Today, the International Monetary Fund, in a published Public Information Notice, summarized the IMF Executive Board’s February 17 discussions of principles for exiting from the unprecedented intervention policies resulting from the financial crisis. The discussions addressed and generally endorsed three IMF policy, or background, papers on the role of indicators in strategies for exiting fiscal support and implementing long-term fiscal consolidation and exit strategies for monetary policy intervention.
A brief summary of the discussions is as follows:
- Echoing a theme of a working paper published late last week by the Organization for Economic Co-Operation, the directors discouraged internationally unified and synchronized implementation of exit strategies, except where national economies are strongly linked. Generally, each country presents unique issues that need to be resolved in individualized ways, and exit strategies should be tailored accordingly. A more gradual implementation, varied in timing, pace and mode, will reduce the likelihood of creating adverse economic shocks. For instance, exit strategies are already underway in some countries, but should not begin until 2011 in others.
- The directors underscored the need for credibility and clarity in formulating exit strategies and communicating them to the public. Predictability will enable market participants to develop expectations and act accordingly.
- Restoration of fiscal sustainability—“the most daunting task”—should be a key priority. In the medium-term, the directors agreed that policy makers should aim to reduce debt ratios to pre-crisis levels or below, depending on the circumstances of each country. Achieving the goal of fiscal sustainability will require significant reductions in spending; however, such reductions could present opportunities to advance reforms. The directors also emphasized that reforms with long-term effects on fiscal sustainability need not be postponed to the extent they will not compromise recovery in the short-run.
- The directors discussed exit strategies for monetary policies and agreed that increases in interest rates, when appropriate, will not necessarily require the unwinding of other unconventional stimulus measures. However, during the upcoming interest rate adjustments, preservation of central bank independence will be vital to avoid pressures on central banks to relax their commitments to price stability.
- Financial sector intervention should be withdrawn gradually and flexibly by using market incentives and varied termination dates to maintain confidence in the market and minimize fiscal costs.