Download Macroeconomic Modeling for Planning in Nepal BRIEF OVERVIEW

MacroeconomicModelingforPlanningin
Nepal
BRIEFOVERVIEW
Team:
LalShankerGhimire,JointSecretary,NPCS
SumanAryal,D.DirectorGeneral,CBS
RabiShankerSainju,ProgrammeDirector,NPCS,
RameshKumarCharmakar,SecondSecretary,NepaleseEmbassy
December8,2015
National Planning Commission
December 2011
PresentationOutline
1. Backgrounds
2. InitialAttempts
3. Modelsusedinpreviousplans
4. MDGsconsistentMacroeconomicModel
National Planning Commission
December 2011
HistoricalBackground
• Intheearly1980’s,individualresearchersfirstattemptedtouse
statisticalmodelsinNepal.
• Macroeconomicmodelinghasbeenstartedwithintroductionofa
multi‐sector,economy‐widemodelbyNPCandIIDSIn1985.
• TheWaterandEnergyCommissiondevelopedamacromodelfor
forecastingenergydemandin1987.
• MinistryofIndustrydevelopedamacro‐economicmodelintegrate
withtheLeontiefinput‐outputframeworkcomprising39.
• Asimilarversionofthemacroeconomicmodelwasalsousedinthe
formulationoftheEighthPlan.
• In1990,asimplemacroeconomicaccountingframeworkwas
employedtoexaminethepossibilityofpolicycoordinationbetween
exchangeratepolicyandfiscalpolicy.
National Planning Commission
December 2011
HistoricalBackground
• Aslightlydifferentmodelintheframeworkofthestandardflow‐of‐
fundsaccounting,commonlyusedbytheWBandIMFwas
developedfortheNationalPlanningCommissionSecretariat.
• Acomputer‐basedmodelnamely,ReferenceEnergySystem‐
IntegratedMacroeconomicInput‐Output(RES‐IMIO)Modelwas
developedandusedinthePerspectiveEnergyPlan(PEP)in1995.
• InTenthPlan,theintegratedmacroandinput‐outputmodelwas
usedtosetthegrowthratesandtheinvestment.
• IntheWaterResourcesStrategyFormulation(WRSF)‐ PhaseIalso
usedRevisedMinimumStandardModeltoprojecttheresources
availabilityrequiredformeetingtheinvestmentdemand.
• MacroeconomicModelwasusedinNationalWaterPlan(NWP)to
assessthemacroeconomicimplicationsoftheinvestmentonWater
Resourcessectoronthenationaleconomy.
National Planning Commission
December 2011
MacroeconomicModelingfor
PlanninginNepal
National Planning Commission
December 2011
Background:ModelPracticesinNPC
 TillSeventhPlannoframework
(quantitative)wereused.
 Planinvestmentwasallocated
betweenprivateandpublic
sectorontheadhocbasis.
Desired
growth
rate
Investment
Requirement
Assumed
ICOR
 Developmentexpenditureofthepublicsectorwasestimated
basedonassumptionofsomepredeterminedpercentageof
totalinvestment.
National Planning Commission
December 2011
InitialAttempts
 “A Regionally Disaggregated Planning Model”
constructed with the technical and financial support of
UNESCAP and Social Institute in 1984/85 is the first
attempt for multi sector, economy wide modeling in Nepal.
 Itwasbuildas:
• Aframeworkforeconomicanalysisthroughalternative
policysimulation
• Tobringimprovementindevelopmentplanningparadigm
anditsmethod.
National Planning Commission
December 2011
Initialattempts
 Developedtorepresentecological/development
regionsatfairlydisaggregatedlevel
Structure
ofthe
Model
“CGEType
Model”
 Aseparatesubmodel ofeachregionandtwoforeign
region:IndiaandRestoftheworld
 Asmallsizeinputouttablefor1981/82of9X9was
compiledformodelsimulation
 Themodelspecificationwashighlycomplexin
situationwheretherewasnoenoughexpertsavailable
 Themodelwasrevisedusing1986/87databutit
couldnotbeutilizedsofar
National Planning Commission
December 2011
ModelusedinEighthPlan
 TheModelconsistsof
31behavioral
equations,21
exogenousand18
laggedvariables.
