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IMF says Canada must justify post-pandemic stimulus spending, needs clearer fiscal anchor

FILE PHOTO: St. Catherine Street is seen on the first night curfew imposed by the Quebec government

By Julie Gordon

OTTAWA (Reuters) - Canada must justify its planned C$100 billion ($78.86 billion)post-pandemic stimulus plan before committing to significant new spending and should commit to a clear fiscal anchor, the International Monetary Fund said on Tuesday.

The IMF, in a mission report, said Canada's response to COVID-19 was "timely, decisive, and well-coordinated." But it warned that the crisis had exposed cracks in the country's social safety net and urged clear targets for support and stimulus.

"The federal government's commitment to spend up to 4 percent of GDP over the next three years to support the recovery needs further justification," the IMF said in the report following an official visit.

"While the government still has some fiscal space, the additional spending, if deemed unjustified, could weaken the credibility of the fiscal framework," it added.

Canada's Liberal government said last year it would spend up to 3-4% of GDP to help boost growth once the pandemic is under control.

But in its report, the IMF cautioned Canada to calibrate its stimulus plans carefully, with the aim of supporting full-capacity growth and preventing permanent damage to output, before committing funds.

It also noted that while the introduction of "fiscal guard-rails" were a welcome step, more clarity was necessary, and said a clear debt anchor is needed to ensure "that credibility in the fiscal framework is maintained over the medium term."

Prior to the pandemic, the Liberal government anchored its spending by targeting an annual decrease in its debt-to-GDP ratio.

"We have a plan to provide meaningful investment to build our way out of the coronavirus recession, so our economy comes roaring back stronger than before," Finance Minister Chrystia Freeland said in a statement reacting to the report.

The government plans to give details on its stimulus plan with its budget, expected in March or April.

($1 = 1.2680 Canadian dollars)

(Reporting by Julie Gordon in Ottawa; Editing by Dan Grebler)