Loonie shouldering heavier share of greenback's decline: IMF

Canada
Posted: 2007-11-20 19:57:13

The loonie is one of the currencies shouldering a disproportionate share of the U.S. greenback's decline, Tamim Bayoumi, head of the North American division of the International Monetary Fund's western hemisphere department, said on Tuesday.

"The fall in the U.S. dollar is probably on net a good thing," said Mr. Bayoumi, echoing comments made by the IMF managing director Dominique Strauss-Kahn at the G20 meeting last weekend. "We've had a view for a long time the U.S. dollar is overvalued and that to lower global imbalances it needs to depreciate."

What is less clear is whether the currencies of countries that have large current account surpluses are adjusting as well.

"But several currencies are doing a disproportionate part of the adjustment and clearly your currrency is one of the them," he said at a briefing in Toronto.

He added the surge in oil prices have obviously played a role in the loonie's climb but not a "particularly strong part."

He noted for example, that the loonie only takes a 17% weighting in the IMF's U.S. dollar trade-weighted index yet it has contributed to 30% of decline of late.

Cutting taxes on savings and investment urged over reducing GST

The IMF was in Canada to present "Northern Star, Canada's Path to Economic Prosperity," a compendium of recent analysis on the Canadian economy.

In the report, the IMF largely attributes Canada's lagging productivity growth compared with the United States to its much smaller high-tech sector.

Individual sectors compared favourably on productivity but the United States has been much more successful in shifting resources towards high-productivity industries, the IMF said.

In terms of taxes, the IMF ran an interesting study on whether Canada would be better off cutting taxes now to boost growth or putting surpluses toward debt reduction.

"There are significant potential benefits to be gained by reducing government debt and delaying tax cuts," the study found. "In the base case, delaying tax reductions by 10 years at the cost of short-term losses in output doubles the medium-term gains to real GDP of the eventual tax cut, and the longer-term benefits can be even larger."

Reducing debt is especially important knowing the huge impending increase in health costs.

Like most economists in Canada, the IMF suggested Canada would be better served by reducing taxes on savings and investment than cutting the GST.

And Mr. Bayoumi repeated the IMF's suggestions that Canada try to make its economy more flexible by loosening up its labour and product markets.

On financial institutions specifically he said the IMF is "not great fans of the widely held rule," which effectively rules out mergers between the big banks and foreign competition in the domestic market.

"There could be a bit more competition," he said, in this sector.