By James Mackenzie
ROME (Reuters) - The International Monetary Fund urged Prime Minister Mario Monti on Wednesday to press ahead with economic reforms to boost growth, saying Italy was on the right track and could not afford to veer off it.
Speaking after the fund's regular annual survey of the Italian economy, Europe department head Reza Moghadam gave strong backing to Monti, who has pushed European leaders hard to add growth policies to the austerity imposed to fight the crisis.
"The policies put in place by the government have created a stability that is really remarkable against the background that we saw at the end of last year," Moghadam told reporters in Rome.
Italy has pulled out of the near-terminal spiral it was caught in late last year when soaring borrowing costs threatened to push it to a Greek-style meltdown.
But it still faces a severe recession that could knock its deficit-reduction targets off track.
The IMF reaffirmed its forecast that Italy would contract by 1.9 percent in 2012, after gross domestic product shrank by 0.8 percent in the first quarter.
It said risks to the GDP outlook were on the downside but it did not consider the government, which has widened its deficit forecast to 0.5 percent of economic output in 2013 from 0.1 percent previously, needed to make further fiscal adjustments above what was already planned in 2012-13.
"The fiscal stance for this year and next year is one the IMF fully supports," Moghadam said.
He said the consultation focused on structural reforms to boost growth, fiscal consolidation and ensuring that the Italian banking sector supported the rest of the economy.
"Our recommendation is to continue with the plans for bank recapitalization, precisely to ensure that banks have enough capital to support lending activities in Italy," he said.
Moghadam pointed in particular to labor reforms to increase the number of people in work, attracting foreign investment, overhauling the notoriously inefficient legal system and public services as well as cutting taxes and high energy prices.
Moghadam said if Italy managed to get its main indicators to the median for countries in the OECD, it could lift output by six percentage points.
"There is a large payoff from structural reform," he said, urging swift approval for a labor bill now before parliament that is intended to give companies more flexibility to hire and fire workers.
He said there had been broad political support for Monti's reforms and it was important that there should be a consensus should continue.
(Editing by John Stonestreet)