BENCHMARK MACROECONOMIC

MODELS FOR EFFECTIVE POLICY

MANAGEMENT IN AFRICA
BENCHMARK MACROECONOMIC
MODELS FOR EFFECTIVE POLICY
MANAGEMENT IN AFRICA
 Dr. Akinwumi A. Adesina,
President, African Development Bank Group
FOREWORD
In the face of escalating global uncertainties and challen-
ges confronting African economies - including energy tran-
sitions, good governance, accountability, climate change,
debt sustainability, and most recently, the COVID-19 pan-
demic - policy makers must make decisions with a clear
understanding of their potential impact on economic
growth and living standards. This typically involves evi-
dence-based policy formulation, which requires a critical
analysis of prevailing and emerging macroeconomic envi-
ronments and models, in order to ground policies in reality,
as much as is possible.
Africa’s capacity for macroeconomic modelling and forecas-
ting however remains limited. This critical capacity is essen-
tial for comprehending economic dynamics, policy planning
and implementation. As such, many African countries re-
quire assistance to develop and implement models that re-
flect the social, political, cultural, and environmental realities
of their respective nations.
Recognising this need, the African Development Bank Group ,
through its capacity development focal point - the African De-
velopment Institute - initiated this project to gain a deeper un-
derstanding of Africa’s macroeconomic modelling landscape.
Our objective is to have an inventory of models currently
used by countries, and gain a better understanding of their
features and predictive capacities. We also aim to diagnose
existing capacity needs in African institutions, focusing on
government Ministries (especially Finance, Planning, and
Treasury) and Central Banks.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Our goal is to provide a reference point and present a ba-
lanced view of the current state of macroeconomic model-
ling on the continent. Through the analysis in this report,
we aspire to illustrate what should occur for an enhanced
macroeconomic modelling experience.
The report identifies significant gaps in Africa’s macroecono-
mic modelling. This includes:
(i) human capacity development;
(ii) development of advanced macroeconomic modelling
tools;
(iii) macroeconomic software and programming language;
(iv) data quality enhancement;
(v) incorporation of emerging issues into existing macroe-
conomic models/frameworks; and
(vi) strengthening institutional arrangements, coordination,
and communication.
(vii) Furthermore, most African countries have relied on and
continue to use externally built models that largely fail
to capture their unique characteristics. This needs to
change.
This effort has benefited from guidance and feedback from
the Bank’s senior management, regional member countries’
i
Ministries of Finance, Development, Planning, and Central
Banks, who in turn seek insights into the opportunities and
challenges of improved macroeconomic modelling across
the entire macroeconomic spectrum.
We envisage an enhanced provision of targeted training, po-
licy dialogue, and technical assistance on macroeconomic
modelling to African countries, to help them better recover
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
ii
more effectively from the adverse economic, growth, and
social impacts of COVID-19.
In light of this, I trust that this milestone report assists all
relevant global, regional, and national stakeholders to better
navigate the rapidly evolving African landscape of policyma-
king and macroeconomic modelling.
ACKNOWLEDGEMENTS
I
n undertaking the study and compiling this report,
we owe a debt of gratitude to the many people who
contributed to this accomplishment. First and fore-
most, we appreciate the conceptualization and overall
guidance provided by Professor Kevin Chika Urama,
the Chief Economist and Vice President of the Econo-
mic Governance and Knowledge Management Com-
plex (ECVP). We also acknowledge the coordinating
role of Dr. Eric Kehinde Ogunleye, the Officer in Charge
(O.I.C) Director, African Development Institute (ECAD)
and Manager, Policy Management Division (ECAD.2);
Mr. Nkoanyane Sebutsoe, Senior Capacity Develop-
ment Officer, who was the study task manager; as well
as Ms. Kamaria Badirou and Mr. Charles Kindo-Boua-
di for their excellent administrative assistance.
We gratefully acknowledge the support of the African
Economic Research Consortium (AERC) in underta-
king the study. The team was led by Professor Nju-
guna Ndung’u, the Executive Director; supported by
Dr. Abebe Shimeles, the Director of Research; and Dr.
Dianah Muchai, the Research Manager; as well as the
contributions of Dr. Sayed O.M. Timuno; Dr. Thomas
Bwire; Dr. Shireen Fahmy; Dr. Christine Makanza; Dr.
Austin Chiumia, and Professor Alemayehu Geda.
We deeply appreciate the inputs made by the officials
of various institutions in the 31 African Development
Bank regional member countries (RMCs) by comple-
ting and promptly returning the questionnaires that
formed the basis for the analysis undertaken in this
report. These include 16 Ministries of Finance and
Economic Planning and 23 Central Banks.
We are thankful for the invaluable inputs, comments,
and feedback provided by the senior management
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
and many other colleagues drawn from all relevant
complexes and departments within the Bank, espe-
cially in the Country Offices. These colleagues, too
numerous to mention, played vital roles in liaising
with the national authorities to ensure the question-
naires were completed and returned.
We are grateful for the inputs from participants at the
Virtual Workshop held on 24 January 2022 to review
the draft report. The feedback received in this meeting
contributed immensely to improving its quality.
This study would not have been successful without
the support of the AfDB Directors General, Country
Managers, Country Economists, and staff in the re-
gional and country offices who were instrumental in
liaising with the government and central bank officials
in their respective regions and countries.
We also wish to thank colleagues in the Bank’s
Communication and External Relations Department
(PCER), as well as the Consultant Ms Wanda Ollis, for
her editorial and desk publishing support in producing
the final report. The Bank’s Translation and Languages
Department (TCLS) also provided helpful support in
the translation of the document from English into
French.
Finally, to all other colleagues too numerous to men-
tion who contributed one way or the other to the suc-
cess of this work, we say “Thank you”.
This is an independent research work. Thus, the views
and findings contained in the report do not necessarily
reflect the position of the African Development Bank
Group, its Boards of Directors and Senior Management.
iii
EXECUTIVE SUMMARY
The Major Findings:
Macroeconomic modelling is important for policy-
makers in Africa to contribute effectively to the de-
sign, analysis, and effective implementation of evi-
dence-based economic policies. Technicians need
adequate skills and comprehensive operational
macroeconomic models to undertake this function.
Meanwhile, African countries receive various levels of
technical support from bilateral and multilateral institu-
tions as well as from external consultants to build these
models. Despite this, they still face numerous challen-
ges including, but not limited to, data limitations, high
staff turnover, lack of capacity to build, maintain and
operate the macroeconomic models, and inadequate
funding. Considering this, the AfDB conceived of and
designed this scoping study on the status and use of
macroeconomic models in Africa. The key objectives
of this exercise were to: (i) document the macroeco-
nomic models used by government institutions; (ii)
identify gaps in modelling frameworks; and (iii) provi-
de recommendations to improve model development,
adoption, and capacity development.
For monetary policy, the results show that most Cen-
tral Banks in Africa have adopted the Forecasting and
Policy Analysis System (FPAS) that is underpinned by
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
iv
the forward-looking medium-term Quarterly Projection
Gap Model (QPM). Others use a combination of the
Macroeconomic Frameworks, Macro-econometric
models, and autoregressive (AR) frameworks such as
univariate Autoregressive Integrated Moving Average
(ARIMA) models and the Vector Autoregressive (VAR)
models. The findings also indicate that a few Central
Banks use the Dynamic Stochastic General Equili-
brium (DSGE), now-casting, and artificial intelligence/
machine learning models while others use the Central
Bank’s Cash Flow Forecasting model; Bank Liquidity
Forecasting models; Inflation Forecasting models; Fi-
nancial Programming and Policy Frameworks (FPP);
Near-term Forecasting models; Real Effective Ex-
change Rate Frameworks; and Dynamic Factor Mo-
dels (DFM).
On the fiscal policy side, the results show that Minis-
tries of Finance/Economic Planning (MoF/EP) mostly
use the Macroeconomic Frameworks, Macro-econo-
metric models, and, to a lesser extent, DSGE models.
They also use the Medium-Term Fiscal Frameworks
(MTFF) which guide the government resource enve-
lopes and expenditure decisions; some ministries use
intermediate to advanced tools such as the FPP and
the Computable General Equilibrium (CGE) Models.
The former is used mostly for short-to-medium term
policy analysis while the latter generates “What if”
scenarios for fiscal policy guidance. Some Ministries
reported using DFMs for sectoral output analysis. The
salient theoretical features of these models are given
in Box 1.
The results indicate that some of the models in Afri-
ca are developed with external support, especially the
complex ones (the QPM, CGE, and DSGE models, as
well as Machine Learning) that involve programming lan-
guages. Maintenance of these models is mostly done
locally but largely supported by external institutions
such as the International Monetary Fund (IMF), United
Nations Economic Commission for Africa (UNECA),
and independent consultants including OGResearch
and tutors from national, regional, and international uni-
versities, among others. The less-skills-intensive mo-
dels are maintained mostly by internal staff. The results
also indicated that modelling in both Central Banks and
Ministries of Finance/Economic Planning is mainly done
on EViews and Microsoft Excel platforms. The results
also revealed that Matlab, STATA, and R-studio are
commonly used by Central Banks, while the General
Algebraic Modelling System (GAMS) is used by Minis-
tries of Finance/Economic Planning.
The results reveal that in many countries, the staff com-
plement ranges from 2 to 21, and that the education or
training levels of staff operating these tools is insufficient
for the skills needed. The results also showed that there
are more PhD holders in macroeconomic modelling
units in Central Banks than there are in MoF/EP.
The study has further shown that capacity gaps in
macroeconomic modelling and forecasting vary across
and within countries. These gaps fall within six cate-
gories of needed development: (i) human capacity;
(ii) advanced macroeconomic modelling tools; (iii)
macroeconomic software and programming language;
(iv) strengthening data quality; (v) incorporating emer-
ging issues in existing macroeconomic models and
frameworks; and (vi) strengthening institutional arran-
gements, coordination, and communication. Econo-
mic report writing, data visualizations, and access to
specialized journals also emerged as areas that need
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
improvement. The findings indicated that the challen-
ges experienced by modelling teams range from lack
of/inadequate and inconsistent data, and shortage of
skilled personnel occasioned by high staff turnover,
to financial challenges and low training opportunities.
Even though these challenges vary across the sur-
veyed institutions, macroeconomic data and human
resource-related challenges appear to be cross-cutting
and urgently need to be resolved.
The Way Forward:
There is arguably a reasonable history of macroeco-
nomic and macro-econometric modelling in Africa.
However, even though these models have addressed
some challenges, the results suggest that they are
unable to capture the unique structures of many Afri-
can economies fully and, to some extent, do not ade-
quately address the needs of the policy makers. Going
forward, in the short-to-medium term, there is a grea-
ter need to improve the collection and management of
macroeconomic data, and to build sustainable human
and institutional capacity in Ministries of Finance/ Eco-
nomic Planning to develop and/or customize macroe-
conomic models than there is in Central Banks. In the
long term, resources should be channeled towards
developing a tailor-made Africa-wide macroeconomic
model that can capture the heterogeneity across the
region and address the specific structural and poli-
cy challenges facing African economies. The model
should be flexible to address emerging challenges,
amenable to extension, and capable of helping African
policy makers to design relevant, context-specific is-
sues that capture the unique features of each country
for coherent, consistent, and inclusive policy analysis.
Creating incentives (monetary and non-monetary) for
existing staff to stay in their posts, thereby reducing
the high turnover, is crucial. Concomitantly, continuous
on-the-job training and upgrading the skills of the mo-
delling staff in a continuous manner are identified as
important tasks, which will incentivize job satisfaction
and improve macroeconomic modelling outcomes.
However, given the constrained fiscal space and level
of public salaries in some countries, this may continue
to be difficult to achieve in the short run.
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 BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
vi
 TABLE OF CONTENTS
FOREWORD i

