Systemic bias of IMF reserve and debt forecasts for program countries

Countries experiencing balance of payments (BOP) crises may obtain IMF loans to stabilize external accounts. These loans require IMF programs that outline performance targets to ensure forecasted recovery trajectories. Two key indicators of external account performance are reserves and short-term external debt (“STdebt”). Extensive literature evaluates IMF forecasts, but reserves and STdebt have not been studied. We construct a database of nearly 300 BOP crisis countries with IMF BOP programs from 1992–2019. Reserve forecasts are shown to be systematically biased and inefficient, a result that is startlingly persistent across (a) degrees of capital mobility, (b) trade openness, (c) exchange rate regimes, (d) inflation, and (e) country income levels. We show the bias is driven by deeply pessimistic IMF reserve forecasts that underestimate reserves and systematically ignore information known at the time of the forecast. STdebt forecasts are also inefficient but with an optimistic bias, systematically underestimating future debt. If STdebt is used to peg reserve requirements, the optimistic bias of STdebt forecasts may drive the pessimistic bias of reserve forecasts.