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US ‘Fiscal Cliff’ Is ‘Major Concern’ for World: IMF’s Zhu

Zhu Min, deputy managing director of the International Monetary Fund (IMF)
Bloomberg | Getty Images
Zhu Min, deputy managing director of the International Monetary Fund (IMF)

The U.S. needs to provide more clarity to ease fears about the "fiscal cliff'" of tax hikes and spending cuts that are due to kick in in January, Zhu Min, deputy managing director of the International Monetary Fund said on Friday.

The U.S. Congressional Budget Office and the IMF have said that if the fiscal tightening that is due to take place early next year goes ahead without action from Congress, the U.S. economy will probably fall into recession .

In short, the "fiscal cliff" is a "major concern" for the whole world, " Zhu said, urging Washington to take action to soothe worries.

"It's very clear that if the whole tax package moves off the table it will immediately bring the U.S. into a recession, which will have a huge negative impact on the whole world, " Zhu told CNBC on the sidelines of the IMF's semi-annual meetings in Tokyo.

He added: "But it's also very clear, that it will not happen that way."

Economists peg the damage from the impending fiscal tightening as high as $720 billion, which will wipe off 4.6 percent from gross domestic product (GDP). And there are concerns about whether investors will continue to lend money to the U.S. given the country's $16 trillion debt and $1.1 trillion budget deficit. (Read More: 'Fiscal Cliff' May Be Felt Gradually, Analysts Say .)

"The most important thing for the time being is we really encourage the U.S. to provide more clarity and to tell the world what (will happen), " Zhu said.

Replying to a question about whether the IMF had talked to the U.S. government about seeking more clarity on fiscal policy, Zhu said: "We talk with all governments. It is important to reduce the uncertainty."

Can China Do More?

Zhu said there were signs that Asia's big economies, China and India, were showing signs of stabilizing after months of slowing growth. (Read More: IMF Cuts China, India, Emerging Asia Growth Forecasts .)

He added that China, which has disappointed financial markets with a reluctance to deliver a large stimulus package to support its flagging economy, has the room to maneuver in terms of its fiscal and monetary policy.

"I would say China needs to stabilize growth and needs to put more (emphasis) on demand, " Zhu said.

"They do have the space to move, they have a lot of fiscal space. Government debt is only roughly 28 percent (of GDP) and they have a lot of monetary space also, " he added.

The IMF earlier this week lowered its GDP forecast for China, saying the world's second biggest economy was likely grow 7.8 percent this year and 8.2 percent in 2013, aided by interest rates cuts in June and July.

In July, the IMF estimated China to grow 8 percent this year and 8.5 percent next year.

By CNBC's Dhara Ranasinghe

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