The IMF has warned the government that economic recovery will be a long and arduous task.

The International Monetary Fund (IMF) has warned that economic recovery in the UK is set to be a long slog and the stability of fiscal institutions will be crucial.

In a public information notice posted on its website, the IMF states that the UK was hit particularly hard by the economic crisis because of “the large size of its financial sector, high household indebtedness, and strong cross-border links.”

It adds that the economic outlook remains highly uncertain, despite recent indicators suggesting economic activity has begun to stabilise. The road back to recovery is likely to be slow and long, with GDP predicted to decline by 4.2% in 2009.

The main issue highlighted in the annual report of the UK economy was the importance of repairing the financial system. Various parts of the financial sector are still vulnerable and yet more capital may have to be injected into fragile banks with worrying balance sheets.

“Resolving the problems in the financial sector and setting monetary and fiscal policies consistent with a firm commitment to price stability and fiscal sustainability are the main priorities”, said the IMF.

The IMF turned the spotlight on banks, which are still reluctant to lend money in an effort to strengthen their own financial standings.

“With banks focused on reducing leverage, the growth of credit to the private sector has fallen to nearly zero, and is expected to remain low in the near term,” commented the IMF.

Banks are in a particularly poor position in the current economic climate and the IMF warned that banks may be forced to make further write-offs and suffer further losses that could lead to an even more vulnerable position.

The IMF also pointed out the measures being employed by the government in response to the crisis. These measures include expansion of the Bank of England’s liquidity facilities, significant public capital injections into some large banks, asset protection schemes and quantative easing. The IMF commented that these measures have helped avoid a “systematic breakdown in the financial system” but nevertheless vulnerabilities remain.

Quantative easing was introduced earlier this year in an attempt to stimulate the economy and the IMF has deemed this action to be appropriate but it is too early to judge the overall effectiveness of the scheme.

The rapid deterioration of public finances remains a major worry for the UK. Revenues highly sensitive to the economic cycle as well as to financial sector activity contribute to widening fiscal deficits, which are expected to reach a massive 13% in 2009/10.

Gross general government debt is set to double over the next five years to nearly 100% of GDP, painting a worrying picture for the future of the UK.

Within the public information notice, the IMF also gave numerous recommendations to help the recovery of the UK economy. These included improving the frequency and quality of disclosure of financial information by banks, enhancing the UK’s prudential framework and diversifying the Bank of England’s private asset purchases.

The overarching message for the government from this report was a bleak one, warning of a prolonged period of economic uncertainty with the light at the end of the tunnel very far away.