The best example of a big error in projections is of the current account deficit in 2016-17. Following the Twelfth (last) Review of the EFF by the IMF, the current account deficit was expected to be limited to $4.7 billion in 2016-17. Instead, the deficit has already reached $8.9 billion in the first eleven months of the year. It could exceed $9.5 billion by the end of the year. As such, the forecasting error is likely to be over 100%.
Similarly, the MoF and IMF had projected a fiscal deficit of Rs 1240 to Rs 1276 billion in 2016-17, equivalent to 3.8% of the GDP. According to the Fiscal Operations reported by the MOF, the deficit had already come close to the annual target in the first nine months and reached the level of 3.7% of the GDP.
Recent developments indicate that the fiscal deficit has risen further to above Rs 1800 billion, by the beginning of June 2017. This includes massive bank borrowing, all from the SBP, of Rs 1084 billion, and of Rs 716 billion from all other sources, including net external borrowing. If it hits Rs 1900 billion by the end of the year, then the error in forecasting the fiscal deficit in 2016-17 will be close to 50%.
Turning to the projections for 2017-18, the IMF has now tried to be more realistic and projected the current account deficit at 3.2% of the GDP, equivalent to almost $11 billion. This is the magnitude projected by IMF and not by me. Further, in the Twelfth Review, the Fund has projected the amortization of external debt in 2017-18 at close to $6 billion. As such, the IMF's own estimate of the external financing requirement is $17 billion.
The problem is that the current account deficit could go beyond $11 billion next year because of a peak in CPEC imports and increased fuel imports for the new power plants. It is also based on an optimistic growth rate in exports of 9.4% in 2017-18. As such, the estimated financing requirement of $17 billion is conservative. It could rise to almost $19 billion.
The MoF is optimistic that the financial/capital account of the balance of payments will be able to generate a surplus of $11 billion in 2017-18, to fully cover the deficit in the current account. This year, in the first eleven months, the surplus is $7.3 billion, despite flotation of a billion dollar Sukuk Bond and massive commercial loans from external sources. Can the surplus be increased by almost 30% next year? This may require resort to an unprecedented level of external borrowing and take the country further into the external debt trap, with dire consequences down the road.
The projection of SBP foreign exchange reserves by the end of 2017-18 of $18.88 billion by IMF is based on a mistake. The June 16 Article IV Statement by the Executive Directors of the IMF gives the SBP reserves at $18 billion as of end-June 2017. Unfortunately, they have already fallen to $15.4 billion by the 16th of June 2017. Therefore, he projection by IMF of reserves at the end-June 2018 is substantially biased upwards.
At the end, I hope and pray that the MOF is closer to being right in its expectations about developments on the economic front in 2017-18. This is the election year and for a smooth democratic transition it is essential that there are no financial difficulties during the year, especially during the tenure of the caretaker government. However, there is a need to be cognizant of the risk factors and take corrective actions quickly and strongly, especially on the trade front.
(The writer is Professor Emeritus and former Federal Minister)
Copyright Business Recorder, 2017