Finance set to adopt World Bank's model in making fiscal forecasts

The Ministry of Finance is set to adopt a new, more dynamic and realistic model than the current one for fiscal forecasts, according to officials.
The Macro-Fiscal Model (MFMod), developed by the World Bank in 2019, will be utilised for the committee meeting on fiscal, monetary and currency exchange in April next.
The meeting, based on the forecasts and available data, sets various targets in formulating the national budget for the next fiscal year.
"The MFMod works based on data of many years and it is more practical, robust, and comprehensive," a senior Finance Division official told the FE.
He said there are 338 equations in the model that generate forecasts by taking lots of variables into consideration.
"The higher number of factors you add in the modelling, the greater realistic results you get," said the official.
Since the fiscal year 2006-07, the Finance Division has been relying on the International Monetary Fund's (IMF) Financial Programming for projecting macroeconomic variables.
It is a comprehensive set of coordinated policy measures aimed at achieving a set of economic objectives, but not a formal econometric model, and instead, employs a simple flow-of-funds framework that combines basic macro-accounting identities, according to another Finance Division official.
This model has been consistently used by the IMF for policy purposes, which the Finance Division has also continued to use until now, he said.
Dr Md Khairuzzaman Mozumder, a former additional secretary at the macroeconomic wing under the Finance Division, in a paper wrote that the division will adopt a macro-econometric forecasting model that "can give realistic projected values of relevant macroeconomic variables".
Based on the experience of other countries, the Finance Division can use a pluralist approach to modelling, incorporating the MFMod and other updated flow-of-fund models with a macro perspective, he wrote.
Another senior Finance Division official said the current forecast model has been inconsistent, resulting in mismatches between the government's fiscal forecasts and those of international lenders and development partners in many cases. According to a technical description of the MFMod published on the World Bank website, the MFMod is a structural econometric model which makes a concerted effort to estimate the economic and behavioural determinants of economic variables.
In models like MFMod, these structural relationships are developed to be both consistent with economic theory and the observed dynamics of the economy, it said.
In recent times, macrostructural models have experienced a resurgence in popularity among central banks.
Recent reviews conducted for the Bank of England and the Reserve Bank of Australia recommend that these central banks supplement their existing tools with macro-structural models. This is due to the ability of these models to support a hybrid judgment and model-based forecasting process, as opposed to less flexible but theoretically pure model-centric approaches. The European Central Bank has also recently reverted to using a macrostructural model as its main policy analysis tool, while various private-sector forecasters also employ similar models.
Dr Zahid Hussain, a former lead economist at the World Bank's Dhaka office, welcomed the move by the Finance Division to adopt the MFMod in making economic forecasts.
There were several attempts to pursue the Finance Division to use the Bangladesh-customised part of the MFMod in making economic forecasts but the efforts did not work, he told the FE.
He said forecasts the World Bank makes for global and country perspectives on growth, inflation, fiscal, expenditure, deficit, balance of payment, and monetary - all are based on MFMod. "The problem is the political bosses in the ministry concerned do not agree to accept the numbers forecasted by the MFMod," Dr Hussain noted.

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