IMF says stimulus needed to aid 'nascent' recovery

ST ANDREWS, Scotland (AFP) - The International Monetary Fund on Saturday said emergency stimulus measures must remain to avoid endangering a "nascent" economic recovery, as the G20 agreed here to maintain support.

"An overarching risk is that the recovery stalls" owing to early exits from record-low interest rates and massive state cash injections, the IMF said in a report to coincide with a meeting of G20 finance ministers in St Andrews.

"Premature exit from accommodative monetary and fiscal policies could undermine the nascent rebound, as the policy-induced rebound could be mistaken for a strong and durable recovery," the IMF said.

The world's largest and top emerging economies on Saturday agreed to maintain stimulus measures to support "uneven" economic recovery.

"The recovery is uneven and remains dependent on policy support, and high unemployment is a major concern," the G20 said in its final communique.

"To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured."

The IMF said that while financial markets were recovering from the crisis, weakness persisted across the banking system -- causing the Fund to predict only a "gradual" recovery from the worst downturn since the 1930s.

"Financial strains could also re-emerge if the recovery falters and efforts to restore health to bank balance sheets are not forcefully implemented.

"Hence, it would be important for G20 countries to maintain policy stimulus until there are clear signs of a durable recovery," the IMF added.

With a number of major economies already out of recession, countries are considering when best to end emergency measures.

The US Federal Reserve last week decided to hold rock-bottom US interest rates for "an extended period" and to keep trillion-dollar stimulus measures in place to support the United States' fragile recovery from recession.

And with Britain still stuck in its longest recession on record, the Bank of England has decided to keep British borrowing costs at all-time lows and agreed to pump 25 billion pounds (28 billion euros, 41 billion dollars) of new money into the economy.

Britain agreed last week to pump more capital into Royal Bank of Scotland, taking state investment to 45.5 billion pounds, making it the world's biggest bank bailout.

"The global economy has returned to positive growth following dramatic declines," the IMF said in its study on Saturday.

"The recovery is, however, uneven and not yet self-sustaining, notably in advanced economies. Financial conditions have continued to improve, but are still far from normal."

When the time was right, exit strategies "should pave the way for strong, sustained and balanced economic growth," noted the Fund.

"The overall pace of policy adjustment and removal of financial support will depend on the strength of recovery... in each country and enduring financial stability.

"This suggests that the timing of exits will be country specific, although coordination on some specific fronts is desirable," the IMF added.

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