IMF says Italy on long path to economic turnaround

ROME (Reuters) - The International Monetary Fund said on Tuesday that Italy still has a long way to go to turn around its economy, which has had the slowest growth rate in the EU over the past decade.

Prime Minister Mario Monti's government has an "ambitious and wide-ranging agenda (which) aims to revive growth," the Washington-based institute said in its annual report on Italy's economy, the euro zone's third biggest.

Monti's pension reform, his limited deregulation of services, his labor market reform, and newly announced cuts to state spending go in the right direction, but to break Italy's low-growth, high-debt spiral, more must be done, the IMF said.

"This is a process that must continue and must continue forcefully and expeditiously if it is going to succeed," said its Italian mission chief Kenneth Kang in a conference call.

The group did not revise its growth forecast for the Italian economy, seen shrinking 1.9 percent this year, but it predicted the country's budget deficit would be 2.6 percent of gross domestic product, up from April's 2.4 percent forecast.

May's earthquakes in the industrial region of Emilia-Romagna will drag on manufacturing and exports in the third quarter, the IMF added.

Monti, whose term ends in the spring of next year, said on Tuesday in Brussels that uncertainty over who will take over for him is hurting foreign investment and driving up borrowing costs on the country's 1.95 trillion euro ($2.4 trillion) debt.

Monti was brought in unelected to save Italy from defaulting on its debt in November. He repeated on Tuesday that he is not willing run for office next year, and most political parties have made it clear they would prefer he did not.

Increasing concern about the future of the reform process prompted President Giorgio Napolitano to say on Tuesday that party leaders will continue down the path to Monti has set.

"Maintaining the momentum for reform in Italy will be important to address underlying structural weaknesses and revive growth," the IMF said.

The IMF praised the 26 billion euros in extra public expenditure cuts by 2014 announced by Monti last week, but said more reductions should be made and the savings used to lower labor costs.

It also encouraged further flexibility on rules governing the job market, while praising Monti's labor reform.

"Absent shocks, (economic) recovery will take hold in early 2013, led by a modest pickup in exports, but will lag the rest of the region," the IMF's report said, but added: "The risks to the outlook are on the downside, stemming mainly from an intensification of the euro area crisis."

Thanks to Monti's policies, the IMF said Italy's primary surplus, which excludes interest payments, would be above 4 percent next year, the highest in the euro area.

($1 = 0.8160 euros)

(Reporting by Steve Scherer; Editing by Ruth Pitchford)