ACKNOWLEDGEMENTS iii

EXECUTIVE SUMMARY iv

TABLE OF CONTENTS vii

LIST OF ABBREVIATIONS viii

LIST OF FIGURES X

LIST OF TABLES X

I INTRODUCTION 1

II METHODOLOGY 3

III BENCHMARK MACROECONOMIC MODELS/FRAMEWORKS IN AFRICA 5

3.1. Performance of the existing Macroeconomic Models/Frameworks in Africa 14

3.2. Dynamics of Capacity and Management of Modelling Units in African Institutions 15

3.3. Challenges facing Modelling Units of Central Banks and Ministries

of Finance/Economic Planning in Africa 18

IV. CAPACITY NEEDS ASSESSMENT 20

4.1. Evaluation questions 20

4.2. Analysis of emerging needs 20

4.2.1. Human Capacity/Skill Development 20

4.2.2. Technical support on advanced macroeconomic modelling tools 21

4.2.3. Training on Macro Econometric Software and Programming Language 22

4.2.4. Data, Information and Knowledge Management 25

4.2.5. Incorporating Emerging Issues in existing Macroeconomic Models/Frameworks. 25

4.2.6. Institutional Arrangements, Coordination and Communication 26

V A PROTOCOL FOR SELECTION AND HARMONIZATION OF MACROECONOMIC

MODELS IN AFRICA 29

VI CONCLUSION & RECOMMENDATIONS 34

ANNEXES 39

Annex I: Macroeconomic Model/Framework Performance 40

Annex II: Country Survey Reports 46

Annex III: List of Countries Surveyed 109

Annex IV: Technical Description of a Dynamic Stochastic General Equilibrium Model (DSGE) 112

Annex V Alternative Dynamic Stochastic Macroeconometric Model focused on Africa 118

Annex VI: Training Modules and MA Program on Modelling 126

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

vii
 LIST OF ABBREVIATIONS
AD-AS Aggregate Demand – Aggregate Supply
AfDB African Development Bank
AFRITAC Africa Regional Technical Assistance Centers
AR Autoregressive
ARIMA Auto Regressive Integrated Moving Average
ARIMAX Auto Regressive Integrated Moving Average with Explanatory Variable
BoP Balance of Payments
BCEAO Central Bank of West African States
BEAC Central Bank of Central African States
CEMAC Central African Economic and Monetary Community
CIEA Composite Index of Economic Activity
CGE Computable General Equilibrium Model
COMESA Common Market for Eastern and Southern Africa
CPI Consumer Price Index
DSA Debt Sustainability Framework
DFM Dynamic Factor Models
DSGE Dynamic Stochastic General Equilibrium
FAVARS Factor-Augmented Vector Autoregressions
FPP Financial Programming and Policy Framework
FPAS Forecasting and Policy Analysis System
GAMS General Algebraic Modelling System
GDP Gross Domestic Product
HIPC Heavily Indebted Poor Countries
IFI International Financial Institution
IMF International Monetary Fund
MDGs Millennium Development Goals
MEFMI Macroeconomic and Financial Management Institute for Eastern and Southern Africa
MoF/EP Ministries of Finance/Economic Planning
MTFF Medium-Term Fiscal Frameworks
MDAs Ministries, Departments and Agencies
MPC Monetary Policy Committee
OECD Organisation for Economic Co-operation and Development
QPM Quarterly Projection Gap Model
RMC Regional Member Countries
SACU Southern African Customs Union
SAM Social Accounting Matrices
SDGs Sustainable Development Goals
SoE State-Owned Enterprise

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

viii
STIF Short Term Inflation Forecasting
TA Technical Assistance
T21 Threshold 21
UNCTAD United Nations Conference on Trade and Development
UNECA United Nations Economic Commission of Africa
VAR Vector Auto Regression
WAEMU West African Economic and Monetary Union
WB World Bank

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

ix
 LIST OF FIGURES
Figure 1: Availability of macroeconomic models/frameworks in Central Banks
and Ministries of Finance/Economic Planning 6

Figure 2: Use of the Macroeconomic Models/ Frameworks in Africa 12

Figure 3: Macroeconomic Models/ Frameworks Development in Africa 13

Figure 4: Macroeconomic Models/ Frameworks Maintenance in Africa 14

Figure 5: Flexibility of the macroeconomic models/ Frameworks to accommodate analysis

of emerging policy issues 15

Figure 6: List of statistical/econometric/modelling software installed in Central Banks

and Ministries of Finance/Economic Planning in Africa 16

Figure 7: Existence of a modelling unit 19

Figure 8: Capacity of the unit/team to fulfil the institution’s modelling requirements 19

Figure 9: Academic qualifications of staff in modelling units of Central Banks 20

Figure 10: Academic qualifications of staff in modelling units of Ministries of Finance/Economic Planning 20

Figure 11: Challenges faced by Modelling Units Central Banks in Africa 21

Figure 12: Challenges faced by Modelling Units in Ministries of Finance/Economic Planning in Africa 23

Figure 13: Institutionalised Modelling and Forecasting Task at the Reserve Bank of South Africa

Figure 13a: The Basic Structure of the Generic Modern DSGE Models

Figure 13b: Flowchart of the suggested DSGE model structure 40

LIST OF TABLES
Table 1: Macroeconomic Models and Frameworks in Central Banks and Ministries
of Finance and Development Planning 8

