The advent of digital currencies in emerging markets could spark "cryptoization" of local economies, potentially undermining exchange and capital controls and upsetting financial stability, the International Monetary Fund said on Friday.

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Bitcoin and its kin have in the last year soared in price and popularity, with emerging and developing market economies such as Vietnam, India and Pakistan seeing rapid growth in some measures of adoption, according to US blockchain researcher Chainalysis.

Cryptocurrencies offer, in theory, a cheaper and quicker way of sending money across borders. Backers say digital tokens such as stablecoins could also help protect savings from high inflation or fluctuations in local currencies.

In September, El Salvador became the first country in the world to adopt bitcoin as legal tender, with backers tipping the experiment to lower costs for billions of dollars of remittances sent to the Central American nation.

The IMF said that unsound macroeconomic policies and inefficient payment systems are among the drivers of cryptocurrency adoption in emerging economies, along with the lure of quick gains that has also excited investors across the world.

But the IMF said the exact level of adoption of crypto in emerging economies was hard to gauge accurately.

Factors such as low credibility of central banks and weak domestic banking systems that can fuel "dollarization" can also contribute to growing crypto use, the Fund added.

Dollarization is where a foreign currency – typically the US currency – is used in addition to, or instead of, a domestic currency. High inflation or the instability of a domestic currency are among the drivers of the process.

Wide adoption of stablecoins – digital tokens designed to hold a steady value and seen as useful for savings and commerce – could also pose significant challenges by reinforcing existing dollarization forces, the IMF said.

"Dollarization can impede central banks' effective implementation of monetary policy and lead to financial stability risks through currency mismatches on the balance sheets of banks, firms, and households," it said.

"Cryptoization" could also become a threat to fiscal policy, with digital assets possibly facilitating tax evasion, the IMF added.

The fund urged developing nations to strengthen macroeconomic policies and consider the possible benefits from issuing central bank digital currencies as a response to the rise of crypto.

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The IMF's latest World Economic Outlook foresees a slight rebound in 2020 but warns of threats ranging from heightened political tensions in the Middle East to the threat that the United States and China will fail to prevent their trade war from escalating.

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The updated forecast released Tuesday was prepared for the fall meetings this week of the 189-nation IMF and its sister lending organization, the World Bank. Those meetings and a gathering Friday of finance ministers and central bankers of the world's 20 biggest economies are expected to be dominated by efforts to de-escalate trade wars.

The new forecast predicts global growth of 3% this year, down 0.2 percentage point from its previous forecast in July and sharply below the 3.6% growth of 2018. For the United States this year, the IMF projects a modest 2.4% gain, down from 2.9% in 2018.

Next year, the fund foresees a rebound for the world economy to 3.4% growth but a further slowdown in the United States to 2.1%, far below the 3% growth the Trump administration projects.

IMF economists cautioned that even its projected modest gains might not be realized.

"With a synchronized slowdown and uncertain recovery, there is no room for policy mistakes, and an urgent need for policymakers to cooperatively de-escalate trade and geopolitical tensions," Gita Gopinath, the IMF's chief economist, said in the report.

Last week, the United States and China reached a temporary ceasefire in their trade fight when US President Donald Trump agreed to suspend a tariff hike on $250 billion of Chinese products that was to take effect this week. But with no formal agreement reached and many issues yet to resolved, further talks will be needed to achieve any meaningful breakthrough. The Trump administration's threat to raise tariffs on an additional $160 billion in Chinese imports on Dec. 15 remains in effect.

The IMF's forecast predicted that about half the increase in growth expected next year will result from recoveries in countries where economies slowed significantly this year, as in Mexico, India, Russia, and Saudi Arabia.

This year's slowdown, the IMF said, was caused largely by trade disputes, which resulted in higher tariffs being imposed on many goods. Growth in trade in the first half of this year slowed to 1%, the weakest annual pace since 2012.

Kristalina Georgieva, who will preside over her first IMF meetings after succeeding Christine Lagarde this month as the fund's managing director, said last week that the various trade disputes could produce a loss of around $700 billion in output by the end of next year or about 0.8% of world output.

IMF economists said one worrisome development is that the slowdown this year has occurred even as the Federal Reserve and other central banks have been cutting interest rates and deploying other means to bolster economies.

The IMF estimated that global growth would have been about one-half percentage point lower this year and in 2020 without the central banks' efforts to ease borrowing rates.

"With central banks having to spend limited ammunition to offset policy mistakes, they may have little left when the economy is in a tougher spot," Gopinath said.

In addition to trade and geopolitical risks, the IMF envisions threats arising from a potentially disruptive exit by Britain from the European Union on Oct. 31. The IMF urged policymakers to intensify their efforts to avoid economically damaging mistakes.

