Presented by Macroeconomic Policy Division June 2015 Addis Ababa, Ethiopia

1. Presented byMacroeconomic Policy DivisionJune 2015 Addis Ababa, Ethiopia Economic Forecasts

2. Table of contents • Significance of forecasts • Key issues and challenges • Why forecasts differ • The ECA model for Africa • Tracking forecasters exercise • Conclusions

3. Significance of economic forecasts • Concise and timely forecasts are important for economic planning to their institutions. • They assist in conducting dynamic, forward-looking policy analysis through the application of a system of customized and structurally relevant economic and econometric tools. • Monetary policy - for inflation targeting. • Fiscal policy - for framing budgets. • Instead of reacting to events as they occur, policy makers can frame their policies ahead of the events predicted in the forecasts. • Forecasts can also serve as a monitoring tool and provide a basis against which to judge policies’ effectiveness.

4. However, policy formulation and implementation has been hampered in Africa • Caused mainly by the inability to develop and maintain these tools for application in policy formulation, implementation and monitoring; • Previous attempts have been affected by weak capacity to use quantitative tools in general and forecasting methods in particular; • The models developed were mostly stylized and highly aggregated regional models or prototype individual country models, with little relevance for individual African country policy and analytical needs; • In many countries the expertise could not be transferred to local/national experts, as most of the countries rely on foreign experts on short mission assignments for the maintenance and sustained development and application of these tools.

5. ECA forecasting model for Africa • The primary objective of this project is to improve capacity of African countries in economic modeling and forecasting for rigorous policy analysis and formulation in to support national development planning; • The project is developing a comprehensive and streamlined system of integrated models and a network of experts, to enhance the capacity of policy makers in African countries in generating robust medium- to long-run economic policy analysis and economic forecasts; • ECA has contracted Oxford Economics to assist in the development of ECA’s forecasting model. • Started with training in UN-DESA’s WEFM in Dec. 2013 • Expected to be delivered by September 2015.

6. However, it is observed that economic forecasts produced by different institutions differ Mainly due to: • Differences in timing of information (how recent is the data?) and information content (included regions or countries) used; • Unanticipated shocks (e.g. drought, recession); • Differences in assumptions and data quality; and • Methodological and model differences.

7. To ensure the accuracy, reliability and cross-country comparability, ECA came up with the Tracking Forecasters exercise. • With the objective of assessing and providing a better understanding of the accuracy, and usefulness of forecasts provided by different institutions; • This is believed to contribute to better informed strategic policy decisions by countries • The Theil’s decomposition methodology was used since it is less sensitive to outliers and extreme values, and can be used to evaluate the accuracy of ex post as well as ex ante forecasts; • The results in general indicate that forecasts provided by national institutions tend to be more accurate compared to those provided by “non-national” institutions.

8. Conclusion There is need to build capacity in forecasting and modelling skills on the continent, to support economic planning through the provision of credible and timely forecasts; There is need to support also the statistical capacity and forecasting units of national institutions in Africa as sources of more credible, accurate, timely and useful forecasts; The data frequency on quarterly basis is critical in enabling African countries to produce accurate and timely forecasts.

9. Thank you for your attention!