(RTTNews) - The global economy has turned the corner, but the recovery remains fragile, the International Monetary Fund managing director Dominique Strauss-Kahn said Friday.

"Policy makers should therefore keep supportive measures in place until a recovery is firmly established and conditions for unemployment to recede are in place," Strauss-Kahn said in an annual lecture at the Monetary Authority of Singapore. "In some emerging markets, including a few in Asia, the recovery is further along, and crisis support policies may need to be unwound sooner rather than later. But, in other regional economies, where the recovery is less firmly established, policy stimulus should be maintained for longer."

Regardless of the extent of economic recovery, it makes sense for policy makers in all countries to start planning their exit strategies now, the IMF chief said. "Such early planning will help the eventual unwinding of exit policies and ease the transition to more normal economic conditions."

In economies that face serious concerns about fiscal sustainability, like G-20 economies, it will be particularly important to identify the longer-term reforms needed for eventual fiscal consolidation. Fiscal reforms that advance consolidation but do not slow the recovery should be implemented now, he urged.
Moreover, he said the resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges as they can raise risks of rapid and potentially destabilizing movements of currencies and asset prices.

Strauss-Kahn said policy makers have several tools to mitigate the effects of these inflows. "They include exchange rate appreciation, tighter fiscal policy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bubbles. Market-based controls on capital inflows can help reduce the volatility of such flows." He noted that these measures are costly and tend to lose effectiveness over time.

Asian currencies should appreciate over time as part of a global economic rebalancing and many of the region's currencies are still undervalued related to those of their major trading partners, while the euro is somewhat overvalued on this basis, he said. "In my view, the region should not resist a gradual appreciation of its exchange rates, which I consider an important prerequisite for long-term rebalancing."

Strauss-Kahn said the risk of protectionism with unemployment still rising in the advanced economies is a big challenge, especially for the externally-oriented Asian economies.

by RTT Staff Writer

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