Lao Macroeconomic Model

Sthabandith Insisienmay

Center for Macroeconomic Policy and Economic RestructuringNational Institute for Economic Research

Regional Capacity Building Workshop Formulating National Policies and Strategies in Preparation forGraduation from the LDC Category14-16 November 2017, Thimpu, Bhutan.

Outline

1. Rational2. The Evolution of institutional/model

conceptual frameworks/forecasting methods

3. Current Macroeconomic Model/Framework4. Difficulties to apply model results for

actual policymaking and implementation5. Modeling framework for SDG and Way

forward

Rational

1

Rational

The government adopts short and medium term planning for Lao socio-economic development under NEM.

The need for easy tool understandable by policy makers for monitoring the plan and provide economic outlook.

To create common understanding on economic inter-linkage between macro sectors and cross check consistency of sector planning among concerned government agencies.

The Evolution of institutional /model conceptual frameworks /forecasting methods

2

Key stakeholders

Bank of Lao PDR (BOL) National Statistic Bureau (LSB), MPI International Organizations (World Bank, IMF) Center for Macroeconomic Policy and Economic

Restructuring (CMER), NIER. Other line Ministries (unpublished reports)

Purposes of the Involvement of Stakeholders

- Data sharing- Creating consensus on

the estimated and forecastedmacroeconomic indicators

- Aligning forecasting results and creating synergy among stakeholders, particularly the WB

- Strengthening stakeholders’ network and dialogue on Macroeconomic issues

- Providing policy recommendation from the simulation and forecasting results

- Model development- Creating network and

understanding on the use of model for policy planning

- Capacity buildings

2011MMWG established under Macroeconomic Division of

NERI of the MPI

2014MMWG extended, Modeling Division established under

NERI

2016NIER established as an

independent government research institute

Evolution of Conceptual Framework

2011MMWG established under Macroeconomic Division of

NERI of the MPI

2014MMWG extended, Modeling Division established under

NERI

2016NIER established as

independent government research institute

- Updated Macro-econometric Model

- Financial Programing typed Macroeconomic Framework (MF)

- Production Model (PM)

- Forecast/Policy Simulation/Coherent economic analysis

- MM/MF/PM- Initiative to develop

DSGE

- Macro-econometric Model (MM)

- Supply side with some demand aspects

- Forecasting/Policy simulation

Role of WG members for Macro Model Development (2011-2013)

National University of Laos:• Contribute to the development of

macro model• Provide feedback

Ministry of Finance:• Contribute to the development of macro

model• Supports

• Fiscal Data• Provide feedback

Bank of Laos:• Contribute to the development of

macro model• Supports

• Monetary and Financial Data• Provide feedback

National Statistics Bureau:• Contribute to the development of

macro model• Supports

• Real Sector Data• Provide feedback

Sasakawa Peace Foundation (SPF)• Fund• Technical Support

• Macro model Experts from Japan such as GRIPS, IDE-JETRO, Tsukuba University

• Exchange of modeling experience with Japanese orgs.

NERI of MPI• Main player

• Develop and maintenance macro model

• Preparing a technical paper• Final user

• Coordinator • Organizing regular meeting• Consultation workshop• Other supports

Output

Role of WG members for Macro Framework Development

National University of Laos:• Participate a discussion• Access to macro framework• Use the framework and data for the

purpose of education

Ministry of Finance:• Update data on fiscal sector• Update data on public debt sector• Forecasting fiscal revenue • Policy design (budget plan)

Bank of Laos:• Update data on monetary sector• Update data on BOP and external

sector• Policy design (money supply

targeting)

National Statistics Bureau:• Update data on real sector (GDP)

• Production • Expenditure

IMF:• Technical assistance• Training in country and abroad

CMER of NIER• Main player

• Develop and maintenance macro framework

• Use the framework and data for macroeconomic analysis

• Forecast real GDP growth• Coordinator

• Regular meeting for macro economic outlook

• Study tour, mission and etc

Output

Department of planning, MPI:• Participate a discussion• Access to macro framework• Use the framework and data for the

purpose of macro economic planningMinistry of Industry and Commerce:

• Participate a discussion• Access to macro framework• Use the framework and data for the

purpose of trade analysis

World Bank:• Fund• Update data on resource sector• Participate a discussion• Access to macro framework

Ministry of Energy and Mining:• Update data on resource sector• Participate a discussion and access

Current Macroeconomic Model/Framework

3

1. Macro-econometric Model

Data:1991-2014Variables:71 Endogenous 25 Stochastics

Core Model (Operation and Feedback)

Long Run Capacity (GDPP)

Short Run Production (GDP)

Final Demand (Y, GDPE)

Price (PCPI)

Short Run Demand Pressure (EXCESS)

Long Run Demand Pressure (GDPP)

GDP Deflator (PGDPV)

Oil Price, Thai CPI (POILW, PCPITHAI)

Import Price (PIMV)

Exchange Rate (EXRUS, EXRBATH)

Trading Partner GDP (GDPW)

Domestic Sector

External Sector

Simulation Result

Implication

Government investment is either growth enhancing or inflationary while government consumption to be even more inflationary.

