Tuesday August 14 11:12 AM ET

IMF: U.S. Current Account Unsustainable

By Anna Willard

WASHINGTON (Reuters) - The U.S. current account is unsustainable and could mean the dollar is at risk from a sharp depreciation, the International Monetary Fund said in a report released on Tuesday.

In its latest annual assessment of the U.S. economy, the IMF failed to reach a conclusion about the future direction of the world's largest economy, saying that the outlook was uncertain and depended on a number of factors.

``Directors indicated that the size of the U.S. current account deficit did not appear sustainable in the longer term and that it raised concerns that the dollar might be at risk for a sharp
depreciation, particularly if productivity proved disappointing,'' the report said.

Productivity and confidence in the consumer and business sectors are the keys to the future of the U.S. economy, the report said without providing any specific forecasts.

Although evidence suggests a favorable outlook for productivity, the IMF said a less optimistic outcome could pose a ``significant challenge'' for U.S. policy. Productivity at U.S. businesses rebounded sharply in the second quarter, posting its best showing in a year with a rise of 2.5 percent.

Nevertheless, with uncertainty ahead, the IMF said it welcomed the flexible policy stance the authorities have taken, in particular, the Federal Reserve's aggressive easing of monetary policy.

The Washington-based lender said this easing might need to continue if economic data remained weak, with tame inflation providing room for the Fed to do so.

``Most directors expected that inflationary pressures would remain generally quiescent, and therefore should provide the room for monetary policy to support economic activity in the event of persistent weakness,'' the report said.

However, some directors warned that the authorities should remain vigilant in monitoring inflation prospects.

The IMF also expressed concern about the rise in household and corporate debt levels and the decline in personal savings, with any further slowdown likely to have a knock-on effect on household and business balance sheets.

TAX CUT TO COST THAN EXPECTED

As far as fiscal policy is concerned, the report said a U.S. tax cut implemented this year was ``timely and appropriate'' and would help insure against a sharper economic slowdown. But it cautioned that the cost of the tax cut was likely to be larger than forecast.

``Directors cautioned that the total cost of the tax cut was likely to be higher than current estimates suggest unless offsetting actions are taken, largely owing to the likelihood that tax measures would not expire as scheduled,'' it said.

Expenditure slippage poses a ``significant risk'', the IMF warned, and so recommended that spending and tax policy remain flexible over the medium term.

But over the longer term, setting aside sufficient resources to put Social Security and Medicare ``on a financially sound footing'' should be a priority.

Despite deterioration in loan quality at some banks in 2000 and the first half of 2001, the banking sector remains healthy. Nevertheless, the IMF advised the United States to participate in one of the fund's Financial Sector Assessment Programs which examine risks in the financial system.

The fund urged the United States to continue to push for further liberalization of international trade, and to resist pressures to continue supplemental agricultural subsistence.

Finally, the IMF urged the world's No. 1 economy to increase its level of official development assistance to bring it in line with the UN target of 0.7 percent.

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