Table 2: Capacity Areas and Recommendations 35

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1. INTRODUCTION
The African continent is a natural-resource - and
agriculture-dependent region. Despite its vast
resource endowment, the region’s macroeconomic
performance remains subpar. Gross Domestic
Product (GDP) growth averaged 4.4% between 2010
and 2017, contracting to 3.2% between 2018 and
2019. Growth shrank rapidly to -1.9% in 2020, due
to the combined impacts of the COVID–19-induced
health and economic crisis and multiple shocks
(floods, locust invasion, and collapse of commodity
prices). Inflation, on average, rose to 10.8% in 2020,
from 8.4% annually between 2010 and 2019 due to
supply-side bottlenecks arising from the COVID–19
crisis and a rebound of energy prices towards the end
of the year.
The slow economic activity lowered revenues, amidst
competing expenditure demands, chief of which was
health-related expenditure. In this connection, as
a percentage of GDP, the fiscal deficit in the region
widened from an average of 3.4% realized between
2010 and 2019 to 6.9% in 2020.
COVID–19-related recurrent expenditures, coupled
with a sharp decline in revenues occasioned by
lockdowns, and the general economic slowdown in
2020 caused Africa’s public debt, as a share of GDP,
to surge to 58%, from a yearly average of 34.5% over
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
the period 2010-2017 and 48.3% and 51.5% in 2018
and 2019, respectively. A closer look at the debt profile
shows that much of the debt accumulated during this
period was from external creditors, as external debt
grew from 30.5% of GDP to 46.5% during the same
period.
Similarly, Africa’s external current account deficit,
as a percentage of GDP, remains on a declining
trajectory, worsening from an average of 2.6% over
2010-2017 to 3.7% in 2020. The deterioration in
the external balance is primarily due to a persistent
decline in exports and relatively inelastic import bills.
The COVID–19 pandemic, which disrupted domestic
and regional trade as well as value chains, amplified
the already worsening situation.
The average import cover for African countries
declined to 4.8 months in 2020, after peaking at 6
months in 2019, from 4.7 months in 2018, and 4.9
months over the period 2010-2017. The sharp dip
reflects considerable pressure to support COVID–19-
related expenses and smoothing disruptive volatility
in the exchange rate arising from shocks to exports
during the crisis. Albeit low, the average of over 4
months of future imports covered over the last 10
consecutive years is a testimony to Africa’s prudent
monetary and exchange rate policies. On balance, the
1
subdued performance of the region reflects persistent
external shocks, low economic diversification,
and dependence on primary commodity exports
amidst a shrinking manufacturing sector and heavy
dependence on rain-fed agriculture.
These statistics derive from the measured formal sector,
which, relative to the informal sector, is far smaller,
although its share has been rising. Medina et al. (2017)
show that the size of informality ranges from a low of
20% to 25% in Mauritius, South Africa, and Namibia to
a high of 50% to 65% in Benin, Tanzania, and Nigeria.
The informal economy in Africa remains among the
largest in the world. Moreover, the financial system,
which partly contributes to insulating economies
against external shocks, remains underdeveloped—
posing significant concerns for the transmission and
effectiveness of domestic policy.
Factors such as these make the use of “traditional”
economic modelling problematic. For instance,
macroeconomic models are applicable to the extent
that they capture the formal sector and that markets
are competitive. However, the presence of a large
informal sector and underdeveloped market systems
poses significant constraints on model choices
and applications. These features characterize the
macroeconomic modelling environment in African
economies and have, by and large, shaped the
choice of models used to design economic policy
interventions. The natural question arising is: “What is
and has been the role of macroeconomic modelling in
the macroeconomic transformation process of African
economies?”
The use of macro-econometric models for policy
analysis and forecasting dates to World War II
(Valadkhani, 2004). Early stages of formal modelling
in Africa show that about 160 models were in use
between 1964 and 1994. These models were
mainly developed by international organizations and
development partners like the World Bank, International
Monetary Fund (IMF), United Nations Conference on
Trade and Development (UNCTAD), Organisation for
Economic Co-operation and Development (OECD);
and a few other models that were developed by
respective government ministries, departments,
and agencies (MDAs) such as Central Banks and
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2
Planning Commissions. Since then, modelling has
further expanded with Central Banks’ recently
adopting QPMs and ARIMA models for monetary
policy analysis while Ministries of Finance/Economic
Planning (MoF/EP) largely rely on macroeconomic
frameworks, macro-econometric models, and CGE
models, among others.
In addition, there are several important differences
between countries, which may relate to different
policy frameworks, degrees of exposure to domestic
and foreign shocks, degree of financial development,
etc. These issues contextualize the modelling
environment in African economies and have shaped
the choice of models used to design economic
policy interventions. These models have assisted
policy makers to predict the future direction of their
respective economies, compare different policy
options, and they have provided effective policy
guidance required for prudent macroeconomic
management.
In this context, the purpose of this study is to:
(i) document macroeconomic models used by
government entities in Africa;
(ii) identify gaps in modelling frameworks; and
(iii) provide recommendations to improve model
development, adoption, and usage in Africa.
The report continues in five sections. Section two
describes the methodology used in the benchmarking
exercise, while in section three the benchmarking
of macroeconomic models/frameworks in Africa,
based on the survey results, is discussed. In
sections four and five, we assess the capacity needs
for macroeconomic modelling and forecasting in
Africa, and profile a protocol for their selection and
harmonization, respectively. Section six provides
conclusions and recommendations. Appended to the
report are country survey reports; a survey instrument;
the list of countries surveyed; a prototype DSGE
Model for an African economy; an alternative Dynamic
Stochastic Macro-Econometric Model focused on
Africa; and proposed training modules and MA/MSc
and PhD programs on economic modelling.
2. METHODOLOGY
To meet the objective of the study, we used a
survey instrument that focused on taking stock of
macroeconomic models in use in African economies.
The survey, in questionnaire form was sent to Central
Banks and MoF/EP in all the 54 AfDB Regional
Member Countries (RMCs) countries (a total of 108
Central Banks and MoF/EP). Of this, 31 countries
responded to the questionnaire (representing
a 57% country-response rate), comprising 23
Central Banks and 16 MoF/EP, (representing a
36% institution-response rate1). Analysis by the
World Bank income classification shows that of the
countries that responded to the questionnaire, 52%
were low-income; 26% were lower-middle-income,
16% were upper-middle-income and 6% were from
high-income countries. Moreover, the distribution of
Central Banks and MoF/EP is quite balanced across
the continent, with some responding from Central,
Eastern, Northern, Southern, and Western Africa.
These institutions are the main policy authorities that
are responsible for national macroeconomic modelling
related to monetary and fiscal policy. Respondents
-------------------------------
1
While a higher response rate would be desirable, we remain extremely careful not to document information that has not been provided by Central
Banks and Ministries of Finance/Economic Planning in Africa
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
were asked about the types of macroeconomic
models, if any, used in policy analysis and design.
Questions also focused on the frequency of the use
of models, the output obtained from the models,
and the capabilities of these models in terms of
forecasting, simulation, policy analysis, the ability to
handle sectoral or disaggregated data, the flexibility
to incorporate emerging shocks— such as that of
COVID-19—and whether the development and
management of models are externally or domestically
supported.
To facilitate filling the capacity-building gaps, the
questionnaire requested information about the
presence and size of modelling units or teams in
the 54 RMCs’ Central Banks and MoF/EP, the skills
that the unit or team members possess, and the
challenges they face in macroeconomic modelling.
Information was also gathered about whether the
local modelling units are fully equipped to develop
and maintain the models they use, and the training
that is needed to make these teams self-sufficient.
3
The questionnaire was circulated electronically, and
the responses were used to compile the relevant
country reports for the 31 countries that responded
(see Annex II for the individual country reports). For
each country report, a desk review was conducted
for the introductory section that explores the
macroeconomic landscape of each country. This
involved the use of secondary data sources from the
respective countries, complemented by online data
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
4
published by international organizations such as the
AfDB, IMF, and the World Bank. The survey data was
then used to document the type of models used in
each country, the challenges faced, and the capacity
gaps that exist in each of the 31 countries. Each
country’s report concludes with recommendations
for capacity building in macroeconomic modelling.
The results of the survey are presented in
what follows.
3 BENCHMARK
MACROECONOMIC
MODELS/FRAMEWORKS IN
AFRICA
This section presents a summary of the results obtained
from country survey reports. They show that there
is arguably a good history and presence of macro-
econometric modelling efforts in Africa, but challenges
and gaps persist. Figure 1 shows that almost all
economic institutions in Africa that responded to
our survey have some macroeconomic models and
frameworks to guide macroeconomic policy design.
The results also showed that three economic
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
institutions—the Central Bank of the Democratic
Republic of Congo, the Central Bank of Libya, and the
Ministry of Finance of Mauritius—do not use or apply
macroeconomic models or frameworks. Mostly, these
institutions rely on external consultants and small-scale
informal back-of-an-envelope type of calculations to
supplement the conduct of macroeconomic modelling
and forecasting. Box 1 highlights the salient features
of the models employed.
5
 Figure 1: Availability of Macroeconomic Models/Frameworks in Central Banks and
Ministries of Finance/Economic Planning

Source: Survey responses, 2021

(a) The Nature of Macro Models in Use
A summary of macroeconomic tools that exist in Africa
is presented in Table 1. The results indicate that there
is a suite of macroeconomic models in use across
Central Banks and MoF/EP. Overall, the Quarterly
Projection Model (QPM) and the Forecasting and
Policy Analysis System (FPAS) are the most widely
used models/ frameworks in Central Banks across
Africa. Specifically, these models are the workhorse
for policy analysis in Cameroon, Egypt, Kenya, Malawi,
Mozambique, Niger (the Office of the Central Bank of
West African States (BCEAO), Rwanda, Seychelles,
Sierra Leone, South Africa, Togo (BCEAO), Uganda,
and Zambia. This is primarily explained by the role
of the IMF in providing technical assistance to the
Central Banks of many countries, as these models are
generally developed by economists working at the IMF
(see for instance Vlcek et al., 2020 for Rwanda QPMs;
Andrle et al., 2013a, 2013b; Berg, Karam, and Laxton,
2006a, 2006b). The next dominant and commonly
used models are the Autoregressive Integrated
Moving Average (ARIMA), Vector Autoregression
(VAR), Macroeconomic Framework and the Macro-
econometric models. The less sophisticated nature
of such models (except the Macro-econometric ones)
and their simplicity for estimation and implementation
partly explains their ranking next to the QPM.
The Computable General Equilibrium (CGE) model,
the Medium-Term Fiscal Framework (MTFF), and the
Threshold 21 are either not as common or not used at
all in Central Banks, mainly due to the nature of output
these models generate, which, to a large extent, is not
commensurate with the operations of these institutions.
This pattern shows the deficiency of high-level experts
in African Central Banks and MoF/EP. Instead, using
continental knowledge hubs that have the comparative
advantage of knowing how African economies work
(such as at the AfDB), which are well-staffed by (or
networked with) high-level modelling experts, could
build capacity and progress to economic modelling

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6
on the continent. As in-depth modelling is currently
dominated by International Financial Institutions (IFIs)
such as the IMF, employing modelling experts with
specific knowledge of national African economies could
improve macroeconomic planning.
The MoF/EP mostly use the comprehensive
Macroeconomic Framework and the Macro-
econometric models as their macroeconomic
management tools. This is followed by the Financial
Programming and Policy (FPP) frameworks and the CGE
models. The data shows that the FPP is largely used
in Botswana, Kenya, Lesotho, Malawi, Mozambique,
Senegal, and Zimbabwe. CGE models are the
common choice in Botswana, Burkina Faso, Senegal,
and Togo. The dominant use of Macroeconomic
Frameworks and Macro-econometric models in the
MoF/EP is primarily explained by the major task of the
IFIs in the preparation of a medium-term expenditure
framework and the available resources for their use.
As medium-term frameworks must be translated into
annual detailed budgets—the primary task of finance/
economic ministries—the macroeconomic framework
and macro-econometric models are central to their
preparation.
The results also show that none of the Ministries
that responded to the questionnaire used the Debt
Sustainability Framework (DSA), which is not surprising
because in most cases the DSA’s technical assistance
missions are conducted with input from bilateral
and multilateral institutions, as well as from other
capacity building institutions across the world. It is
also not surprising that the Central Banks’ specific
macroeconomic management tools such as the Bank
Liquidity Forecasting models, the Inflation Forecasting
models, the Cash Flow Forecasting models, and the
Near-term Forecasting models as well as the Real
Effective Exchange Rate Framework are not used
in MoF/EP in Africa due to the nature of output they
produce, which are not relevant and applicable for the
MoF/EP.

