Recession looms large - IMF

New York - The threat of a global recession looms large and more needs to be done to safeguard emerging economies, a senior International Monetary Fund official said on Tuesday.

John Lipsky, the IMF's first deputy managing director, said emerging market economies were now clearly feeling the effects of the financial storm and broader policy actions that encompass emerging nations are now necessary.

He said growth in emerging economies was slowing rapidly. Many emerging market economies now facing credit strains are important sources of growth for a world economy in which many major economies either are in or on the brink of recession.

"There is scope for further actions, particularly with respect to guarding emerging economies from adverse external developments," Lipsky said in prepared remarks for a speech to the Securities Industries and Financial Markets Association.

He said policies adopted by major economies to guarantee bank deposits may unintentionally impact emerging economies, since the subsidiaries of large Western banks are not covered.

"Thus they may feel pressured to put in place their own programs, even where the resources needed to create credible policies of this nature may not be available," he added.

Lipsky said emerging economies' policies should target sudden interruptions, or reversals, of capital flows. Liquidity support needs to include the corporate sector in countries where funding markets are shrinking, he added.

Also, emerging market economies that have substantial reserves should be ready to pump liquidity into the system if companies cannot access US dollars.

Emerging economies may also consider traditional policies to deal with a shortfall in financing and growth, Lipsky added.

With the global economic slowdown pushing down commodity prices and dampening inflation, the scope for monetary policy to support economic activity has increased, especially in advanced economies that have until now dealt with containing inflation risks.

The IMF is in talks with several emerging economies on possible financial assistance to help them deal with the crisis. Last week it approved a $2.1bn package for Iceland, followed by a $16.5bn standby loan for Ukraine, and is working on details of substantial lending to Hungary. It is also in talks with Serbia and Belarus.

Lipsky said while the Washington-based lender was no stranger to crises, this one was different in size, scope and complexity.

He said the IMF had a war chest of some $200bn and could always draw on additional resources through standing borrowing arrangements with groups of IMF member nations.

- Reuters