IMF cautions EU candidate states on urgent need for fiscal restraint

WASHINGTON (Reuters) – European Union candidate countries need to rein in spending because of growing current account gaps and to prevent strengthening exchange rates, the International Monetary Fund (IMF) said yesterday. The economies of EU accession countries should grow 3.9 percent this year and 4.5 percent in 2004, the IMF said. «Although the nature of required adjustments varies across countries, the need for fiscal restraint is likely to remain a central focus of policy,» the IMF said in its semiannual World Economic Outlook report. A long war with Iraq is among the key risks to the region, as it could cause higher oil prices and reduced exports to the European Union if the economy there slows. Another risk would be the failure of countries to rein in fiscal policy which could undercut market sentiment and economic activity. Poland’s economic position is the weakest in the region, the IMF said, and warned the country to keep control of spending to ensure there is room for monetary policy easing. «Fiscal restraint – including the recently advanced comprehensive fiscal reform package – is essential to leave room for further monetary easing, which is warranted by the lack of inflationary pressures in the economy,» the IMF said. Accelerated privatization would also help the economy. The fund is expecting the Polish gross domestic product to rise 2.6 percent this year but to jump to 4.1 percent in 2004. The big task in Hungary, the IMF said, is to close the widening fiscal deficit. «Meeting this challenge, in part through public sector wage restraint, would also help mitigate related sources of risk, including relatively rapid economy-wide wage inflation.» The IMF said fiscal restraint and wage moderation would also help unburden monetary policy in Hungary. The IMF is expecting the Hungarian economy to grow 3.6 percent this year, rising to 3.9 percent in 2004. In the Czech Republic, the focus is to adjust the fiscal balance and to provide monetary policy with additional flexibility to respond to shocks now that domestic interest rates have been reduced to those below the level of the European Central Bank. A further strengthening of the crown currency could be one such shock, the fund suggested. The IMF said the budget tightening in Slovakia in the 2003 budget is appropriate but warned that an «even greater fiscal effort could nevertheless be needed» if capital inflows are sustained. Turkish urgency The IMF said Turkey «urgently» needs to establish the government’s fiscal credentials by sticking to the 6.5 percent fiscal surplus target agreed to with the IMF. «Only by taking early strong action, especially in the fiscal area, can doubts about debt sustainability be dispelled,» the fund said. Turkey has a $95 billion debt load. Investors are worried that disagreements with the IMF, the war in neighboring Iraq and cooler relations with the United States could upset the economy and compromise the country’s ability to service its debt. Turkey has a $16 billion loan program with the fund. On Saturday, it sent its letter of intent to Washington, which sets out the country’s economic program as agreed to with the IMF, paving the way for the next loan review to go ahead. The IMF expects Turkey’s economy to grow 5.1 percent this year and 5.0 percent in 2004.