RISK OF LATIN AMERICAN ECONOMIES OVERHEATING

Paris, January 25- The International Monetary Fund (IMF) has warned of the risks of inflation and overheating of the economy in Latin America, at a forum held in Paris.

“Inflation is already higher than expected in several emerging economies,” said Deputy Managing Director John Lipsky at the meeting organised by the Organisation for Cooperation and Economic Development (OECD) and the Inter-American Development Bank (BID).

“The high prices of raw materials and the increase in food have added complexity to perspectives, because inflation and its expectations are beginning to increase,” added Lipsky.

“Emerging economies need to keep overheating under control and at the same time take advantage of low international interest rates and in some cases, exploit income from raw material exports,” he added.

At the forum’s closing Lipsky also said: “Emerging economies have represented the driving force of the post-crisis global expansion: strong domestic demand -buoyed by an accommodative policy stance and renewed inflows of foreign capital- has powered a very robust recovery, even providing some boost to advanced economies”.

However, he warned that despite the pace of growth, future economic expansion faced three downside risks.

“The links between financial stresses and fiscal sustainability -especially in the euro area - have the potential to undermine growth,” he said.

“The lack of progress in formulating credible medium-term fiscal consolidation plans in many advanced economies, that could weaken confidence and push up long-term interest rates; and high commodity and food prices, that could undermine macroeconomic stability and trigger social and political strains in developing countries”.

Lipsky said advanced economies did not have much policy room to manoeuvre to secure faster growth via shifts in domestic macroeconomic policies.

”Other countries (excluding the US) either have no room for further fiscal expansion, or they are being pushed by financial market pressures to tighten budget policies immediately. In this context, accommodative monetary policies in advanced economies so far have been welcome and appropriate,” he said.

<