Table 1: Macroeconomic Models and Frameworks in Central Banks and Ministries of

Finance/Economic Planning

Ministries of Finance/
Macroeconomic Model/Framework Central Banks
Economic Planning
1 Autoregressive integrated moving average (ARIMA)
12 0
and/or with Explanatory Variable (ARIMAX)
2 Bank Cash Flow Forecasting Model 2 0
3 Bank Liquidity Forecasting Model 5 0
4 Computable General Equilibrium (CGE) Model 0 4
5 Dynamic Factor Models (DFM) 3 0
6 Debt Sustainability Framework (DSA) 1 0
7 Dynamic Stochastic General Equilibrium (DSGE) Model 4 2
8 Financial Programming and Policy (FPP) Model 3 6
9 Inflation Forecasting Model 5 0
10 Leading Economic Indicators 3 1
11 Machine Learning Model 1 0
12 Macroeconomic Framework 8 10
13 Macro-econometric Model 6 7
14 Medium Term Fiscal Framework (MTFF) 0 1
15 Near-term Forecasting Model 1 0
16 Quarterly Projection Model (QPM) 14 0
17 Real Effective Exchange Rate Framework 1 0
18 Threshold 21 Model 0 2
19 Vector Autoregression (VAR) Model 10 0
Source: Survey responses, 2021

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7
Box 1: Salient Theoretical and Econometric Features of the Models Employed in Africa

ARIMA, ARIMAX, and VAR Models

These are time series econometrics-based models that draw their inspiration from the Box-Jinkins models.
The most salient feature of such models is that they are not motivated by an economic theory, but by the
time series patterns–such as cycles and trends–of the data. They are effective for short-term forecasting in
many instances, and are superior to theoretically informed structural econometric models. These classes
of models also include the use of techniques to get short-term forecasting also referred to as “Near-term
Forecasting Models”.

Dynamic Factor Models (DFM)

These classes of models are related to the ARIMA/VAR kind of models and take them to the next level of
sophistication by developing many techniques that can usefully be employed for macroeconomic analysis
and forecasting. DFMs begin from the premise that the common dynamics of a large number of time-series
variables stem from a relatively small number of unobserved (or latent) factors, which in turn evolve over time,
and that they sufficiently explain the complex reality. DFMs and the associated statistical tools could be both
parametric (state-space forms) and nonparametric (principal components and related methods). In addition
to their applications for forecasting and macroeconomic monitoring, they can be used for the analysis of
structural shocks, a special case of which is Factor-Augmented Vector Autoregressions (FAVARs).

Computable General Equilibrium (CGE) Models

These are built on the basis of typical market-clearing neoclassical models to mimic what is called the Walrasian
General Equilibrium model. In these models, any excess demand in any market (goods market, labor market,
financial market, etc.) is cleared through prices. With such a setup, most of the parameters of these models
are calibrated, although a few could be estimated. There is another genre of CGE models that do not obey
the price clearing theory, referred to as “structural CGEs”. These are commonly employed in Latin American
countries, but are almost unheard of in African institutions.

Dynamic Stochastic General Equilibrium (DSGE) Models

The DSGE models currently in use feature New Keynesian principles; they are applied predominantly by
Central Banks and Research Institutions in developed countries. They are derived from micro-foundations
by assuming a representative consumer and firm that carry out optimization in an inter-temporal optimization
framework. DSGE models are preferred as they are built on a micro foundation with deep structural
parameters (agents’ behavior and technological relations). They are developed initially by adding nominal
and real rigidities in the adjustment process, which generates a role for policy intervention making DSGE
models unlike their predecessors, such as the real business cycle models (RBC) where policy interventions
are considered as distortional.

Macro-econometric Models

These are economy-wide models built in the Keynesian tradition of the 1970s. The theoretical basis is the
Keynesian demand-driven theory but could be modified in some countries by incorporating supply-side
issues (such as production functions). They are set up in a dynamic aggregate demand (AD) aggregate
supply (AS) (also known as AD-AS) framework and most of their parameters are econometrically estimated
using modern techniques such as co-integration and Error-Correction modelling. They also have various
blocks defined as fiscal, monetary, external, prices, etc. The models are usually used for forecasting, policy
analysis, and budget preparation.

Quarterly Projection Models (QPMs)

These models attempt to reflect the working of the aggregate economy, including the Central Bank and
its policy transmission mechanism, and reflect key features of the domestic economy. They are simplified
models that blend dynamic aggregate demand and supply with simplified DSGE/New Keynesian features.
They emphasize nominal and real rigidities while incorporating the real business cycle of the DSGE feature
of rational expectations. Each of the equations in the QPM has an economic interpretation.

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8
 Financial Programming Model/Policy (FPP)

This applied model was developed by the IMF, given its mandate of helping (by financing and providing
stabilization policy guidance) member countries to alleviate Balance of Payments (BoP) problems. Thus, the
model attempts to identify the causes of BoP problems, which they found to be related to monetary policy
(such as credit expansion). Hence, they are theoretically based on what is called the monetary approach
to the BoP as developed by Polak (1957) and Robichek (1967). As given by Kahan et al. (1990) the IMF’s
approach is based on three fundamental assumptions. First, real GDP is assumed to be exogenous,
nominal GDP is assumed to change due to changes in prices. Second, velocity is assumed to be constant,
and third, the monetary market is assumed to be in a flow equilibrium. These foundations offer the policy
implications of the model such that restraint in monetary expansion will improve the BoP problem.

Leading Economic Indicators

Leading indicators are any measurable or observable variables that predict a change or movement in
another data series, process, trend, etc. The approach was first developed in the 1930s by the National
Bureau of Economic Research (NBER) and has been widely used in the United States to appraise the
state of the business cycle. Since 1961, these indicators have been published by the U.S. Department
of Commerce to forecast changes in the economy. Leading economic indicators are used to forecast
changes in the rest of the economy and help policy makers predict those changes. Thus, the “Purchasing
Managers Index” (PMI) could be used to predict growth in GDP and the demand for materials from firms;
the Consumer Confidence Index (CCI) also could be used to predict how aggregate demand and hence
GDP will change, etc.

Medium-Term Fiscal Framework (MTFF) and Medium-Term Expenditure Framework (MTEF)

The MTFF is used to estimate the medium-term stance of fiscal policy and the output can be used to
guide government stakeholders on the resource envelope and expenditure priorities. Generally, the process
involves three steps. The first requires estimating major categories of total revenue (i.e., tax revenue, non-tax
revenue, and grants). The second step requires an estimation of major components of aggregate expenditure
and net lending (i.e., Recurrent spending – compensation of employees, use of goods and services, interest
payments, and transfers to State-Owned Enterprises; and Development/Fixed expenditure). The final step
requires estimates of the overall budget balance and below-the-line items. The MTEF usually guides a
process of rolling three-year budgets. It is a process that attempts to improve the decision-making process
by estimating the available resources (macro framework), costing activities, and policies (within the macro
ceiling for each spending unit), and finally matching these in a three-year envelope and related annual
budget to link government policies, priorities, and requirements with limited resources.

Threshold 21 (T21) Model/Framework:

This is system dynamics modelling for policy analysis, a framework built by the Millennium Institute which
has primarily focused on how countries could realize the global Sustainable Development Goals (SDGs)
as the successors to the Millennium Development Goals (MDGs). It attempts to capture the interaction of
economic, social, climate, and environmental variables that are then tailored to fit a particular country in a
comprehensive modelling framework.

Source: Alemayehu Geda (2021a). Advanced Macroeconomics for Africa I: Short-run Macroeconomics (Unpublished, Dept of Economics, Addis
Ababa University/AAU, under consideration at AAU Press.)

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9
(b) Use of the Macro Models
The results in Figure 2 suggest that, generally, most
of the macroeconomic management tools are used
to guide the process of macroeconomic forecasting,
followed by macroeconomic policy analysis, while
a few are used for macroeconomic policy guidance
and economic policy design. The QPMs and the
ARIMA models are largely used by Central Banks
to forecast key macroeconomic variables such as
inflation, interest rates, and the output gap, among
others. Other macroeconomic tools frequently used
for macroeconomic forecasting in Central Banks are
the DSAs, VARs, ARIMAX, Liquidity and Cash Flow
forecasting models as well as the DFMs, which are
domiciled across Central Banks in Africa.
The FPP, which is used in both Central Banks and
MoF/EP, is for analyzing macroeconomic policies
and generating forecasts for macroeconomic
aggregates. It is also used to conduct simulation
exercises for a range of scenarios that inform policy
in both institutions.
Figure 2: Use of the Macroeconomic Models/Frameworks in Africa
Source: Survey responses, 2021
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
10
Other tools in use for macroeconomic forecasting and
policy analysis in both Central Banks and Ministries
include the (i) Leading Economic Indicators, (ii)
Macroeconomic Framework, (iii) Macro-econometric
models, and (iv) DSGE models. The latter three are
also in use for macroeconomic policy guidance and
economic policy design, particularly in countries such
as Malawi, Madagascar, Niger, Senegal, and Togo.
Macroeconomic models and frameworks that are only
used in MoF/EP are the MTFF, Threshold 21, and the
CGE. The MTFF is used by Botswana to estimate
and forecast aggregate government revenue and
expenditure while Threshold 21 is used to simulate
the medium- and long-term impact of economic,
social, and environmental policies in Burkina Faso and
Senegal. The CGE model, which is largely used to
guide government planning decisions by generating
‘what if’ scenarios and analyzing macroeconomic
policies, particularly those from the fiscal side, is used
in Botswana, Burkina Faso, Senegal, and Togo. Figure
2 shows that the CGE models are also used to guide
the process of economic policy design while they are
rarely used to generate macroeconomic forecasts.
(c) The Models’ Development and Routine to some extent, some Leading Macroeconomic
Maintenance Indicators—were developed with external technical
assistance (TA). However, the depth of engagement
Figure 3 indicates that the majority of the of the external TA appears to vary across the region
macroeconomic management tools in Africa were and type of models used. In some instances, some of
largely developed locally while only the Threshold the external experts were internally contracted for a
21 and Machine Learning models were solely short period, while others were domiciled in the host
developed by external experts. The data also shows country for three to five years with financial support
that macroeconomic tools that require an in-depth from cooperating bilateral and multilateral partners.
knowledge of modelling expertise and programming There are instances where the QPM (in Togo), CGE
language —QPM, CGE, DSGE DSA, and Near- (in Burkina Faso and Senegal), and DSGE (Niger and
term Forecasting as well as Machine Learning, and Malawi) are developed without external assistance.