 Themodelwas
constructedusing
timeseriesdata of
1974/74to1988/89
National Planning Commission
Product
ion
Govt
Revenue
Expendi
ture
6
Blocks
Money
Supply
&prices
Foreign
Trade
Labour
Demand
December 2011
RMSM‐XModelusedinEighthPlan
 RMSM‐XModelwasdevelopedwiththesupportofWorld
BankforMacroeconomicAnalysisduringEighthPlan
Periodwithobjectives to:
1. Evaluateconsistencyamongdifferentsourcesofdata
anddatagaps
2. Evaluateexistingeconomicconditions
3. Assessoverallmacroeconomicperformance
4. AnalyzeconsistencyofEighthPlanMacrovariables.
National Planning Commission
December 2011
MacroModelforTenthPlan
 IntegratedMacroModelandInput‐outputtablewas
developedtofixgrowthrateanddetermineinvestmentlevel.
 Periodcoveredwas1985‐2000
 Itconsistsof31behavioralequationand20identities
 Itconsistsoffiveblocks:ValueAdded,Consumption,Money
SupplyandPrices,Employment,Import,Taxes
National Planning Commission
December 2011
MillenniumDevelopmentGoalsconsistent
MacroeconomicModel(MDGcMEM)
National Planning Commission
December 2011
MDGsconsistentmacroeconomicmodel
(MDGcMEM)
 Developedain2013,
• Aimisto:
• providingasetofsectoral projectionsconsistentwitheachotherandalso
withmacroeconomicgoalsandpolicies,andtakingintoaccounttheleveland
compositionofinvestmentrequiredtoachieveMDGtargetsanditspotential
effectontheeconomy.
• ThespecificObjectivesisto
• provideinputforpreparingMDGbasedlongtermdevelopmentplanning;
• strengthencoherencebetweenplanningandMTEF/budgetaryframework;
• provideamonitoring&evaluationframework;andsupportthenational
policydialogue&negotiationswithdevelopmentpartners.
National Planning Commission
December 2011
Introductionofthemodel
 It is a Keynesian type of macroeconomic model in which social sector (MDG component) is included in the system; and output/price are determined endogenously.  It consists of:  6 blocks : National account, Monetary, Government Finance, BOP, Price and Social Sector  74 equations (43 behavioral and 31 identities).
 92 variables.
 Government expenditure is the key policy variable.  Based on yearly time series data starting from 1992/93.
National Planning Commission
December 2011
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Modellingstrategyandunderlying
assumptions
 The model uses a Cobb‐Douglas type of production function in order to estimate the sectoral GDP
 GDP is decomposed into agriculture, industry and service.  The sectoral investment and the gross fixed capital formation are estimated separately  The model follows a flexible price regime as the GDP deflator is obtained endogenously.  Sectoral employment and poverty rate are obtained from the survey data.
 Recognize the role of the private sector appropriately assuming that
public investment "crowds in" private investment,
National Planning Commission
December 2011
15
Modellingstrategyandunderlying
p
assumptions
 The model addresses MDGs in 3 ways –
 incorporating poverty‐growth nexus,  making public expenditure a policy variable in order to link the investment requirement to attain MDGs and  allowing availability of foreign assistance in order to meet the expenditure requirements.  Considered remittance to be one of the main driving factors in economy.  Highlights the role of remittance through income and consumption channels.  Remittance is also considered to be one of the determinants for reducing poverty in Nepal  Use various dummy variables to capture the effects of political instability, strikes, load shedding, weather conditions and take care data outliers.
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December 2011
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THECRUXOFTHEMODEL
National Planning Commission
December 2011
Impactofchangesingovtcapital
p
expenditure
• Revenue
• Deficit
• Internal or external loan
GBO
National Planning Commission
December 2011
Impactofchangesingovtcapital
p
expenditure
• Revenue
• Deficit
• Internal or external loan
GBO
National Planning Commission
Monetary
• Claims on Govt.
• Domestic Credit
• Net domestic assets
• Money Supply
• Bank Deposit
December 2011
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Impactofchangesingovtcapital
p
expenditure
• Revenue
• Deficit
• Internal or external loan
GBO
National Planning Commission
Monetary
• Claims on Govt.
