The International Monetary Fund (IMF) holds its spring meeting in Washington, DC, on Saturday amid what officials describe as the worst financial crisis since the 1930s Depression and as the global economy weakens.
The 185-member IMF, set up to oversee the reconstruction of Europe after World War II, warned on Wednesday that the economic outlook was increasingly grim, with the United States in a recession from a housing meltdown whose effects are still spreading.
Global expansion would slow to 3,7% in 2008, it said, cutting earlier forecasts and warning there was a 25% chance growth would fall further to leave the world effectively in recession this year and next.
The risks growth remain ”tilted to the downside”, it said in its biannual World Economic Outlook report prepared for its spring meetings with the World Bank in Washington on Saturday and Sunday.
”The principal downside risk comes from the possibility that financial strains could deepen,” said Simon Johnson, the IMF chief economist.
That view was reinforced on Friday when the Group of Seven (G7) industrialised nations said the economic outlook was weakening and called on the banks to ”fully and promptly” reveal their risk exposure due to the current financial market turmoil within 100 days.
The world economy ”continues to face a difficult period … [and] near-term economic prospects have weakened”, G7 finance ministers and central bank governors said after their own meeting here.
”The turmoil in global financial markets remains challenging and more protracted than we had anticipated,” they said. ”While economic conditions differ in our countries, downside risks to the outlook persist in view of the ongoing weakness in US residential housing markets, stressed global financial market conditions, the international impact of high oil and commodity prices, and consequent inflation pressures.”
The G7 finance chiefs also noted that since their last meeting in February, there have been ”sharp fluctuations” in major currencies and members ”continue to monitor exchange markets closely and cooperate as appropriate”.
Analysts said the G7 statement was a welcome recognition of the seriousness of the problems, especially with regard to the banks and getting some transparency back into the system.
IMF MD Dominique Strauss-Kahn said on Thursday the organisation would play a key role in confronting the global financial crisis.
Strauss-Kahn said the global financial turmoil that originated in rising defaults in the US on subprime mortgages and roiled markets in August was the biggest financial crisis since the Great Depression of the 1930s. ”But it is a new kind of crisis,” he said at a news conference.
Strauss-Kahn, who took the reins of the 185-nation institution in November, said the crisis shows above all the need for analysis of the links between the financial sector and the real economy. The IMF is ”one of the rare” institutions” that can address the two sides of the problem, he said.
Even while the IMF meetings are likely to be dominated by the economic gloom, the IMF faces its own financial distress.
Established to promote global financial stability 64 years ago, the IMF finds itself out of step with the times and strapped for cash as countries shun its lending that carries what critics say are overly severe conditions.
Strauss-Kahn took office promising to restore its relevance, credibility and ailing finances.
The IMF board recently approved a series of reforms, ranging from creation of a new voting rights system that gives more voice to developing countries to a sharp budget cutback and the sale of 403 metric tonnes of gold reserves to replenish coffers.
The reforms, which require approval of 85% of the IMF’s voting power to be adopted, ”will be a real big success for the institution”, Strauss-Kahn said. — Sapa-AFP