IMF sees Canada's economy rebounding, says government needs 'fiscal anchor'

FILE PHOTO: King Street West is seen nearly empty a day before the Toronto Film Festival in Toronto, Ontario, Canada September 9, 2020. REUTERS/Carlos Osorio

OTTAWA (Reuters) - Canada’s economy is likely to rebound this year as long as COVID-19 is brought under control, but the government should introduce a “fiscal anchor” to ensure credibility in debt management, the IMF said on Thursday.

“The size and scope of policy support (in Canada) has been unprecedented” during the pandemic, the International Monetary Fund’s executive board said in its annual report.

“The recent sharp rise in public debt increases the importance of clearly specifying a medium-term fiscal anchor... to guard against a potential weakening of credibility in the fiscal framework,” the IMF said.

Canadian net debt jumped to 48% of gross domestic product (GDP) in 2020 from 23.4% the previous year and is projected to come down only marginally this year, to 47.4%, according to the report.

The IMF said the government had been “strong, decisive, and well-coordinated” in its response to the pandemic, and that direct fiscal support during the pandemic had added up to about 15% of GDP.

The IMF forecast economic growth of 4.4% this year after a 5.4% decline in 2020. The new U.S. $1.9 trillion stimulus package “will further boost Canadian growth,” the IMF said.

Looking ahead, Canada’s Liberal government has said it would spend up to 3-4% of GDP to help boost growth once the pandemic is under control. That stimulus is expected to be announced in a new budget due as early as next month.

The IMF urged Prime Minister Justin Trudeau’s government to “carefully balance short-term risks to growth and financial stability” against vulnerabilities, including “those emanating from a persistent buildup of leverage and rising house prices”.

Reporting by Steve Scherer; Editing by Nick Zieminski and Dan Grebler