Figure 3: Macroeconomic Models/ Frameworks Development in Africa

100%
10% 9%
90% 17% 17% 20%
22%
29% 33%
80%
50% 50% 17%
70% 57% 22%
7%
60% 33% 100%
100%
50% 100% 100% 100% 100% 100%
90% 91% 100%
40% 80% 100%
67% 67%
30% 29% 61% 64%
50% 50%
20% 44%

10%
14%
0%
QPM

FPP

MTFF

CGE

VAR

MacroEconometric Model

Leading Economic Indicators

DSGE

Debt Sustainability Framework (DSA)

Bank liquidity forecasting model

Inflation forecasting model

Bank’s Cash Flow Forecasting Model

Near-term forecasting model

Real Effective Exchange Rate

Threshold 21

Dynamic Factor Models

Machine Learning
Macro-Framework
ARIMA

ARIMAX

Framework

Locally Foreign Both

Source: Survey responses, 2021

The results presented in Figure 4 indicate that most Seychelles, Sierra Leone, and Uganda with the
of the macroeconomic models and frameworks in QPM; in Botswana and Burkina Faso with the CGE
Africa (60–70%) are maintained locally2 by officials model; and in Cameroon, Madagascar, and Niger
of both Central Banks and MoF/EP. Consistent with the DSGE models. Dependency on TA for model
with the model development and as expected, maintenance signals the need to upskill the region
the relatively sophisticated models and those that in intermediate and advanced macroeconomic skills,
require programming languages such as QPM, particularly with the specific programming language.
CGE, and the DSGE, among others, sometimes Nonetheless, it is encouraging to see that most of
require maintenance from external experts. This is the model maintenance in Africa occurs locally with
the case in Cameroon, Ghana, Malawi, Rwanda, minimal foreign support.

-------------------------------
2
Out of the 20 macroeconomic management tools, 13 were mostly developed internally as shown by the dominance of the blue bars displayed
in Figure 3.

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11
 Figure 4: Macroeconomic Models/Frameworks Maintenance in Africa

100%
9%
90% 20% 18% 15%
22%
29% 33%
80% 40%
15% 50%
70%
67%
60% 100% 100%
29%
50% 100% 20% 100% 100% 100% 100%
91%
40% 80% 82% 78% 100% 100%
69% 100% 67%
30%
50%
20% 43% 40%
33%
10%
0%
QPM

FPP

MTFF

CGE

VAR

MacroEconometric Model

Leading Economic Indicators

DSGE

Debt Sustainability Framework (DSA)

Bank liquidity forecasting model

Inflation forecasting model

Bank’s Cash Flow Forecasting Model

Near-term forecasting model

Real Effective Exchange Rate

Threshold 21

Dynamic Factor Models

Machine Learning
Macro-Framework
ARIMA

ARIMAX

Framework
Locally Foreign Both

Source: Survey responses, 2021

(d) Flexibility of the Macroeconomic Models conduct of macroeconomic management. This includes
to Accommodate Emerging Policy Issues expanding the existing tools to explicitly tailor the model
to reflect the peculiarities of African economies and
Figure 5 indicates that the majority of these accommodate and possibly track the SDGs; to model
macroeconomic management models are flexible to the impact of the digital economic revolution, the Fintech
the extent that they allow modification to accommodate agenda, and big data; and effectively analyze the effects
analysis of emerging economic issues. While this of natural disasters and climate change, as well as the
is commendable, follow-up discussions with the impact on macroeconomic management policies of
respondents suggest that, despite this level of flexibility, pandemics and gender mainstreaming. In light of these
there is a need to expand the models further to multiple and diverse variables needed to be captured,
contextualize them to fully account for the unique features there is an urgent need to upskill the region to adjust
of many African countries. Improving the models features the current macroeconomic management tools to
will assist policy makers in Central Banks and MoF/EP accommodate effectively the recent issues affecting
to accommodate major global factors that affect the prudent macroeconomic management.

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12
 Figure 5: Flexibility of the Macroeconomic Models / Frameworks to Accommodate
Analysis of Emerging Policy Issues

Source: Survey responses, 2021

(e) Supporting software infrastructure for institutions use this software to run their CGE models,
Macroeconomic Models which according to Table 1, are only found in them.

Figure 6 reflects the presence of supporting software
infrastructure for macroeconomic models and
frameworks in Africa. EViews econometric software
is the most widely used in both Central Banks and
MoF/EP across the continent. The software is used
mostly for Macro-econometric, ARIMA, and the VAR
model estimation. The results also show that Central
Banks use the Matlab (Octave)/IRIS/Dynare and R/R-
studio software, but these are rarely used by the MoF/
EP. This is consistent with the type of models that this
software support such as the QPM, the DFMs, and
DSGE models, which are commonly used by Central
Banks. However, the results also revealed that the
GAMS software, which is a high-level modelling system
for mathematical optimization, is only installed in MoF/
EP. This is not entirely surprising as most of these
Microsoft Excel is equally used in both Central Banks
and MoF/EP—mostly for the FPP framework and
the comprehensive Macroeconomic Framework
(Figure 6). Kenya and Zambia use Excel to run
Macro-econometric models, which are used by both
institutions in forecasting and analyzing the evolution
of macroeconomic variables. The SPSS software,
while minimal in its usage, is also used equally by both
Central Banks and MoF/EP, while the PcGive software
is used only in Uganda. The STATA software is largely
used in Central Banks for data analysis and model
estimation while the Jdematra+ software, which is used
for the seasonal adjustment of macroeconomic data, is
employed in Burkina Faso and Togo. The Troll and the
Rapid model software are used in Malawi and Burkina
Faso, respectively.

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13
 Figure 6: List of Statistical, Econometric, or Modelling Software Installed in Central
Banks and Ministries of Finance/Economic Planning in Africa
Source: Survey responses, 2021
3.1. Performance of the existing
Macroeconomic Models/
Frameworks in Africa
The performance of various macroeconomic models
and frameworks varies in terms of (i) forecasting; (ii)
policy analysis, which includes using simulation;
and (iii) sectoral/disaggregated analysis. The results
are presented in Annex I. Generally, and by design
the ARIMA, ARIMAX, VAR, and the Bank Cash flow
and Liquidity Forecasting models seem to perform
better in forecasting. The popularity of these tools for
forecasting is partly explained by the less demanding
nature of their development and use that does not
(in most cases) require external support. The DSA,
QPM, the FPP, and the MTFF also perform very well
in their forecasting ability. However, because they are
data-intensive and relatively complex, they are largely
externally supported.
On the use of the models for policy analysis, the results
show that the Machine Learning, FPP, ARIMA, Bank
Cash Flow and Liquidity Forecasting Models, DSA,
Lead Economic Indicators, and the Threshold 21 Model
were found to perform satisfactorily. Furthermore, the
DSGE, FPP, Macro-econometric models, and the
QPM are also largely used to analyze policies. This
preference is partly explained by their rich theoretical
foundations and their ability to capture the extensive
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
14
linkages between economic sectors that mimic the flow
of economic activity in an economy. The results also
show that CGE and Exchange Rate Frameworks are
used for policy analysis, including by using simulation
analysis, and are found to perform very well. There are
only a few macroeconomic management tools that
perform well in conducting sectoral/disaggregated
analysis. These include the Threshold 21, the MTFF,
DFM, DSGE, QPM, Macroeconomic Framework, and
FPP which by design have a detailed breakdown of
various blocks (and some of their sectors) such as the
fiscal, monetary, external sector, and monetary blocks.
Overall, despite the varying performance of the existing
macroeconomic models/frameworks in Africa, it is
likely that these policy tools generate forecasting
errors (optimistic and pessimistic results) when
compared to the actual outturn. These forecasting
errors can translate into the most severe policy
mistakes in responding to the relationship between
macro-fiscal and macro-financial aggregates, which
has the potential to undermine macroeconomic policy
design, analysis, and implementation. In view of this,
where large forecasting errors persist, there may be
a need to build capacity within Regional Member
Countries (RMCs) on applying best practices to
address and minimize forecasting errors, particularly
recognizing the impact of the elasticity of public
finances on macroeconomic variables.
3.2. Dynamics of Capacity and
Management of Modelling
Units in African Institutions
This section presents the results of the existence
and the dynamics of the modelling units in Central
Banks and MoF/EP in Africa, most of which have a
modelling unit (Figure 7). Of the countries surveyed,
only in the BEAC office in Gabon and in the MoF/
EP of Malawi were modelling units not established.
Further analysis of the results revealed that some
countries have had modelling units for: about 10
years (Burkina Faso, the Democratic Republic of
Congo, Ghana, Lesotho, Rwanda, Sierra Leone, and
Zimbabwe); some 15 years (Egypt, Guinea, Malawi,
Mozambique, Madagascar, Senegal, and Uganda);
about 20 years (Benin, Central African Republic,
Kenya, and Namibia), about 25 years (Niger and
Togo) and over 30 years (South Africa and Zambia).
Other countries (Cameroon, São Tomé and Príncipe,
Seychelles, and South Sudan) have had modelling
units for fewer than 5 years.
The results also show that staff numbers in various
modelling units’ range between 2 and 21 while the
degree of skill of the experts operating these tools
remains low to semi-skilled. Modelling units with
fewer than 5 employees are found in the MoF/EP of:
Botswana (2);
Madagascar (2); and in the offices of the BCEAO in
Benin (4), Cameroon (3), Malawi (4), Mozambique
(4), Namibia (4), Sierra Leone (2), South Sudan (3),
and Zambia (3). Modelling units with more than 10
employees are found in the Central Banks of: the
Democratic Republic of Congo; Kenya; São Tomé
-------------------------------
3
In the case of Senegal, compared to the other members of the BCEAO, this could be explained by the fact that the institution’s headquarters are based
in Senegal.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
and Príncipe; South Africa; the offices of the BCEAO
in Niger, Senegal,3 and Togo; and the MoF/EP of
Guinea, Lesotho and Sierra Leone. Other countries
have a staff complement of 5 to 9.
There are only a few countries — Ghana, Malawi,
Kenya, South Africa and Uganda — that have
experts with the intermediate to semi-advanced
macro-econometric skills required to develop these
models, particularly the FPAS, CGE, and the FPP as
well as the macro-econometric models. However, the
survey indicates that the current capacity in various
modelling units is insufficient to meet the institutions’
modelling requirements (Figure 8). In this regard,
countries have made efforts to strengthen capacity
in their respective macroeconomic modelling units.
These include: (i) exposing staff to short term training
(in-house and external) on macroeconomic modelling
and related areas offered by capacity building
institutions such as the IMF and its regional training
centers, UNECA, the Macroeconomic and Financial
Management Institute of Eastern and Southern
Africa (MEFMI) and the World Bank, among others;
(ii) strengthening collaboration with other key national
and regional economic institutions; (iii) encouraging
staff to go for further academic training; (iv) procuring
the necessary macro-econometric modelling
software while supporting staff to develop the skills
to handle it; and (v) encouragement of executives to
join the modelling units.
The results presented in Figures 9 and 10 indicate
that there are more staff with PhD degrees and
Master’s degrees in Central Banks than in MoF/EP.
This, to some extent, is consistent with the training
opportunities that appear to be more available in
Central Banks than in MoF/EP (see Figures 11 and
15
 Figure 7: Existence of a modelling unit

