By Alexander Apostolides on July 05, 2010

The triumph of dogma: the IMF in Cyprus

I went to the IMF press conference on the Cypriot economy today. Mr. Bernard J. Loran was quite evasive, but the true intentions of the IMF where outed in the end.
What annoyed me was the way the complete conviction of their belief was clouded to prevent a fall out, while at the same time any other idea was dismissed as immaterial.

Mr. Loran kept stressing that a rapid reduction of the budget deficit is necessary, but kept stressing that this would "lead to growth". He did not manage to explain how exactly a fall in GDP that would lead to the economic growth - and that was intentional as any policy to reduce the government deficit will worsen the current recession. Mr. Loran did not have to explain it to anybody - dogma was more important that actual economic analysis on how a negative shock to aggregate demand lead to its growth.

Mr. Loran also used "wage flexibility" to hide the fact that the IMF demanded a significant reduction in public sector wages. It slipped out arguing that the government plan was not really urgent enough and the plan to reduce the budget deficit needs to be set in place immediately.

However in the end anything that was contrary to what the IMF version of events was dismissed out of hand. When I asked him if the IMF has conducted a study to see whether the reduction of government wages would lead to a rise in non-performing loans and thus jeopardise the Banking system, Mr, Loran dismissed me out of hand, despite the fact that the IMF has admitted that this was never a consideration and that such a study did not take place.

My second question was also dismissed out of hand. I explained that the large deficit is in part due to the very optimistic IMF forecasts of the Cypriot economy, which indicated the Cyprus having growth in 2010 and rapid growth in 2011, while in fact the crisis turned out to be most severe. I pointed out that by trusting overinflated GDP forecasts the Cypriot government got into a financial mess and is now is paying the price, but the IMF has never accepted its role for promoting government expenditure through very wrong forecasts. Mr. Loran sadly refused to even see the logic of the argument, or even discuss that the IMF might have had its small negative part to play in this current economic press.

It is so sad to see that IMF impose generic solutions without really modifying its advice to fit to the economies it monitors. What is worse is that the current dogma, even when it has proven to have errors, is still the only game in town for the IMF - and all other valid questions or approaches are dismissed out of hand.

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