimulus Exit Strategies

By Meena Thiruvengadam, Of DOW JONES NEWSWIRES

ST. ANDREWS, Scotland -(Dow Jones)- As countries grapple with the issue of when and how to withdraw economic stimulus, the International Monetary Fund is laying out principles it believes should underpin those decisions.

In a document released in conjunction with Group of 20 meetings in Scotland, the fund Saturday warned countries not to enact exit strategies too early, adding that an "overarching risk" of a stalling economic recovery remains.

The IMF said economic recovery remains sluggish and isn't yet self-sustaining, while financial conditions are still far from normal.

"Premature exit from accommodative monetary and fiscal policies could undermine the nascent rebound, as the policy-induced rebound could be mistaken for a strong and durable recovery," the fund said.

The fund is encouraging G20 countries to keep in place policy stimulus until private demand and other "clear signs of a durable recovery" return. Its principles recommend that countries concerned about the timing of their exit strategies err on the side of supporting demand and repairing the financial sector.

"Current conditions do not justify a significant and abrupt withdrawal of either stimulus or efforts to mend the financial system," it said.

The IMF also recommended that countries prioritize fiscal consolidation, ensure stimulus measures don't become permanent and communicate exit strategies in a clear and transparent manner. Further, it suggested that countries coordinate with one another but consider their own unique economic conditions when deciding when and how to withdraw stimulus.

"The overall pace of policy adjustment and removal of financial support will depend on the strength of recovery in private demand in each country and enduring financial stability," the fund said.

On central bank monetary policy, the fund said interest rates may need to rise before unconventional actions - such as certain credit programs - are fully withdrawn.

"Maintaining unconventional monetary policy measures does not necessarily constrain increases in policy rates," it said.

The IMF said advanced economies with high debts need to avoid keeping fiscal policy stimulus measures in the system too long but suggested they can afford for monetary policy to "remain accommodative for an extended period" because of subdued price pressures. Emerging economies, meanwhile, may have to hike rates more quickly because of inflation increases.

-By Meena Thiruvengadam, Dow Jones Newswires; 202-862-9255; meena.thiruvengadam@dowjones.com

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