Source: Survey responses, 2021

Figure 8: Capacity of the unit/team to fulfil the institution’s modelling requirements

Source: Survey responses, 2021

12 below). Most of the staff in Ministries of Finance/
Economic Planning possess only Bachelor’s degrees.
Furthermore, it was found that, while some countries
(such as Lesotho, Ghana, Malawi, South Africa,
and Zambia) have taken steps to advance staff
qualifications through postgraduate training, others
(such as South Sudan and Uganda) have indicated
the need to upskill, given the significant shortage
of qualified staff with postgraduate qualifications,
particularly at PhD level. There is thus an urgent need
to provide more support for staff in Central Banks
and MoF/EP to pursue higher academic degrees,
particularly in areas related to macroeconomic
modelling, analysis, and forecasting, as well as
macroeconomic management.
Despite attempts to build macroeconomic models
to guide policy design, analysis and implementation,
modelling capacity is still low due to the skills
requirements needed to maintain these models. The
skills are more particularly lacking at the MoF/EP than
at the Central Banks because of the latter’s ability to
pay and retain a more qualified and skilled labor force
than the former. Most Central Banks can hire staff with

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16
 Figure 9: Academic qualifications of staff in modelling units of Central Banks

Source: Survey responses, 2021

Figure 10: Academic qualifications of staff in modelling units of Ministries of Finance/

Economic Planning

Source: Survey responses, 2021

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17
advanced degrees who are comfortable with the use
of sophisticated econometric models. Any attempt to
strengthen modelling capacity should consider first
building the required intellectual foundations to be
able to use such models, which would be to include
preferential access to PhD programs for officials of the
MoF/EP and Central Banks.
3.3. Challenges facing Modelling
Units of Central Banks
and Ministries of Finance/
Economic Planning in Africa
While significant progress has been recorded on the
modelling front in African economies, challenges
remain. The data shows that the Central Banks
and MoF/EP face a wide range of obstacles as
presented in Figure 11 (Central Banks) and Figure 12
(Ministries of Finance/ Economic Planning). Figure
11 shows that the most significant challenge faced
by modelling units of Central Banks is data gaps and
data unavailability. It also shows that the significant
challenges faced by Central Banks include high staff
turnover and, in general, inadequate knowledge
of macroeconomic modelling. The results
nonetheless suggest that most Central Banks are
Figure 11: Challenges facing Modelling Units of Central Banks in Africa
Source: Survey responses, 2021
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
18
well resourced, as the majority of the respondents
indicate that their units have installed sufficient
modelling infrastructure, and the models seem to
generate good forecasts. Other areas which are
less problematic for Central Banks include reliance
on external experts for macroeconomic modelling
activities and macroeconomic management tools
that do not meet the intended objectives. In this
instance, it appears that the modelling units in Central
Banks are better placed to conduct macroeconomic
policy management to support their mandate.
However, follow-up responses have highlighted
other challenges facing Central Banks including: (i)
lack of regular training in macroeconomic modelling
and forecasting; (ii) poor ownership of the technical
tools by the team; and (iii) low interest in research.
Figure 12 shows that the most significant challenges
faced by MoF/EP are almost identical to those
of the Central Banks, with few exceptions and
minor differences. Two exceptions of note are
staff knowledge issues both in the skills levels and
ability to work with the models effectively. These
are significant challenges within the MoF/EPs, as
inadequate or incorrect use and interpretation of
models has the potential to compromise the conduct
of macroeconomic management. The survey results
verify the overarching capacity support needed in
these institutions in macroeconomic modelling and
forecasting to ensure that macroeconomic policy
analysis is conducted in line with best practices.
The allocation of resources to macroeconomic
modelling is not considered a priority amongst
competing needs. This is exacerbated by weak
collaboration, coordination, and monitoring
problems at the institutional level. In this regard,
disenfranchised efforts lead to duplication of efforts
and continuous dependence on external consultants.
Another challenge faced by the modelling units of
MoF/EP is that the available qualified staff still display
gaps in technical skills. In addition, modelling teams
undertake many assignments which are outside of
the scope of their key roles, thus crowding-out their
modelling responsibility.

