IMF chief sounds cautious note over world economy

Singapore, Sep 15: The threats posed by inflation and unbalanced trade and capital flows point to testing times ahead for the global economy, IMF chief Rodrigo Rato said today.

Rato, managing director of the International Monetary Fund, set the stage for the annual meetings of the fund and World Bank by listing a series of risks that could upset the fund's positive outlook for global growth.

Several years of strong growth had used up spare capacity in the world economy, fanning concerns about inflation that high oil prices were making worse, Rato told a news conference.

Deadlock in global trade talks was a major setback, he added, even though the 184-member fund on Thursday raised its projection for 2007 world growth to 4.9 percent from 4.7 percent.

''And of course, the risk of a disorderly adjustment of global economic imbalances has not gone away, and could well be exacerbated by the other risks.

''Policy makers, many of them here this weekend, need to be ready to adapt to a more challenging environment,'' Rato said.

The elite of those policy makers, finance ministers and central bank governors from the Group of Seven industrial countries meets on Saturday amid market speculation that they will renew pressure on Asian nations, particularly China, to let their currencies rise to help reduce global imbalances.

Singapore has taken no chances with security for the meetings and has irritated Rato and World Bank President Paul Wolfowitz by blocking 27 activists from entering the country.

The city-state softened its stance after Wolfowitz met Prime Minister Lee Hsien Loong on Thursday, saying it might let some of the activists in. ''I hope that will happen expeditiously,'' Wolfowitz told a news conference on Friday.

LOPSIDED ECONOMY At the heart of the imbalances is the U.S. current account deficit, which has reached 6.5 percent of its output, and corresponding surpluses in oil-producing countries and Asia. China has a surplus on its current account, the broadest measure of trade in goods and services, of 7.2 percent of GDP.

Rato said the imbalances were a complex phenomenon that had built up over years. ''It would be unrealistic to expect the problem to be resolved through a magic bullet,'' he said.

U.S. Treasury Secretary Henry Paulson said on Wednesday that Beijing would ignore at its own peril other countries' concerns about its exchange rate, which some U.S. lawmakers and economists contend is undervalued by 15 percent to 40 percent.

Beijing has kept the yuan on a tight leash since it revalued the currency by by 2.1 percent in July 2005 and unshackled it from the dollar to float within managed bands.

Rato weighed in on Friday by restating the fund's view that allowing market forces to play a greater role -- code for a stronger exchange rate -- was in China's self-interest.

''The decision taken by China last year to change its exchange rate mechanism was the right one. But that decision has to be implemented,'' Rato said.

China's central bank governor and finance minister will have a working lunch with the G7 group. But Beijing has given no indication it is about to permit a faster rise in the yuan, which has gained just a further 2 percent since the revaluation.

In a step some economists interpreted as an alternative to a currency rise, China on Thursday reduced or scrapped tax rebates paid to exporters of a wide range of products including steel.

The government said the reform was aimed at reducing China's trade surplus, which hit a record .8 billion in August.

The United States hopes a plan to give China, Mexico, South Korea and Turkey more voting power in the IMF will cajole Beijing into playing a more active role in managing the global economy.

Tackling the under-representation of these four emerging powerhouses is the first step in a broader reform of the fund's shareholding structure that Rato said would entail the most significant change in a generation in the way the IMF is run.

The proposed overhaul has run into opposition in Europe, which fears losing power, as well as in some developing states, which fret they will still not have a loud enough voice.

Despite the controversy, Rato said he hoped the fund's members would endorse the shake-up during the Singapore meetings.

Reuters