• Domestic Credit
• Net domestic assets
• Money Supply
• Bank Deposit
• Import and trade balance
• Foreign aid
• Exchange rate
• BOP surplus/deficit
BOP
December 2011
Impactofchangesingovtcapital
expenditure
• Revenue
• Deficit
• Internal or external loan
GBO
Monetary
• Claims on Govt.
• Domestic Credit
• Net domestic assets
• Money Supply
• Bank Deposit
•
•
•
•
Import and trade balance
Foreign aid
Exchange rate
BOP surplus/deficit
BOP
• Food and Beverage
• Non‐food and services
• Overall inflation
Price
National Planning Commission
December 2011
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Impactofchangesingovt capital
p
expenditure
Monetary
• Revenue
• Deficit
• Internal or external loan
• Claims on Govt.
• Domestic Credit
• Net domestic assets
• Money Supply
• Bank Deposit
GBO
•
•
•
•
Import and trade balance
Foreign aid
Exchange rate
BOP surplus/deficit
BOP
Real Sector
• Food and Beverage
• Non‐food and services
• Overall inflation
Price
National Planning Commission
•
•
•
•
Sectoral GDP Overall GDP Investment
National saving
December 2011
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Impactofchangesingovtcapital
p
expenditure
Monetary
• Revenue
• Deficit
• Internal or external loan
• Claims on Govt.
• Domestic Credit
• Net domestic assets
• Money Supply
• Bank Deposit
GBO
Real Sector
• Food and Beverage
• Non‐food and services
• Overall inflation
Price
National Planning Commission
•
•
•
•
Sectoral GDP Overall GDP Investment
National saving
•
•
•
•
Import and trade balance
Foreign aid
Exchange rate
BOP surplus/deficit
BOP
•
•
•
•
Poverty rate
Employment rate
Inequality
GDP growth
MDGs
December 2011
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Impactofchangesingovtcapital
p
expenditure
Monetary
• Revenue
• Deficit
• Internal or external loan
• Claims on Govt.
• Domestic Credit
• Net domestic assets
• Money Supply
• Bank Deposit
GBO
Real Sector
• Food and Beverage
• Non‐food and services
• Overall inflation
Price
National Planning Commission
•
•
•
•
Sectoral GDP Overall GDP Investment
National saving
• Import and trade balance
• Foreign aid
• Exchange rate
• BOP surplus/deficit
BOP
•
•
•
•
Poverty rate
Employment Inequality
GDP growth
MDGs
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Methodology
Take care of: ‐ sign of parameters
‐ t‐statistics OLS Estimate ‐ adjusted R –square
‐ D‐W test ‐ Use AR(1), MA(1) and dummy to improve the equation
Forecast/Simulation
‐ Run the model
‐ Baseline ‐ Check in‐sample forecasting performance ‐ Other National Planning Commission
December 2011
Assumption
 The exchange rate of the Nepalese currency remains the
constant
 Number of tourists arrival will increase by 15 percent each year;
 Sectoral employment follows historical growth
 Indian GDP growth rate and Indian CPI obtained from Indian
12th Five Year Plan
 GDP growth rate of Middle East countries derived from World
Economic outlook
National Planning Commission
December 2011
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Conclusionandwayforward
• MDGs indictors were very simple and straight but integrating the SDGs indicators in model needs more rigorous discussion and exercise due to its huge numbers of targets and complex inter‐linkages. • Dataproblemsrequirethatthemodelneedstobesimple
• RobustparametersneededforgeneratingSDGsconsistent
macroeconomicframework
• Macroeconomicmodelingworksinregionconfirmthatavarietyof
approachesareneededforSDGsbasedplans
• Models are not panacea for economic development. Effective and sustainable economic, social and political realities matters. • Institutionalization and mainstreaming of macro model is necessary
National Planning Commission
December 2011
Conclusionandwayforward
• Capacity development of related agencies in modeling activities need to be enhanced. • UNESCAP should assist the developing countries in following activities:
 Technical assistance in development of country specific and regional model to address SDGs.  Technical assistance to National Statistical Institutions in integrating the SDGs indicators in National Surveys.  Capacity development of national experts in modeling
National Planning Commission
December 2011
Thank you for your attention
National Planning Commission
December 2011