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Workshop on Macroeconomic Modeling in Asia and the Pacific 8-11 December 2015 Bangkok, United Nations Conference Centre (UNCC) National Macroeconomic Forecasting Model the Case of Cambodia Cambodian Team: 1-Mr. Cheng Savuth (MEF,GDNT) 2-Mr. Senh Senghor (MEF, GDT) 3-Mr. Kim Vera (MOEYS) Disclaim: This presentation represents the view of the authors and does not represent the views of the ministry of economy and finance or any departments. The views expressed herein should be attributed to the authors and not to the MEF or its management. 1 Photo: Linna Ky / World Bank Phnom Penh, Cambodia 2 Why do we need macroeconomic modeling? To support policy makers with difference scenarios to consider To support national budget preparation (revenue and expenditure) 3 Why do we need macroeconomic modeling? Rectangle Strategy (Government’s Plan) 5 years Macroeconomic Condition (Past, Current and Future) Yearly GDP Growth Rate, Inflation Public Forum Cambodia’s Annual Budget Law (Planned Expenditure/Revenue) Execution of Budget (Expenditure/Reveneue) Source: Author’s compilation based on relevant documents 4 Who is the main organization responsible for macroeconomic forecasting? Secretariat General Department General Department of Economic and Public Finance Policy (GDEPFP) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Department of Macroeconomic Policy and Fiscal Department of Statistics Department of Economic Integration and ASEAN General Department of Budget General Department of Sub-National Administration Finance General Department of Public Procurement General Department of Customs and Excise (GDCE) General Department of Taxation (GDT) General Department of State Property and Non-Tax Revenue: General Department of National Treasury (GDNT) General Department of Financial Industry General Inspectorate Department General Department of Internal Audit Source: http://www.mef.gov.kh/mef-line-departments.html 5 Forecasting GDP (Old Technique) Production Function Production approach in agriculture sector Linear-Stages Theory in Other Sectors (Harrod-Domar Growth Model) Source: public workshop presentation by senior officer of MEF, GDEPFP 6 Linear-Stages Theory Production function Q = ƒ(K, L, A) Where Q: real output, K: capital, L: labor, A: technology Exceptional function in Cambodia g = s/k Where g: the growth rate of GDP s: the saving ratio (s = S/Y or s = I/Y) k: the ICOR (incremental capital-output ratio) that measure the efficiency of investment (k = I/∆Y) - inefficient when ICOR become bigger and bigger Y: income (GDP) I: Investment that is financed by saving. Source: public workshop presentation by senior officer of MEF, GDEPFP 7 The ICOR Source: public workshop presentation by senior officer of MEF, GDEPFP 8 Fiscal Policy The main objectives: Achieve macroeconomic stability Facilitate economic growth with low inflation (single digit) Support government policies set forth in the official documents- CMDG, NSDP etc. The adequate measures undertaken: Budget implementation with extreme prudence and caution (Budget discipline) Improvement in revenue collection Selective spending policies (Sector priority) Source: public workshop presentation by senior officer of MEF, GDEPFP 9 Fiscal performance has improved thanks to strong revenue collection and prudent spending Revenue collection has increased substantially in recent years driven by economic buoyancy and improvement in tax administration. Spending has been broadly in line with the budget, and as a result, the fiscal position and government deposits have continued to improve. Source: public workshop presentation by senior officer of MEF, GDEPFP 10 Recent in Revenue Policy Reforms Targeting 0.5% of GDP yearly increase in the medium term - Broadening the taxable base and reducing the tax rate - Simplification of the tax structure - Ensuring the productivity and buoyancy of taxes - Recognition of the need to harmonize tax regimes among neighboring tax jurisdictions Source: public workshop presentation by senior officer of MEF, GDEPFP 11 Forecasting of GDP (New Technique) Summary (short-term forecast): 1. 2. 3. 4. 5. 6. 7. Past data of main economic indictors (Different Sources) Past data of output of each economic sector (National Account) Applies the forecasting techniques to each sector using main indicators to estimate (forecasted) growth rate of each sectors The forecasted growth rate of each sector is used to forecast output by each sectors. Aggregate all the forecasted sectoral output to get GDP (nominal) and real GDP (by adjusting with relevant deflator) Calculated the forecast growth rate of GDP Forecasted growth rate of GDP is used for fiscal forecasting and others Source: author’s compilation from interview and relevant documents 12 Some of the main indicators Garment exports Number of tourists Credit to the private sector divided by the CPI Merchandise Imports divided by GDP Import of construction material + construction equipments + cement and steel; divided by the CPI Electricity energy consumption Government revenue divided by the CPI Others indicators Source: author’s compilation from interview and relevant documents 13 Forecasting Technique The real growth of each sector is assumed to depends on the growth rate of the indicators: Growth rate by sectors Main indicators y=f(x) Source: author’s view 14 Data Sources MEF department of statistics National Institute of Statistics National Bank of Cambodia Other local and international sources Source: author’s compilation from interview and relevant documents 15 Application of Forecasting Model The forecasted GDP growth rate and inflation has been used in designing annual budget law. It is used to help in fiscal projection such as expenditure and revenue Source: author’s compilation from interview and relevant documents 16 Conclusions of the team Macroeconomic forecasting model is very useful in providing alternative future projection for assisting policy makers to choose. The role of forecasting is being widely accepted in government institutions, for example at GDT and GDCE, we have revenue forecasting. At GDNT, we have cash forecasting and debt management, budget execution forecasting (quarterly, semi-annually, annually). The capacity-building for forecasters on knowledge such as forecasting technique is needed for Cambodia. 17 Conclusions of the team Every forecasting technique should be checked for fitness, validity and its assumptions. This helps to update the techniques. Moreover, quality of data do need improvement in the context of Cambodia. International Community, especially, ESCAP can help Cambodia By promote capacity building for forecasters Providing support for setting of system or software for forecasting Allow networking of forecasters (local and international) to share experience on the way forecasting technique is being used. It can validate or modify the currently used technique It can construct technique that allow crosscountries/regional comparison 18 (Angkor Wat Arial View) Thank you very much for your listening. 19