Figure 12: Challenges facing Modelling Units in Ministries of Finance/Economic

Planning in Africa

Source: Survey responses, 2021

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19
4 CAPACITY NEEDS
ASSESSMENT
4.1 Evaluation questions
This section presents findings on the future capacity-
building needs of the surveyed countries. Capacity
deficiency in the context of this study refers to any
emerging and pressing skills needs for Central Banks
and MoF/EP that are missing to fulfil the modelling
mandate. The section profiles capacity needs that
may need the intervention of the AfDB to address
deficiencies but also concurrently identifies available
capacity that no longer requires a specific focus across
the African continent. The AfDB’s ability to address
capacity needs will be guided by well-defined training
curricula and available resources. Two evaluation
questions used in the survey (stated below) guided
the analysis:
i. Do you think that the present capacity of the
unit/team is sufficient to fulfil the institution’s
modelling requirements? Yes/No.
ii. If the answer above is No, what areas do you
think need further intervention to build or enhance
the modelling capacity of the unit/team?
4.2. Analysis of emerging needs
An analysis of the capacity-building needs of modelling
units of Central Banks and Ministries of Finance/
Economic Planning in Africa reveals that they largely
align with the broader objective of conducting prudent
macroeconomic management. A synthesis of capacity
gaps from the survey responses is provided below. The
capacity gaps and recommendations are in no specific
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
20
order and are broadly grouped into six categories,
each of which is briefly discussed subsequently:
(i) Human Capacity/Skill Development in
Modelling;
(ii) Developing Advanced Macroeconomic
Modelling Tools;
(iii) Training on Macroeconomic and Econometrics
Software and Programming Language;
(iv) Strengthening Data Quality;
(v) Incorporating Emerging Issues in Existing
Macroeconomic Models/Frameworks; and
(vi) Strengthening Institutional Arrangements,
Coordination, and Communication of the
modelling work.
4.2.1. Human Capacity/Skill Development
The need to develop and strengthen macroeconomic
modelling and forecasting skills and the ability to conduct
macro-fiscal and macro-financial projections remains a
high priority for modelling units in Africa. Although this is
by no means a generalization to the rest of Africa, most
respondents who provided an answer to the question
suggested areas where modelling units needed increased
capacity. While there is a general understanding of some
concepts of economic modelling, officials highlighted the
need to build sustainable capacity through, among other
methods, in-country workshops/missions and, where
possible, regional technical workshops. In the short-to-
medium term, modelling units in Africa suggest addressing
the capacity deficiency in their units by training officials in:
• Introduction to Econometrics
• Intermediate Macroeconomic Modelling and
Forecasting
• Advanced Macroeconomic Modelling and
Forecasting
• Macroeconomics
• Mathematics
• Statistics
• Accounting, Banking, and Finance
• Introduction to Microsimulation
• Introduction to Social Accounting Matrix (SAM)
and Input-Output Tables
• Financial Programming and Policy Frameworks
• Advanced Microsoft Excel
• Panel Data modelling
• Medium-Term Fiscal Frameworks
• Model Performance and Evaluation
• Conditional forecasting
• Bayesian analysis
Long-Term Human Capacity Development
The importance of continuous staff development in the
modelling units is critical to raising the level of modelling
expertise on the continent and to address the problem of
high turnover in the modelling units.
The respondents highlighted the need for support to staff
currently working in modelling units to attain advanced
academic qualifications, particularly, Master’s and PhD
degrees in macroeconomics.
Recommendation(s):
1. The AfDB could consider a holistic and
sustainable human and institutional capacity
development strategy. It remains useful to
support the modelling units in RMCs with
short-to-medium term training in various areas
(including the ones listed above) related to
macroeconomic modelling and forecasting.
2. The AfDB could also consider helping modelling
units in RMCs to identify and provide opportunities
for long-term training such as Master’s and PhD
degrees in areas related to macroeconomic
modelling and forecasting.
Firstly, however, institutional capacity needs
must be assessed to ensure equitable capacity
development. For instance, some RMCs already
have a decent pool of advanced degree (MA/MSc/
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
PhD) holders whereas others, notably the transition
states, are not equally endowed. Thus, scrutiny of
existing capacity gaps would be necessary to inform
appropriate education and training investments.
Improving and increasing institutional capacity,
however, will not address a secondary core
challenge, namely high staff turnover due to wage
disparities between the public and private sectors
for qualified graduates. While ensuring competitive
remuneration for the technical/macro-modelling
personnel within the public would easily solve this
issue, it may not be possible within the fiscal realities
of most RMCs.
4.2.2. Technical support on advanced
macroeconomic modelling tools
Satisfying the need to develop technical skills in advanced
macroeconomic modelling and forecasting is a high
priority amongst member countries. While countries
have, to some extent, developed capacity in the use
of modelling tools, several others still require support—
through in-country technical missions—to develop
advanced skills in the relevant use of macroeconomic
modelling tools that address the country-specific
dynamics. Countries indicated demand for skills training
in the use of the following tools:
• The Quarterly Projection Model (QPM) of the
Forecasting and Policy Analysis System (FPAS);
• Dynamic Stochastic General Equilibrium Models
(DSGE);
• Computable General Equilibrium Models (CGE);
• Dynamic Factor Models (DFM);
• Artificial Intelligence and Machine Learning
(AIML); and
• Development of a social accounting matrix (SAM)
In the absence of adequate capacity to internalize the
advanced macroeconomic models, simple Excel-based
models should be considered. This is on the grounds
that it is not the sophistication of the analytical tools that
matters, but how efficient the institutional arrangements
underpinning the modelling routine.
Recommendation(s)
1. The AfDB should consider assisting modelling
units in RMCs to develop skills in the use of
advanced macroeconomic modelling tools,
especially those listed above.
21
4.2.3. Training on Macro-Econometric 2. The AfDB could consider developing introductory,
Software and Programming intermediate, and advanced courses in
Language(s) macroeconomic modelling programming
languages (including those listed above) for its
Modelling units have also highlighted the need to be member countries. This should be followed by
supported with necessary software and to be trained TA missions to each country to consolidate the
on various macro-econometric software packages gains.
and the related programming languages. In this
regard, the modelling units need to design and offer Towards realizing these objectives, it is important to
tailor-made courses at various levels (introduction, distinguish the current capacity in each country into
intermediate, and advanced) for statistical software, the following three categories:
particularly focusing on the programming language.
This includes software such as: Category A: Those who have advanced post-
graduate degrees but need advanced tools skills
• EViews training, as well as re-tooling of their modelling skills to
• R, R-Shiny, and R-Studio adapt to emerging needs.
• Matlab/Octave
• Dynare/Iris Category B: These are personnel who have graduate
• Stata degrees or an adequate level of study in economics/
• PcGive statistics and have been working on applied models of
• GAMS the MoF/EP and Central Banks or desire to join such
units.

Recommendation (s): Category C: These are experts that already have

1. The AfDB could consider assisting/intensifying
its support to RMCs in the acquisition of relevant
econometric software to support macroeconomic
modelling and forecasting efforts.
post-graduate level qualifications and have been
working on the applied models but want to move to
an advanced level of macroeconomic modelling, such
as the PhD-level study or equivalent or related level
research.

