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Download Macroeconomic Modeling for Planning in Nepal BRIEF OVERVIEW
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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 14 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. National Planning Commission December 2011 16 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 19 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 21 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 22 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 23 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 December 2011 24 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 26 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
