The Bank for International Settlements urged governments Monday to move away from “staggering” stimulus packages as the global economy stabilizes and focus instead on reforming the international financial system.

BIS, a key standard-setter for the world economy as the central banks’ central bank, said authorities now need to think about the medium-term health of their economies and that means adopting policies that spur critical adjustments, not hinder them.

“The public resources devoted to economic stimulus and financial rescue have been staggering, approaching 5 percent of world GDP — more than anyone would have imagined even a year ago,” the Basel-based institution said in its 241-page annual report.

It conceded that government intervention has helped prevent a worse recession.

But now that the “sense of free fall has dissipated” with growth possible this year, BIS said governments need to come up with plans to put their economies on a more sustainable footing — the richer countries should form growth strategies that are based less on debt while the developing nations should not rely on exports as the sole driver of their growth.

“Policies must aid adjustment, not hinder it,” the report said. “It means repairing the financial system quickly, persevering until the job of restructuring is complete.”

BIS added that the balance sheets of many financial institutions have still not been repaired despite big injections of capital from governments, and that further steps may be needed to shore up their finances.

But as soon as growth returns, governments should cut spending and raise taxes to put policy on a stable path, it said.

Central banks also need to figure out the best way to exit from positions they have taken in the financial crisis to prop up commercial banks as soon as financial markets resume normal operations, the report said.

BIS, which in recent days hosted the annual meeting of the heads of over 50 national banks including U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet, said stimulus and rescue packages have created “enormous” risks to long-term recovery.

If all the money fails to sufficiently restore the health of the banking sector, “the result would be a massive build-up of public debt without a return to robust growth” — or another risky bubble. Governments must resist the urge to stop their financial reforms prematurely as the first signs of recovery become clearer, the report said.

A weak financial sector would also mean that any improvement in the real economy would only be temporary, it added.

At a news conference, BIS General Manager Jaime Caruana stressed that “markets are not yet working normally.”

He said governments need to find a way to wind down failed banks. As these are so internationally involved, countries should work together to make the process as orderly as possible.

Copyright 2009 The Associated Press.