World economic outlook usually uncertain

But the IMF also warned that the outlook for the world economy remains unusually uncertain, even though a variety of risks have receded.

"Risks are generally to the downside, with those related to public debt growth in advanced economies having become sharply more evident," said the IMF in the report.

In the near term, a risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis, it said.

More generally, the main concern is that room for policy maneuver in many advanced economies has either been largely exhausted or is much more limited, leaving the fragile recoveries exposed to new shocks.

"In addition, bank exposures to real estate continue to pose downside risks, mainly in the United States and parts of Europe," said the report.

In its semi-annual Global Financial Stability Report (GFSR), which was released on Tuesday, the IMF said the health of the global financial system has improved as the economic recovery has gained steam, but stability risks remain elevated.

"Improving economic and financial market conditions have reduced banks' expected writedowns from 2.8 trillion to 2.3 trillion U.S. dollars, and bank capital positions have improved substantially," the report said. "But some segments of country banking systems remain poorly capitalized and still face significant downside risks."

Fiscal consolidation strategies urgently needed

In the World Economic Outlook, the IMF called for its members to take balanced policies to sustain and strengthen recovery.

"Given the large amount of public debt that has been accumulated during this recession, in many advanced economies exit policies need to emphasize fiscal consolidation and financial sector repair," said the report.

The move will allow monetary policy to remain accommodative without leading to inflation pressure or financial market instabilities.

In emerging and developing economies, priorities depend on room available for fiscal policy maneuvers and on current account positions, said the IMF.

Spillovers related to fiscal policies are particularly relevant for the major advanced economies, as large deficits and the lack of well-specified medium-term fiscal consolidation strategies in these economies could adversely affect funding costs of other advanced or emerging economies, it warned.

Thus, the IMF said that medium-term fiscal consolidation strategies are "urgently needed."

"Regarding the near term, given the fragile recovery, fiscal stimulus planned for 2010 should be fully implemented, except in countries that are suffering large increases in risk premiums, these countries need to begin fiscal consolidation now," said the report.

Looking further ahead, if macroeconomic developments proceed as expected, most advanced economies should embark on significant fiscal consolidation in 2011.

"Countries urgently need to design and implement credible fiscal adjustment strategies, emphasizing measures that support potential growth," said the IMF. "These should include clear timelines to bring down gross debt-to-GDP ratios over the medium term."

"Also needed are reforms to entitlement spending that lower spending in the future but do not depress demand today," it added