IMF urges US to break budget stalemate

AP News
Posted: Sep 19, 2013 4:48 PM

WASHINGTON (AP) — International Monetary Fund chief Christine Lagarde urged the U.S. on Thursday not to "put a brake on this beginning of recovery" by failing to resolve an impasse over the budget and cutting back government spending too deeply.

Sharp criticism of the across-the-board federal spending cuts imposed in March and known as sequestration has been a theme of Lagarde's speeches over the past months. She told the U.S. Chamber of Commerce in Washington that the budget cutting now underway in the U.S. in this "blunt and relatively blind way caused by sequestration, among other things, is excessive."

She said U.S. economic growth this year, expected to be below 2.0 percent, is weaker than the IMF wants to see. And she said the heavy budget cuts were the main reasons for weak growth this year. Lagarde also said the IMF expects U.S. growth to accelerate next year by about 1 percentage point.

But even with that acceleration and signs that Europe is emerging from its long recession, she said the IMF sees subdued global growth ahead.

Advanced economies are in a better place than they were six months ago. But developing countries that helped keep the global economy afloat during the recent economic crisis are now slowing down, the IMF chief said.

She spoke a few weeks before the IMF is to release its latest global economic forecasts ahead of the lending agency's semiannual meeting in Washington.

Lagarde also said the fight over the budget and over raising the debt ceiling in Congress are potentially destabilizing.

"It is essential to resolve this — and the earlier the better — for confidence, for markets and for the real economy," Lagarde said.

The Federal Reserve, in its surprise decision on Wednesday not to cut back its extraordinary stimulus program for the U.S. economy, said the budget stalemate in Congress and the threat of a government shutdown as soon as next month are holding back growth and putting the economy at risk.

Lagarde also urged the U.S. to support internal reforms of IMF that aim to give developing countries more power at the 188-member agency set up in 1944 to provide emergency loans and other support to countries facing economic difficulties.

The reforms will strengthen the IMF's ability to prevent and resolve financial crises, Largarde said.

The reforms passed within the IMF more than two years ago would reallocate the quota, or voting weight, that each country wields. But they cannot go into effect until Congress approves shifting $65 billion dollars that the U.S. provided to an IMF emergency fund into its permanent reserves.

IMF members are represented through a quota system broadly based on their relative size in the global economy. For much of its history since its creation after World War II, the dynamics in the IMF didn't change much but the rise of China and other emerging economies over recent years has seen some increases in their voting power. Still it has not captured the full rise of countries such as China.