"As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list," Gopinath said. "Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing and raise world growth."

The IMF projected that growth in the 19-nation euro area will slow to 1.2% this year, after a 1.9% gain in 2018. It expects the pace to recover only slightly to 1.4% next year.

Growth in Germany, Europe's biggest economy, is expected to be a modest 0.5% this year before rising to 1.2% next year.

China's growth is projected to dip to 6.1% this year and 5.8% next year. These would be the slowest rates since 1990.

For Japan, the IMF expects growth of just 0.5% next year. It foresees an expansion in Russia of 1.9%, up from 1.1% this year.

And Mexico is forecast to experience growth of 1.3% next year, far better than the lackluster 0.4% gain envisioned for this year.

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The IMF warning comes despite the government's target deficit standing at 2.9% of the GDP, or some 40 billion shekels ($11 billion). If the IMF's forecast comes to pass, it would mean that Israel will exceed its target deficit by a sum of 10 billion shekels ($2.8 billion).

The IMF is recommending that by 2020, the new government adopt a target deficit rate of 2.5% of the GDP, which would require the government and the Treasury to slash the 2020 state budget and increase tax revenue by some 20 billion shekels ($5.5 billion).

On Friday night, the IMF unexpectedly published a summary of an IMF delegation visit to Israel from May 19-23. According to the IMF report, the fund's economists are calling Israel's increasing deficit "worrying."

The IMF economists wrote that Israel's deficit was on the rise despite a very low rate of unemployment. Even if the government makes great efforts to control expenditure, the deficit is expected to grow to 3.5% of the GDP in 2019, or possibly even more, the IMF report said.

Unless the Israeli government checks reins in spending and decreases the deficit, the country's debt-to-GDP ratio would grow for the third straight year, which would affect Israel's international credit rating, which last August reached AA-, the highest on record, the IMF warned.

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The report, which looks at the economies of 23 countries spanning North Africa, the Levant and the Persian Gulf, but also Djibouti, Somalia, Afghanistan and Pakistan, predicts that overall growth across these nations is expected to slow down from close to 2% last year to about 1.5% in 2019.

Inflation is expected to remain unchanged at close to 10%.

A closer look, however, shows sharp variations from country to country.

Iran, for example, is expected to be among the hardest hit this year. The IMF expects a 6% retraction in economic growth in 2019 – and that does not factor in the recent announcement by the U.S. that waivers on Iranian oil exports will expire next week, further deepening Iran's economic recession. Last year, Iran's economy retracted by nearly 4% and inflation remains high.

"The removal of waiver[s] will affect more the recession," said Jihad Azour, the IMF's Middle East and Central Asia Department director. "A negative growth of 6% has an impact on poverty, social protection and also on jobs."

Azour said one of the most pressing issues facing Iran with the impact of U.S. sanctions is the need to align the official currency exchange rates for the Iranian rial with black market rates.

Wealthy Gulf Arab oil exporters face their own sets of challenges, namely diversifying their economies away from reliance on oil exports for revenue in the face of sharp ebbs and flows in prices over the past six months.

The international lender said the six Gulf Cooperation Council countries of Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Oman and Qatar will also need to create 1 million new jobs annually for at least the next five years just to keep unemployment rates from climbing.

For these countries, overall economic growth is expected to remain basically unchanged at around 2% in 2019. Specifically, non-oil growth is projected to pick up slightly from last year at closer to 3% in 2019, although fiscal deficits will also expand somewhat from last year.

More specifically, Saudi Arabia's economic growth is expected to slow down from 2.2% in 2018 to 1.8% this year.

For oil importing countries like Egypt, Jordan, Lebanon and others in the region, inflation overall is expected to remain mostly unchanged at around 10% and growth is expected to slow from just over 4% last year to 3.6% in 2019. That average is mainly driven by Pakistan, where economic growth is expected to slow from about 5% last year to close to 3% this year.

Meanwhile, protests in Algeria and Sudan, conflicts in Libya, Syria and Yemen, tensions between India and Pakistan and shaky peace talks in Afghanistan "may increase investors' perception of risk for the whole region, leading to capital outflows and exchange rate pressure," the IMF noted.

"This may feed back into further oil price volatility and regional uncertainty," the report said.

Oil prices climbed above $80 a barrel in October, then fell below $50 a barrel in January. The IMF is factoring an average of around $65 a barrel in the medium term. The organization says swings in oil prices are being impacted by global trade tensions, U.S. sanctions on Iranian oil exports and oil production cuts by OPEC and other oil producing nations.

The unrest in countries like Algeria and Sudan is heavily rooted in economic discontent over unemployment, corruption and poor public services.

For oil importing countries, unemployment remains stubbornly high at close to 25% among young people, the IMF said.

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