"In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help," IMF Managing Director Christine Lagarde said on the third day of a partial US federal government shutdown.
Overall, the global outlook remains subdued, said US Treasury Secretary
The US federal government lurched into the first shutdown in 17 years after the Congress failed to pass a spending bill by Monday's midnight deadline.
Republicans in the House of Representatives are demanding changes to President Barack Obama's signature health care law in exchange for funding the government, which the White House opposes.
"The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy," Lagarde said in a speech at George Washington University.
US Treasury Secretary Jacob Lew told Congress Tuesday the government will reach its debt ceiling of $16.7 trillion by Oct 17, and that failure to raise it would lead to "catastrophic" default. However, Republican lawmakers insist that a debt ceiling increase should be tied with GOP policy priorities.
"Overall, the global outlook remains subdued. In many of the advanced economies, however, we are finally seeing signs of hope. Growth is looking up, financial stability is returning, and fiscal accounts are looking healthier," she said prior to the upcoming annual meetings of the IMF and its sister agency World Bank scheduled for next week.
In the short term, the US needs to replace the ongoing government spending cuts, the so-called sequester, with more back-loaded measures that do not hurt the economic recovery, she said.
At the same time, Washington needs to do more in the long run to make debt sustainable down the road by containing the growth of entitlement spending and raising revenues, she suggested.