UNITED NATIONS ECONOMIC COMMISSION FOR AFRICA Sub regional Office for Eastern Africa (SRO – EA) MODELLING & FORECASTING SYSTEM IN EAC CENTRAL BANKS: Empirical analysis Dr. Félicien USENGUMUKIZA Senior Lecturer at National University of Rwanda Kigali, March 13TH 2010

Presentation Outline Overview of Macroeconomic models and Forecasting Objective of the study Methodology Justification of Modelling and Forecasting Methods in EAC Central Banks Challenges and Gaps related to Modelling and Forecasting use in EAC Central Banks Conclusion Recommendations

OVERVIEW OF MACROECONOMIC MODELS AND FORECASTING

Macroeconomic model Macroeconomic model is a basic tool of analysis used to describe, to explain and to understand macroeconomic phenomenon.

Macroeconomic model (Cont’d) Why macroeconomic model matter? A model serves as like a laboratory of experimentation or for testing hypothesis Making assumptions regarding behaviour of macro variables, Why macroeconomic model matter? Specifying equations expressing the relationship between the selected macroeconomic variables Specifying and defining variables used in the model, Expressing economic identities if required Specifying criteria for drawing conclusions

Economic Forecasting Economic forecasts predict the course of the aggregate economy and concentrate on variables such as GDP analysis, interest rates, the rate of inflation, and the rate of unemployment. Forecasts of private consumption and investment, government expenditures, and net exports help government policymakers responsible for fiscal policy.

use historical data as the basis of estimating future outcomes FORECASTING METHODS QUALITATIVE METHODS QUANTITATIVE METHODS use the assumption that it is possible to identify the underlying factors that might influence the variable that is being forecast use historical data as the basis of estimating future outcomes incorporate intuitive judgements, opinions and subjective probability estimates JUDGEMENTAL METHODS TIME SERIES METHODS CAUSAL FORECASTING METHODS

MODELLING & FORECASTING METHODS IN EAC CENTRAL BANKS

Objective of the Study To undertake a stocktaking of the competency gaps in Economic Modelling and Forecasting in the five central banks; To define the areas where the overall level of the region stands behind; To define needs of a training capacity building program and the recipient candidates; To formulate recommendations on training modules and general content.

Methodology The field work has been identified as the best approach. It is in this context that the tour in the five EAC central banks was carried out within two weeks. It has been identified that Research Department in each central bank would be the best source of information related to the needs in terms of training in Modelling and Forecasting Program.

Justification of modelling and Forecasting program in EAC Central banks To develop adequate skilled capacity in analytical capability of EAC Central Banks to effectively manage the monetary policies and monitor the performance of the Economies in the Region, To enhance the capacity in management of reserves money and liquidity forecasting, To understand how financial markets work and impact on monetary policy; To undertake surveys on inflation expectations; To understand interaction between monetary policy and real sector, and liquidity forecasting , To eliminate liquidity phobia associated with commercial banks borrowing from central bank.

STUDY ON MODELLING AND FORECASTING IS A TASK OF RESEARCH DEPARTMENT IN EAC CENTRAL BANKS National Bank of Rwanda (BNR) Bank of Uganda Bank of Tanzania Central Bank of Kenya (CBK) Banque de la République du Burundi (BRB) Senior Directorate (Monetary Policy and Research, Financial Stability) Modelling & Forecasting Division Directorate of Research Research Department Directorate of Research Large Macro econometric Modelling Section Research Department Monetary & Financial Market Department

Modelling and forecasting system is facing a huge challenge in all EAC Central banks Some Central banks are not using the econometric approach in modelling and forecasting analysis All EAC central Banks witness a gap in terms of high qualified staff equipped with econometric background Use of adequate software related to modelling and forecasting is almost inexistent Lack of harmonisation in terms of forecasting techniques. This leads to the diversification in terms of interpreting the results from respective central banks

Gaps related to use of modelling & forecasting system in EAC Central Banks Scarcity of sound forecasting frameworks weakens budgeting and planning processes in the continent; EAC Central Banks remain far behind in building full-fledged macroeconomic models and in providing accelerated training for qualified modellers and forecasters ; Macroeconomic forecasting in EAC Central Banks has been highly dependent on models developed in others central banks in the world, which were not true representation of local realities;

Conclusion Modelling and Forecasting Program is designed to provide anyone who needs to make financial decisions, The reality found in EAC central Banks confirms that the training in Modelling and Forecasting is for great necessity, The heads of research department in respective EAC Central banks are welcoming the initiative proposed by UNECA of providing such kind of training, As the EAC is deepening and widening its regional integration, the harmonisation of macroeconomic and financial analysis will facilitate to eliminate gaps observed in interpretation of national and regional economy.

Recommendations EAC central Banks needs training in modelling and forecasting in order to facilitate the harmonisation of macro economic and financial analysis with the community. due to existing gaps between different central banks, it would be necessary to organise internal training related to specific needs and gaps of each individual central bank. The share of experience among staff of central banks would accelerate the harmonisation of financial analysis Due to the project establishing the EAC central bank, some activities would be executed jointly with the five central banks. The EAC needs to establish its own model related to its reality rather than continuing using models applied in advanced economies.

Name of contacted Person List of contacted Persons N˚ Country Institution Name of contacted Person Position Address Phone number E-mail 1. Rwanda National Bank of Rwanda (BNR) Dr. Kigabo Rusuhuzwa Thomas Chief Economist P.O Box 531 Kigali -Rwanda +250 788303633 thkigabo@yahoo.fr 2. Burundi Banque de la République du Burundi (BRB) Mr. Sota Bonaventure Directeur Responsable du service des Etudes P.O Box 705 Bujumbura - Burundi +257 79910367 sotabon@yahoo.fr Mr. Audace Niyonzima Deputy Director Monetary & Financial Market Department +257 79970126 aniyonzima@brb-bi.net Mr. Joseph Bahizi Head of Monetary & Financial Market Department +257 77733230 jbahizi@brb-bi.net 3. Uganda Bank of Uganda Dr. Adam Mugume Assistant Director Head, Modelling & Forecasting Division P.O Box 7120 Kampala - Uganda +256 772416058 amugume@bou.or.ug Mr. Francis Leni Anguyo Head, Large Macroeconometric Modelling Section Research Department +256 774224565 fanguyo@bou.or.ug 4. Tanzania Bank of Tanzania Dr. Kamili Alphonce Kombe Deputy Director, Research P.O Box 2939 Dar es Salaam Tanzania kakombe@hq.bot-tz.org 5. Kenya Central Bank of Kenya (CBK) Mr. Charles G. Koori Director of Research Department P.O Box 60000-00200 Nairobi - Kenya +254 722235583 kooricg@centralbank.go.ke Mr. Lukas Njoroge Research Department +254 720459004 NjorogeLK@centralbank.go.ke

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