Questionable IMF projections

The Staff Report of the IMF on the second to fifth reviews under the Extended Fund facility to Pakistan has just been released. This is an important document as it contains a list of prior actions, performance criteria and the structural benchmarks that the Government of Pakistan has agreed to implement for achieving the objectives of stabilization and sustainable growth.

The report also contains a set of important projections from 2020-21 to 2025-26. These relate to the macroeconomy, balance of

payments, public finances and the monetary sector. They usually serve as a useful guide to the prospects for the economy of Pakistan not only for economic agents in the country but also for foreign investors.

The short-run projections for the current year and for the subsequent year by the IMF are generally, more or less, reliable in nature. However, this time the report contains projections for 2020-21 and 2021-22 which are questionable.

We take up the estimates of the current account deficit in the balance of payments for 2020-21 and then for subsequent years in this article. This will be followed by an examination of the public finance projections for these two years in a subsequent article.

The key magnitudes in the current account of the balance of payments are exports, imports, balance of trade and workers remittances. The IMF projections are based, of course, partly on likely movements in the exchange rate of Pakistan. These are not explicitly stated in the report but can be derived from Tables 3a, 4b and 8 in the report. The IMF exchange rates are, unfortunately, not correct. However, they are not quoted here because of the apparently confidential nature of these estimates.

Exports are projected by the IMF to reach $24,937 million in 2020-21 with a significant positive growth rate of 10.8 percent. The problem with this projection is that in the first eight months of the year exports have actually declined by 2.3 percent, according to the SBP. This implies that if the annual growth of 10.8 percent is to be attained, then exports will have to increase by as much as 46.2 percent in the last four months of 2020-21. Clearly, this is way beyond the realm of possibilities.

Turning to imports, the IMF projections imply that from March to June 2020-21 they will grow by 9.4 percent. This is the right order of magnitude, although the on-going hump in agricultural imports and larger oil imports could take the rise to a double-digit rate.

The consequence of the over optimistic projection of exports is that the likely trade deficit in 2020-21 has been significantly understated by the IMF. It has increased by over 22 percent in the first eight months of 2020-21. But IMF expects that in the last four months it will be reduced by 4.4 percent due to the big jump in exports. For the full year IMF has projected that the trade deficit will increase by $2,430 million in 2020-21 in relation to the level last year, whereas it has already increased by $2,917 million in the first eight months.

There is an even bigger problem with the IMF projection of the growth in home remittances in 2020-21. It is anticipated at only 6.6 percent, whereas in the first eight months of the year it has been as high as 24.1 percent. The IMF projection implies that remittances will fall by as much as 26.2 percent in the last four months of 2020-21. We hope and pray that this does not happen.

The overall impact of the questionable projections by the IMF on the current account of the balance of payments is that the deficit on this account has been exaggerated. IMF expects the year to close with a current account deficit of $4,154 million. But there was actually a surplus of $881 million in the first eight months. As such, the IMF expects that the deficit in the last four months of 2020-21 will be as large as $5,039 million.

The SBP has rightly projected in its last Monetary Policy Statement that the likely deficit in the current account of the balance of payments in 2020-21 will be below 1 percent of the GDP, significantly less than $2.8 billion. The IMF projection is 50 percent higher at close to $4.2 billion.

The problem with the likely overstatement of the current account deficit in 2020-21 is that this tends to lead to bigger projections of the deficits in subsequent years. Exports are pitched too high, while imports are understated. The outlook for home remittances hinges on post-COVID-19 developments.

IMF anticipates that the current account deficit will rise exponentially despite the implementation of policies and reforms undertaken as part of the on-going Program. From $4,154 million in 2020-21 it is projected to grow by over 20 percent annually and spiral up to $11,459 million by 2025-26.

The fundamental question is why the IMF has opted to make such fundamentally different projections for the last four months of 2020-21 as compared to the trends revealed in the first eight months. Is it because these projections were made a few months ago and have not since been updated? Alternatively, these estimates have been made in agreement with the SBP, although the publicly revealed estimates by the SBP are more optimistic.

There are other serious problems with IMF estimates. First, the projected budget deficit in 2020-21 is 7.1% of the GDP. It has already exceeded 4.5 % in the first 8 months. Over 45% of the annual deficit is generally incurred in the last four months of a financial year.

Second, the projected GDP growth rate of 4% in 2021-22 looks optimistic given the knockout blow by the intended much higher power tariffs and indirect tax rates. Due the same set of reasons the projected inflation rate in 2021-22 at 8% is on the low side.

We look forward to an appropriate clarification by the IMF on its projections.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021