Domestic price is sensitive to Thai inflation, world crude oil price and exchange rate.

The depreciation of Lao Kip against US Dollar leads to an increase in trade surplus while that of Lao Kip against Bath worsens trade balance.

A decrease in copper price worsens exports and trade balance.

Forecasting (Examples)

7.8% 7.6%7.9% 8.1% 8.3%

8.0% 7.8% 7.6% 7.8% 7.8% 7.8% 7.6% 7.6%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Import duty net

Service

Manufacturing

Electricity

Mining

Agriculture

GDP

Growth Projection for Annual Economic Report 2014

.068

.072

.076

.080

.084

.088

.092

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

GROWTH ± 2 S.E. (Scen 1: Baseline)

-.08

-.04

.00

.04

.08

.12

.16

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

INFLATION ± 2 S.E. (Scen 1: Baseline)

2. Macroeconomic Framework (MF)

Linkage of 4 Blocks in the framework

18

3. Production Model

Output of Macro Framework: Report Hub (example)

Source: Author

Year 2014 2015 2016p 2017p 2018p GDP and prices (percentage change)

Real GDP growth 7.8 7.5 6.9 8.5 7.2CPI (annual average) 5.1 1.7 1.1 1.1 1.4

Public finances (in billions of kip) Revenue and Grants 20,812 20,683 23,398 25,942 28,437

Tax 14,665 15,692 17,800 19,784 21,583Non tax revenue 2,607 2,673 3,093 3,060 2,994Grants 3,540 2,317 2,505 2,486 2,519

Expenditure 23,630 24,306 30,369 28,384 31,039Current Expenditure 15,885 16,488 21,518 18,417 20,125Capital expenditure 7,746 7,818 8,851 9,967 10,914

Overall balance -2,818 -3,623 -6,971 -2,442 -2,602Money and credit (in billions of kip)

Reserve money 19,086 20,495 22,523 26,542 30,041Broad money 48,069 58,671 64,733 74,318 84,115Bank credit to the economy 44,527 52,293 63,169 64,158 66,538Bank credit to the private sector 34,599 40,996 50,146 49,490 49,327

Balance of payments (in millions of U.S. dollars) Current account balance -1,187 -2,124 -1,311 -918 -630

Exports of goods 2,662 2,769 3,008 3,578 4,182Imports of goods 4,271 5,233 4,612 4,747 5,002

Capital and Financial Account 1,608 2,813 1,890 1,844 1,851Balance of payments 145 308 202 581 854Gross official reserves 815 986 1,188 1,769 2,623

In months of prospective goods and services imports 1.7 2.2 2.6 3.6 5.1Public debt

In millions of U.S. dollars 6,575 7,045 7,352 7,755 8,173In percent of GDP 48.6 48.6 47.9 46.0 43.3

Exchange rate Official exchange rate (kip per U.S. dollar; period avge) 8,024 8,090 8,151 8,201 8,250

Nominal GDP In billions of kip 90,823 100,702 108,709 122,409 134,041In millions of U.S. dollars 11,318 12,448 13,336 14,927 16,247

Difficulties to apply model results for actual policymaking and implementation

4

Difficulties

Background and interest of policy makers Get them involved with the modeling process Need regular meeting/dialogue with stakeholders/policy

makers.

Limitation of macro model to explain the results in a more disaggregate level Disaggregate as much as possible Supplement the macro model with a micro-foundation

typed model

Modeling framework for SDG and Way forward

5

Modeling Framework for SDGs and Way Forward

Current macro models might only cover areas related to goal 8 (decent work and economic growth) and 9 (industry, innovation and infrastructure), not including social and environmental aspects.

To integrate SDGs into a macro model/framework is challenging particularly the goals related to poverty (goal 1), education (goal 3), health (goal 4), energy (goal 7), inequality (goal 10) and climate change (goal 13) into the macro model or framework. Need to identify potential or applicable indicators.

This requires more blocks of micro models (highly disaggregated) joined into macro models

Modeling Framework for SDGs and Way Forward

Other option: Computable General Equilibrium (CGE) or micro-simulation

models might be desirable to link macro model, SDGs and policy analysis since these models can handle with disaggregate levels such as households and firms from the survey.

But that is time consuming and requires skills (economics and programming) and computable software package.

Macroeconomic Framework might be extended to cover blocks related to SDGs.

Full package of capacity building including technical assistance from ESCAP is strongly needed: to provide training, technical Assistance, software, etc.

Special WG or taskforce to strengthen the cooperation across member States and experts in the area of macroeconomic modelling for SDGs in Asia and the Pacific

Thank you for your attention