Canada’s economy has proven to be “exceptionally resilient” during the past year and is poised to reap the benefits of a recovery in 2004, the International Monetary Fund said Tuesday.

In its annual report on Canada, the IMF said it agreed with private sector economic forecasters, who predict that Canada’s economy will grow by “about 3% in 2004.” The IMF said the outlook is “broadly favourable.”

But it said there are “downside” risks. The IMF said the dollar’s strength could hurt Canada’s exports, business profits and throw more Canadians out of work.

The improved growth prospects have been boosted by low interest rates, which are expected to support continued strength in household spending and residential investment, along with increased investment in machinery and equipment by Canadian companies.

However, the IMF statement points to some potential risks to the current economic outlook. These include the recent rise in the value of the Canadian dollar, which could “weigh more heavily on net exports, business profits and labour market conditions.”

The IMF also said that personal income tax rates still appear high in Canada, but added that there seems little immediate opportunity for significant further rate reductions at either the federal or provincial levels given weaker budgetary positions. “The public pension system and other age-related programs appear sound but further reforms may still be warranted on efficiency and equity grounds,” it said.

Turning to financial sector regulation, the IMF said that bank merger-review guidelines that will be finalized next year should provide a transparent framework for allowing mergers to go forward unless there is a compelling public-interest concern. “In addition, the fragmentation of securities market regulation and legislation across provincial lines appears to have resulted in an additional administrative burden and a risk of regulatory arbitrage,” it added. “Greater harmonization ‘with the eventual aim of establishing a single regulator’ would support the financial sector’s ability to remain globally competitive.”

As well, the IMF called on the government to maintain its focus on balanced budgets and debt reduction, pointing out that “sustained surpluses will be essential in order to ensure fiscal sustainability and intergenerational equity.” It added that in the current fiscal environment, the government must control its spending and “further efforts to cut existing programs may be necessary.”

The IMF will release a full report on Canada early next year.