IMF Concludes 2009 Article IV Consultation With Canada

by Mike Godfrey, Tax-News.com, Washington

08 June 2009

The IMF has concluded an Article IV consultation with Canada. Canada benefited from the commodity boom and sound macroeconomic and financial policies during the good years, so that it is well placed to take appropriate measures in the present conditions - the IMF has praised its proactive response to the crisis.

Real GDP contracted by 3.4% (seasonally adjusted annual rate) in the fourth quarter of 2008 after a weak performance earlier in the year, driven by a 5% decline in domestic demand as the terms of trade, credit conditions, equity prices, and employment deteriorated abruptly. Net external trade contributed positively to growth, as imports plummeted more than exports. The economy contracted further in early 2009, reflecting the sharp downturn in the United States and further tightening of financial conditions, but the IMF expects a moderate rebound later in the year boosted by fiscal and monetary stimulus.

The Canadian dollar has served as an effective shock absorber to the deterioration in Canada's terms of trade given its sensitivity to trends in commodity prices: a 35­% appreciation in real effective terms during boom years (2002 to 2007) and a 12­% depreciation in the fourth quarter of 2008.The Bank of Canada has committed to keep interest rates at current levels through the end of the second quarter in 2010 (conditional on the inflation outlook). It has also announced a framework for quantitative and credit easing, to be deployed if downside risks to growth materialize. The need for these unconventional measures would be assessed at each monetary policy meeting. The financial system has avoided systemic pressures amid the global turbulence, thanks in good part to strong supervision and regulation.

Building on the permanent tax relief measures announced in October 2007, the authorities tabled further fiscal stimulus of around 2.8% of GDP in January 2009. Taking into account supplementary provincial actions announced following the federal budget, the measures are among the largest across G-20 countries. The stimulus relies mainly on infrastructure spending, support to the vulnerable sectors, enhanced social safety nets and retraining programs for job reallocation, and tax reductions and incentives. Its deployment is being monitored via quarterly parliamentary reviews. The package and the economic downturn will end an 11-year string of fiscal surpluses, which allowed Canada to achieve the lowest debt to GDP ratio among G-7 countries.

The IMF Directors' assessment included the following:

Canada has an impressive macroeconomic track record, strong policy framework and proactive response to the crisis, according to the IMF. Maintaining a highly accommodative stance in the foreseeable future should limit downside risks to economic growth and inflation, while continuing to support financial stability, in the view of the IMF. The IMF commended the authorities’ bold fiscal stimulus package, utilizing the space provided by past strong fiscal performance, and saw the federal stimulus package as timely, appropriately sized, diversified, and well structured, with steps to facilitate labor reallocation and protect the vulnerable. With Canada’s strong fiscal position, its lowest debt to GDP ratio among G-7 countries, and the authorities’ commitment to medium-term structural surpluses, further fiscal expansion is sustainable, the IMF believes. It would be important to ensure that any further measures are quickly applicable and self-reversing the IMF warned. The IMF saw scope to recalibrate the debt targets, once the outlook clarifies, to underpin the authorities' commendable objective of maintaining fiscal credibility. Future debt reduction would also provide fiscal space needed for future costs related to population aging and health, concluded the IMF.

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