‘There are lies, damn lies and Greek statistics’. This was a common quip among European bureaucrats prior to the crisis and Greece, justifiably, came under intense criticism when it emerged that the government had for years been lying to voters and EU institutions alike about the height of its deficit. Fudging economic data for political purposes is, of course, not a good thing.
Now however there are indications that the IMF itself may also have engaged in such a practice prior to the approval of the Greek bailout program.
A report released yesterday by the Independent Evaluation Office of the IMF assessing the quality of IMF forecasts found that while the Fund does seem capable of making accurate forecasts most of the time, it appears to fail when it matters the most. “Short-term forecasts of GDP growth and inflation made in the context of IMF-supported programs were unbiased in the majority of cases. However they tended to be optimistic in high profile cases characterized by exceptional access to IMF resources,” the report writes.
Such high profile cases include the bailouts of countries hit by the crisis such as Greece. And as the report notes, “the cases represented over eighty percent of the dollar amount of IMF resources disbursed.” So over 80 percent of IMF loans is based on a rose-tinted view of reality.
Furthermore, once countries signed on to the bailout programs, this bias tended to decrease or disappear, typically once the institution returned to a country for the first program review, usually six months after the IMF first approved the bailout.
The report appears to support the view that the forecasts provided by the IMF prior to the approval of the huge bailout programs were effectively rigged for political reasons. “Projections are sometimes aimed at influencing program outcomes.” the report writes.
In the cases of countries such as Greece that received large bailouts, in addition to overestimating future GDP growth, the IMF also tended to be overly pessimistic when came to fiscal deficits. The report explains how this gives the IMF and government officials more leeway when it comes to program implementation, “First pessimistic forecasts for the fiscal balance give country authorities some room for maneuver in the revenue and expenditure side so as to meet budget targets even if government revenues fall short of projections or unexpected expenditures arise. Second, where a waiver is needed, lower than expected GDP growth offers a very good explanation (outside of the authorities’ responsibility) of why fiscal targets could not be met,” (emphasis added).
In other words the IMF’s overly optimistic projections of GDP growth in Greece appear to be the product of planning rather than honest accounting errors.
Perhaps most tellingly the authors chose to begin the section “Forecasts in the Context of IMF-Supported Programs” with the following quote from the Nobel-prize winning economist and prominent IMF critic, Joseph Stiglitz, “IMF lending programs… are predicated on certain assumptions about output, inflation and other economic variables. Too often those numbers are a result of a process of negotiation rather than a more dispassionate economic forecast.”
The report concludes with several recommendations to improve the forecasting of the IMF. For her part in a written statement the Managing Director of the Fund, Christine Lagarde said she welcomed the report and supported most of the recommendations. However in response to the proposal that the IMF increase the transparency of its forecasting methods and make historical forecasts easily accessible, Ms Lagarde said her support was ‘qualified’, and that she was concerned that such a move ‘may not be practical’.