By Gavin Jones
ROME (Reuters) - Italy's budget deficit will overshoot the government's 2020 target and public debt will rise in the medium term as economic growth languishes, the International Monetary Fund said on Wednesday.
In the concluding report following the IMF's annual mission to Rome, the fund urged the Italian authorities to adopt "upfront high quality measures" to consolidate public finances.
"It is strongly advisable to take advantage of the current low interest rates to implement credible medium-term consolidation," the fund said, calling for a budget surplus of 0.5% of gross domestic product by around 2025.
It forecast this year's deficit would be 2.4% of gross domestic product (GDP), overshooting Rome's 2.2% target due mainly to lower nominal GDP growth, and said record high public debt will not come down as targeted in the coming years.
"Debt is projected to remain high at close to 135% of GDP over the medium term and to increase in the longer term owing to pension spending," the report said.
The 5-month old government of the anti-establishment 5-Star Movement and the center-left Democratic Party targets the debt to fall from 135.2% this year to 131.4% by 2022.
The government is working on a pension reform with trade unions to allow more flexibility in the retirement age, but it is not clear what impact that will have on public finances.
Italian economic growth will come in at about 0.5% this year, the fund said, confirming its previous forecast, and then remain at around 0.6% or 0.7% over the next few years.
"These forecasts are the lowest in the EU, reflecting weak potential growth," the IMF said.
Turning to the financial sector, it noted significant progress by Italy's banks in reducing non-performing loans and said the capitalization and asset quality of the banking sector had improved considerably.
Nonetheless, "further bank consolidation is needed", it said, given the limited scope of Italy's lenders to increase revenues.
In addressing banking crises, Italy has resorted to a deposit guarantee scheme provided by healthy lenders, an approach the fund said was not the right way forward for preventive measures and "should be avoided as much as possible".