IMF advises US to rein in deficit, calls for fiscal reforms

The IMF has advocated fiscal consolidation and a reduction in trade tensions in the United States, stating that the country’s external position in 2024 was moderately weaker than warranted by fundamentals.

A wider current account (CA) deficit—3.9 per cent of GDP, up from 3.3 per cent in 2023—was driven by a larger goods deficit and a shift in the primary income balance. The CA deficit is projected to gradually narrow to around 2.5 per cent of GDP as private savings increase, the IMF said in its External Sector Report.

IMF recommends that US policymakers aim for a general government primary surplus of around 1 per cent of GDP to place public debt on a declining path and restore external balance. It cautioned that industrial policies should remain narrowly targeted, avoiding implicit import bias, and urged efforts to constructively address trade frictions, promote predictability, and pursue non-discriminatory trade liberalisation.

The net international investment position (NIIP) deteriorated sharply to –89.9 per cent of GDP in 2024, from –71.6 per cent in 2023, mainly due to valuation losses linked to stronger US equity performance and a 2.4 per cent appreciation in the US dollar. Around 70 per cent of US external assets are foreign-currency denominated, while liabilities are largely in US dollars—making the NIIP highly sensitive to currency shifts.

The IMF assessed the real effective exchange rate (REER) as overvalued by 11.9 per cent, consistent with the CA gap. The CA norm was estimated at –2.2 per cent of GDP, versus a cyclically adjusted CA of –3.6 per cent, implying a model-based CA gap of –1.4 per cent of GDP.

While the US financial account deteriorated modestly in 2024 to –4.3 per cent of GDP due to stronger investment flows, the Fund noted that risks to financial stability are mitigated by the dollar’s reserve currency status, deep capital markets, and institutional strength.

Nevertheless, it stated that an unexpected fall in foreign demand for US debt—particularly due to fiscal sustainability concerns—could pose risks.

ALCHEMPro News Desk (HU)