The International Monetary Fund issued its annual statement on Canada today, lauding its recent economic performance but warning that risks lie ahead in the form of currency moves, commodity prices and an aging population.

On the policy front, the IMF notes that Canada could use lower taxes, clarity on bank mergers, and a single securities regulator.

“Canada’s recent macroeconomic performance has been enviable, and has reflected the benefits of sound institutions and a strong policy framework,” it says, suggesting that inflation targeting will allow a patient and measured approach to further monetary tightening.

“The strong commitment to ‘budget balance or better’ has yielded welcome progress toward the debt reduction needed to cope with the fiscal pressures of an aging population,” it says. “These policy successes, together with recent structural reforms and a business-friendly environment, have helped Canada again record one of the fastest growth rates and highest living standards among the G-7 countries, and provide considerable confidence that this performance can be maintained in the year ahead.”

“Looking beyond the near term, however, important challenges remain. Exchange rate appreciation, commodity price volatility, prospective trade liberalization, and the potential spillovers from the resolution of global current account imbalances have increased the importance of flexible labor and product markets,” the IMF adds. “In addition, Canada — like other industrial countries — faces a dramatic increase in the share of the elderly population in coming decades. Meeting these challenges will require sustained fiscal prudence and debt reduction, fundamental reform to control health care costs, and structural policies to maximize the productivity and flexibility of the Canadian economy.”

The IMF expects the economy to continue to perform solidly in the coming year, anticipating 3% growth in 2005, ”supported by strong profits, high world commodity prices, and a pickup of business investment”.

“The challenge remains to guard against the considerable uncertainties that remain. Although there are upsides to the outlook — especially if the U.S. economy remains resilient and oil prices fall more rapidly than suggested by futures markets — an even sharper drop in net exports cannot be ruled out in response to recent exchange rate appreciation. Moreover, global current account imbalances may require further significant exchange rate adjustments, which would compound the reallocation of resources across regions and sectors that is already needed to absorb recent relative price movements. Also, with the household saving rate at exceptionally low levels, a more abrupt slowing of consumer spending remains a possibility,” it cautions.

As for structural policies, the IMF notes that the tax burden remains relatively high, the Employment Insurance system could stand some improvement, reforms in other social programs could help increase labor utilization and efficiency, regulatory frameworks and infrastructure investment could be strengthened, and multilateral trade liberalization should continue.

In the financial sector, it says that the regulatory framework governing bank mergers could be further clarified. Also, “Adopting a single national securities regulator, as recommended by the Wise Persons Committee, would reduce compliance and administrative costs. The upcoming review of financial sector regulation may also provide scope for reducing regulatory overlap,” it notes.

“Useful steps have been taken to harmonizing the regulation of defined benefit pension plans,” it says. “Consideration could also be given to enhancing incentives for funding and ensuring that the recent decision to extend the funding period for one large plan is applied consistently to other bankruptcy cases.”

The organization lauds the Bank of Canada’s performance and increased transparency, but also says, “There remains scope, however, for providing a richer background on policymakers’ views on the distribution of risks and related policy implications at the time of the Bank’s fixed action dates, especially when these are not accompanied by an MPR or an Update.”

Minister of Finance Ralph Goodale welcomed the annual statement. “This report is a further vindication of the sacrifices made by Canadians to get our nation’s finances back on track over the past decade,” said Goodale.

The IMF statement also encourages Canada to work towards a more sustainable and efficient health care system. Although the report acknowledges the stable funding provided by the September 2004 $41-billion, 10-year health care agreement with the provinces and territories, it concludes that more could be done to improve efficiency and control costs.

“The economic and fiscal progress underlined in this report is gratifying, but going forward we cannot take anything for granted,” Goodale said. “We must continue to be prudent and balanced in our planning and to do a better job than ever of delivering to Canadians greater value for their hard-earned tax dollars.”