The head of the International Monetary Fund (IMF) has urged world financial leaders to seize the period of economic calm as a time to tackle weak spots in their economies.

In his first speech to the IMF's main policy-setting committee since becoming the fund's managing director in June, Mr Rodrigo Rato said countries could not let down their guards, since current low volatility could invite increased risk-taking.

He noted that in some countries, signs of reform fatigue had emerged. "What is needed is durable fiscal consolidation, growth-enhancing structural reforms, strengthened corporate and financial balance sheets, the rebalancing of global current account positions and poverty reduction," he told the IMF's International Monetary and Financial Committee (IMFC) on Saturday, marking the opening of the annual IMF/World Bank meeting.

The last instance of a major economic emergency during the meetings - one of the rare events that bring together top global finance officials from rich and poor nations - was in 1997 in thebuild up to the Asian contagion.

Mr Rato, Spain's former finance minister, used the gathering to present the global lender's outlook for the world's economy.

The IMF's World Economic Outlook, released earlier this week, saw the strongest performance for the global economy in nearly three decades this year, with growth of some 5 per cent.

Charged with promoting economic stability, the IMF said while the economy was at its best in many decades, the recovery would moderate next year to 4.3 per cent as oil prices surged on the back of increased demand from China and India.

Crude prices rose to above $50 a barrel on Friday, although the IMF has said that in real terms they are still way below prices in the late 1970s.

However, the IMF chief also said over the weekend that he believed oil prices would fall to around $35 a barrel in 2005. The fund's own figures indicate that a rise of $5 in the price of a barrel of oil produces a fall of three-tenths in world economic growth.

Mr Rato said the recovery had become further entrenched and was geographically more broad-based, mainly due to accommodative economic policies, improved corporate profits and stronger equity and house prices.

"Financial market conditions are benign at present, supported by the global recovery, and the financial system is more resilient today than it has been since the bursting of the equity bubble," he said.

Mr Rato said most financial institutions seemed well protected against the risk of higher interest rates, but warned regulators to be vigilant in their supervision of key institutions to guard against a build-up of excessive leveraging and risk-taking.

While the IMF has said developing Asia should help rebalance the global economy, Mr Rato noted there had been "little progress" by Asia, and China in particular, towards more exchange rate flexibility.

"The key policy requirements include medium-term fiscal consolidation in the US to boost national savings, structural reforms to boost growth prospects outside the US and exchange rate flexibility in Asia," he said.

Mr James Wolfensohn, president of the World Bank, pointed to the dangers in store for the world's poorest countries from oil prices and higher interest rates. He said they would mainly affect heavily indebted nations and oil importers.