IMF: Make further cuts to government-backed insurance

IMF: Make further cuts to government-backed insurance

IMF: Make further cuts to government-backed insurance

The International Monetary Fund (IMF) issued its report on the state of Canada’s economy on Tuesday which commended the government for cutting government-backed mortgage insurance and suggested implementing further limits.

“The government’s recent initiatives to impose limits on government-backed mortgage insurance have been appropriate,” the report stated. “Looking ahead, further measures should be considered to encourage appropriate risk retention by the private sector and increase the market share of private mortgage insurers.”

While recognizing the benefits of the current rules, the organization believes it may expose the economy to potential financial risk if relied on too heavily.

“The current system has its advantages, including as a macro-prudential tool,” it stated. “However, it exposes the fiscal budget to financial system risks and might distort the allocation of resources in favor of mortgages and away from more productive uses of capital.”

Though it also warned that any changes should be enacted slowly and carefully.

“Any structural change should be made gradually over time to avoid any unintended consequence on financial stability,” the report added.

As for the central bank’s overnight rate, the IMF suggested holding off on enacting any changes if there is no natural uptick in economic growth.

“At the federal level, continued progress in fiscal consolidation is appropriate to rebuild the room for fiscal maneuver used during the crisis, but there is room to delay the adjustment needed to return to a balanced budget in 2015 if there is no meaningful pick-up in economic growth.”

On a positive note, the organization expects the Canadian economy to experience two-and-a-quarter per cent economic growth in 2014, up from an estimated 1.6 per cent in 2013. Though this is expected to come with no help from the housing industry.

“The combined additional contribution to growth from net exports and business investment will more than offset the anticipated weakening in the contribution from household consumption and residential investment, as households gradually reduce their debt burden, construction activity moderates to levels consistent with demographic trends, and house price growth slows further,” the IMF said. “Fiscal policy will remain a modest headwind, subtracting about 0.2 percentage points of GDP growth per year over the next three years.”