IMF Urges Italy To Take Further Action To Address Banking Crisis

The Italian economy faces nearly two decades of stagnation and pain, and will not see a return to its pre-financial crisis levels until at least 2025, according to new analysis released by the International Monetary Fund on Monday night.

The IMF kept unchanged its previous U.S. economic growth forecasts of 2.2 percent for 2016 and 2.5 percent in 2017, issued a day before the British referendum. At end of May projections were for 1.1 percent growth this year and 1.25 percent in 2017.

“If downside risks were to materialize, regional and global spillovers could be significant given Italy’s systemic weight”. Employers’ lobby Confindustria now sees growth of just 0.8 per cent this year and 0.6 per cent in 2017.

Economists have been racing to downgrade Italy’s outlook since the British referendum.

However, the report expects that economies of other eurozone members states to increase by 20-25 percent above their pre-crisis levels in mid-2020s.

It noted that the Italian economy also faces a number of domestic challenges, including low productivity and investment, an unemployment rate of more than 11%, one of the highest rates of bad loans in the eurozone and public debt that has edged up close to 133% of GDP.

“Italy is recovering from a protracted recession supported by accommodative monetary and fiscal policy, favorable commodity prices, and impred confidence on the back of the authorities’ wide-ranging reform efforts”, it wrote in the report.

The poor asset quality of Italian banks could snowball into wider problems for global economy if immediate steps are not taken, the report added. On the other hand, European Union rules restrict such a bailout before investors in the banks are made to pay.

If EU-wide stress tests show that financial stability is at risk, there is scope for Italy to use public money to recapitalize its banks, the head of the IMF’s mission to Italy, Rishi Goyal, said.

“Structural rigidities-not least product and service market inefficiencies, wage growth in excess of productivity, high taxation, an inefficient public sector, and lengthy judicial processes-have contributed to Italy experiencing one of the lowest productivity growth rates among advanced economies over the last three decades”.

Over the medium term, International Monetary Fund noted that a higher revenue and productive spending scenario of about 3 percent of GDP, with the expeditious implementation of the 10-point reform agenda, raised the IMF’s baseline growth outlook of about 6 percent to 7 percent to a 7 percent to 8 percent range.