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Monday, December 14, 2009

IMF Gets Its Policies & Figures Wrong

MAPUTO (Mozambique), Dec 12 09  |  Bernama

-- The resident representative in Maputo of the International Monetary Fund (IMF), Felix Fischer, admitted on Friday that the IMF has been making "conservative predictions" of the growth in Mozambican GDP, Mozambique's AIM news agency reported.

At a press conference called to announce the IMF disbursement of 14.2 million Special Drawing Rights (SDRs - about US$22.6 million) to Mozambique under the Fund's Exogenous Shocks Facility (ESF), AIM asked Fischer to explain the huge differences between the IMF figures for Mozambique's growth, and those produced by Mozambican economists and statisticians.
An IMF press release distributed by Fischer predicted that Mozambican growth in 2009 would be only 4.5 per cent, rising to 5.5 per cent in 2010.

Yet the figures released this week by the Bank of Mozambique show that between October 2008 and September 2009, the economy grew by 6.5 per cent.

Fischer admitted that the IMF's figures "will probably have to be adjusted upwards, because the third quarter was better than expected".

Better than who expected? For the IMF has, for the past year or more, been making pessimistic predictions about the fall in the Mozambican growth rate due to the impact of the international economic crisis. Over the same period the Mozambican government has consistently predicted that growth will remain above six per cent - and the figures given by the central bank prove the government right.

Furthermore, the figures cannot be put down solely to an exceptional performance in the third quarter. Growth was stronger than the IMF expected in the second quarter as well - the bank's figures show a growth rate of 6.1 per cent between July 2008 and June 2009.

So how did the IMF repeatedly arrive at figures for GDP growth that were around two per cent less than the real rate (and the difference between a 6.5 and a 4.5 per cent growth rate is very substantial)?

Fischer claimed that the IMF and the Mozambican government worked from a set of agreed figures, "but you must understand the difficulty of making projections in a country where there are not frequent indicators. So we make the projections on a conservative basis".

Such an answer shows how difficult it is for IMF officials to admit that they have made mistakes. For the indicators are the same for both the government and the IMF - and the projections the government made from those indicators were right, and the ones the IMF made were wrong.

Fischer was also reluctant to draw any lessons from Mozambique's break this year from IMF orthodoxy. The government implemented two policies that used to be regarded as heresy in the corridors of the IMF and the World Bank. One was substantial monetary expansion, and the other was a blanket fuel subsidy, under which the prices of diesel and petrol were frozen at their March level.

Monetary expansion in an election year was supposed to drive up inflation. But in fact, as Fischer acknowledged, the yearly inflation rate had, by November, fallen to 2.5 per cent - the lowest annual inflation rate since Mozambique switched from a planned to a market economy in 1987.

Fischer predicted higher inflation in 2010 because there would be higher fuel prices (with the ending of the subsidy), a more restrictive monetary policy, and higher import prices.

Certainly import prices are rising, due mainly to the appreciation of the South African rand, and South African remains the origin of most of the consumer goods that Mozambique imports. But if monetary expansion in 2009 did not cause the economic roof to collapse, why should the government obey the call for monetary restriction in 2010?

As for the fuel subsidy, it makes eminent sense to stimulate the economy at least by subsidising diesel.

But, as the international crisis recedes, economic orthodoxy will be reimposed, and Mozambique may not be allowed to carry out policies that actually work.