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22
Each of these categories needs a different level of training
both in terms of depth and time required. Based on the
preliminary needs assessment from the survey results,
we have developed three training modules and a detailed
curriculum (and course outline) that corresponds to the
three categories of modelling skill level available at the
Central Banks and MoF/EP in the continent. These are:
A) Short-term “on-the-job” training that corresponds
to Category A capacity;
B) Master-level modelling training that corresponds to
Category B capacity; and
C) PhD level modelling training/on-the-job modelling
research to Category C capacity.
The focus of the training should be both on upgrading
the existing skills (quality) and increasing the number
of staff in the modelling unit (quantity) continuously.
The latter is important to tackle the high turnover of
staff, which has been identified as one of the major
problems in the survey. It might be modest to aim to
have at least 10 personnel in the short-to-medium run
(up to 3 years) and about 20 in the medium-to-long
run (4 to 7 years down the line) in each modelling unit.
To realize this capacity-building task, the Bank’s
Macroeconomics Policy, Forecasting, and Research
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Department may need to create a network of macro
modelers in the continent by drawing, for instance,
from the AERC network, and to form a “Modelling
Technical Hub” from which it can deploy to modelling
units of RMCs to offer short-term training that
addresses category A skill deficiency.
For medium- to long-term capacity-building efforts,
the Bank could replicate the project that the Kenyan
Government conducted to train policy experts in the
Treasury and Ministry of Planning in collaboration
with the AERC (Geda, 2014). Similarly, an African
country, in collaboration with relevant institutions,
can open MA/MSc and PhD level programs that
are focused on applied macroeconomics tailored
to the needs of Central Banks and MoF/EP of that
country. Since programs such as these would entail
a relatively large financial commitment by the AfDB,
it would need to be primarily financed by each
member country. Bank financing could be a catalyst
to start the process. Collectively (say for countries in
AfDB regions) opening the programs will also make
it less expensive.
We have developed proposed contents for these
training modules and MA/MSc and PhD programs
with detailed curriculum and course outlines for each.
These are presented in brief below (the detailed
contents are provided in Annex VI).
23
A. Short-term On-the-job Training
(for Category A)
Short-term on-the-job training is highly effective in
addressing capacity problems that were identified among
some of the current staff. It could also be managed easily
using short-term consultants. This part of the training is
aimed either at re-tooling the expertise of existing experts
for a new task or refreshing and updating some of the
experts who may require such training. The re-tooling is
meant for those experts with graduate degrees but do
not have the capacity to perform the required research
and policy analysis tasks effectively. Thus, these courses
will focus on areas deemed a priority in each country’s
needs-assessment exercise.
Such courses are aimed not only at addressing the
deficiency in capacity but also at producing middle-level
experts in the identified priority research areas of the
government. Such courses, apart from improving the
skills of the staff chosen in the specific area identified,
could also help to prepare those wanting to enroll
in advanced studies, such as the AERC PhD/MSc
programs. To realize these objectives, and based on
our needs assessment, we have identified the following
modular courses that need to be offered in the form of
on-job and/or short-term training:
For Central Banks (CBs)
• Advanced Short-run Macroeconomics for
Africa**;
• Applied Time Series Econometrics: With a Focus
on Africa**;
• Applied Macro Modelling and Forecasting for
Africa**;
• The Economics of Financial Markets; and
• Research Methods for Economists**.
For Ministries of Finance/Economic Plan-
ning (MoF/EP)
• Development Planning and its Techniques;
• Project Analysis and Management;
• Tax and Tax Policy;
• Inter-governmental Fiscal Relations and Local
Financial Management;
• Climate Change, Green Economic Strategy, and
Economic Policy; and
• Economic Analysis of the Extractive Sector and
Natural Resource Management**.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
24
Note: Courses marked with “**” are relevant courses
both for CBs and MoF/EP
B. B. MA/MSc in Applied Macro Modelling
for Policy Analysis (for Category C)
Some of the experts at the CBs and MoF/EP
require formal training to address the identified
capacity deficiency sustainably. The first type of
formal training should aim at producing medium-
level experts at MA/MSc level. The second type of
formal training may need to aim at producing high-
level experts at PhD level. Based on this preliminary
assessment, which needs further in-depth, country-
level needs assessment, we propose an MSc/
MA program that could be aligned with selected
universities’ MSc Programs and their electives.
Electives may be conducted on a case-by-case
basis in collaboration with local and international
institutions. This program could be entitled:
MSc/MA in Macro Modelling and
Forecasting
The Bank may work with local universities, research
think-tanks, and the government (Central Banks
and MoF/EP) to develop country specific MA/MSc
programs. This program needs to be flexible to suit
the needs of each specific country, the institution’s
willingness to offer a leave of absence to the staff for
a short period of formal study (such as a one-year
MA program aimed at producing lower- middle level
experts) or a longer period of formal study (a two-year
MSc program aimed at producing upper-middle level
experts). The MA and the MSc categories of programs
will be similar in the first-year coursework delivery.
However, in the second year, the MSc students will be
engaged in one more year or semester thesis/research
project that is focused on applied modelling. This will
distinguish them from MA students who do not need to
do a thesis. The details of these MSc/MA programs (its
curriculum and course outline are offered in Annex VI).
C. Ph.D. and Advanced Level Applied
Macro Modelling Study
The PhD program could be modelled similarly to the
AERC’s Collaborative PhD program. The detail of this
program is well documented and does not require
an elaborated discussion here. Notwithstanding, the
research to be conducted in the context of this PhD
study needs to fit the demands of African Central Banks
and African MoF/EP in terms of content (i.e., an in- depth
theoretical and empirical research focused on issues to
be identified in Central Banks and Ministries of Finance
in each country). In addition, the PhD research should
enrich each block of the macro model that already exists
in the two institutions in each country or to be built in
countries that do not yet have one (the different model
blocks could be, for example: the Monetary Block, the
Fiscal Block, and the Export and Import Block). This PhD
program can also serve as an incentive mechanism to
attract and retain the best and brightest experts to these
government institutions. It will also be helpful to tackle
the short-term skill gap, the long-term skill needs, and
the in-depth research requirements of the government.
The capacity needs assessment in the survey found that
experts whose educational and training experiences are
dated or have been overtaken due to lack of refresher
or remedial training (i.e., obtained prior to the current
ubiquitous use of sophisticated economic modelling
tools) may be disadvantaged in either the qualifications
or knowledge prerequisites needed undertake to the
proposed PhD program. There may also be a cadre of
employees wanting to advance their skills or are facing
new on-job demands that are not able to commit to a
full degree program. Developing courses to remediate
skills or knowledge gaps would address these issues.
The list of recommended courses is noted here, and
the detailed course outline provided in Annex VI:
• Advanced Microeconomics I & II;
• Statistical Methods for Econometrics;
• Advanced Econometrics I & II; and
• Advanced Mathematical Economics.
4.2.4. Data, Information and Knowledge
Management
Data management skills are a priority focus area
to build capacity in the modelling units. Capacity
strengthening is needed the following areas (note this
list is not exhaustive but representative of the major
needs identified through the study) needs:
• Cleaning macroeconomic (especially its
consistency) data;
• Addressing structural breaks and conducting
data exploration;
• Seasonal adjustment of series;
• Now-casting techniques; and
• Procedures for developing high-frequency
indicators.
Recommendation (s):
1. The AfDB could consider assisting modelling
units in RMCs by strengthening their capacity
for data management. This can be done
through short-to medium-term training on data
management and related topics.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2. The AfDB could consider helping modelling
units in RMCs to develop skills in modern data
techniques in instances where official data is
released with longer time lags.
3. The AfDB could consider creating a centralized
repository for macroeconomic data that is
constructed similarly for different African
countries (and possibly include vintages for each
release). This might go a long way in making a
difference in teaching, capacity development,
model development, and implementation at
policy-making institutions.
Despite all this, attempts to address challenges
in modelling gaps in Central Banks and MoF/EP
may not be effective without concomitant actions
to address data collection and analysis gaps in
statistical agencies. This is against the backdrop that
statistical agencies of some low-income countries
cannot produce high-frequency data like quarterly
macroeconomic time series, particularly the data on
GDP. In this regard, there may be a need to have a
holistic and systematic approach in all efforts geared
towards addressing data challenges in Africa. These
efforts may need to be inclusive and recognize
the need to assess and address capacity gaps in
statistical agencies since modelling without quality
data will not yield the needed results.
4.2.5. Incorporating Emerging Issues in
existing Macroeconomic Models/
Frameworks.
Emerging issues—such as digital technology, gender
mainstreaming, climate change, and unpreceded
events such as pandemics—have come to constitute
a challenge for macroeconomic modelling units in
Africa. While Central Banks and MoF/EP want to
encourage the leveraging of technology, they are
also wary of how to factor these into the existing
macroeconomic models and frameworks. In this
regard, countries surveyed suggested the need to
develop training activities that address the flexibility
of macroeconomic models.
Recommendation (s):
1. The AfDB could consider supporting training
(at the regional and/or country levels) in RMCs
to develop or improve existing models and
frameworks to accommodate the analysis of
emerging and pressing economic issues.
2. AfDB could also provide technical and/or
financial support to develop/design macro-
models for those countries without dynamic
macro-models.
25
4.2.6. Institutional Arrangements,
Coordination, and Communication
Another area warranting capacity building is the
strengthening of institutional arrangements underpinning
the modelling routine in the RMCs. This will help
harmonize macroeconomic efforts across countries,
break down the silos between institutions, and improve
the timely exchange of data as well as enhance model
update and maintenance. Building capacity in this will
allow for greater co-ordination and cooperation helping
the institutions and RMCs to work together in the quest
for better macroeconomic modelling and forecasting.
Furthermore, RMCs have also indicated that there
is a need to reinforce study visits and internships,
and strengthen local partnerships, in particular with
universities for cross-pollination of ideas in areas related
to macroeconomic modelling and forecasting. The
suggestion is for various regional blocks and regional
capacity-building institutions such as the IMF’s Africa
Training Institute, the IMF Africa Regional Technical
Assistance Centers (AFRITACs), and the COMESA
Monetary Institute (CMI) as well as the MEFMI to have a
much more coordinated approach to capacity building
in macroeconomic modelling and forecasting to pool
resources and minimize the duplication of efforts. This
may also help promote regional dialogue as well as
peer-learning experiences. There is also a need to help
with setting up a macroeconomic modelling unit for all
African countries that do not have a modelling unit in
their finance ministries.
Recommendation(s) on Institutional
Arrangements and Coordination:
1. The AfDB could consider assisting all African
countries) that do not have a modelling unit in their
Finance Ministries to set up a modelling unit.
2. The AfDB could consider coordinating the
capacity-building efforts of various regional
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
26
economic blocs in macroeconomic modelling
and forecasting to achieve a more systematic
approach to macroeconomic modelling and
forecasting. In this connection, successful
harmonizing of macroeconomic modelling
standards across RMCs in regional economic
blocs will provide a “buy-in” and eventually
support the transition to a ‘tailor-made’ Africa-
wide macroeconomic model.
3. The AfDB could consider helping institutional
arrangements in RMCs around macroeconomic
modelling and forecasting.
Communication between technical experts and
analysts and policy makers regarding the production
of results or the meaning of the results has been
found to be problematic. Producing a rigorous piece
of analysis is simply not enough to get the attention
or understanding of policy makers. Countries noted
the need to package the reports in ways tailored to
their intended audience. Suggestions included the
need to present clearly written reports augmented by
accessible visual data in the form of graphs, charts,
and figures that relay key messages to policy makers.
Respondents suggested holding regular webinars
to improve report writing and data visualizations. In
addition, the modelling units have also suggested the
need to subscribe to specialized journals to strengthen
the research function in their institutions.
Recommendation(s) on Communication
and Access to Quality Research:
1. The AfDB could consider assisting modelling
units in report writing and data visualizations.
2. The AfDB could consider assisting modelling
units in RMCs by guiding staff to consult targeted
topical research journals to help strengthen the
research function in the region.
Addressing the areas of capacity deficiency (i.e.,
knowledge and information management, managing
the incorporation of an emerging issue in the modelling
task, and coordination and communication) requires a
political will and commitment to the institutionalization of
modelling tasks in each institution. Central Banks and
MoF/EP, as well as policy makers need to recognize that
informed policy should be considered the fourth factor
of production (next, to labor, capital, and land) critically
needed. Recognizing this, it is imperative to organize the
modelling task through three organizing frameworks:
a. Institutionalization of the Modelling and
Forecasting Task;
b. Organizing the Modelling Department/Unit by
Research Units/Teams; and
c. Digitalization and Networking of the Modelling
Task through an IT System in the Department.
Figure 13: Institutionalized Modelling and Forecasting Task at Reserve Bank of South
Africa
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
(a) Institutionalization of the Modelling
and Forecasting Task
The macroeconomic modelling and forecasting
activities need to be systematic and part of the normal
and regular function of the institution as is done, for
instance at the Reserve Bank of South Africa or the
Monetary Policy Committee (MPC) in many countries.
Making this a part of legislation would entrench it,
which would then ensure that it would not be neglected
when governments change. Figure 13 illustrates how
modelling and forecasting is institutionalized in the
Reserve Bank of South Africa.
(b) Organizing the Modelling
Department/Unit
The Modelling Unit/Department should be organized
with sub-units that specialize in the different blocks
of the model. For instance, MoF/EP could have a
27
Fiscal Block, which then should include branch such
as a Tax Unit, Expenditure Unit, External Sector Block,
Monetary Block. Each unit would then be responsible
to conduct in-depth research for microdata and
partial equilibrium models that inform their block
in the macro model related to their unit (e.g., the
tax unit can have all micro information and micro
models about different types of taxes, their buoyancy,
incidence, and eventually inform the “fiscal block” of
the macro model). Similarly, the Modelling Department
experts in the CBs could be divided into different units
specialized in different aspects of the macro model
employed by the Central Bank such as “Price Units”,
units responsible for “Monetary Block” of the model,
a unit responsible for the “Financial Sector Block” of
the model. This is important to build research capacity
in these institutions and make the modelling task
grounded on rigorous research, which, in turn, helps
to support an evidence-based policy.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
28
(c) Digitalization and Networking of the
Modelling Task through an IT-System
of the Department:
The modelling Departments/Units need to digitalize
and network their activities: its task, calendar,
internal communication, data, models, model output,
forecast process and output, and all communication
media, such as websites. Once an information
management system is established, modelling tasks
will be more efficient. Moreover, digitalization will also
serve as a management tool for the Directors of the
Modelling Department/Unit, which in turn will improve
transparency and highlight where delays in the process
may occur. Where resources (financial and human) are
limited, Modelling Departments/Units could consider
using other plans such as free platforms like R-studio.
However, even though these platforms may not
require the special skills of an IT-system department,
training the modelling Departments/Units in building
web platforms using packages such as R-shiny (or
R-studio) may be of paramount importance.
5 A PROTOCOL FOR
THE SELECTION AND
HARMONIZATION OF
MACROECONOMIC MODELS
Creating a prototype generic macro model for
macroeconomic management is often difficult. This
is partly because there is no consensus—in the
profession—that a particular genre of the macro model,
such as the DSGE, is the standard, state-of-the-art, and
relevant applied macro model applicable to all countries.
This is true even in advanced countries for which models
such as DSGE are primarily built and used in their
Central Banks, let alone in African countries that have a
different economic structure, institutions, and perhaps
behavior of economic agents. In advanced countries,
this, for instance, became apparent and shocked the
profession after DSGEs failed to predict, explain, and
suggest a solution for the 2008/09 financial-cum-
economic crisis (see Romer, 2019, Romer, 2016, for
example). Contrary to the implications of DSGE models’
predictions and solutions, it was a Post Keynesian fiscal
policy—re-incarnated as the “Stimulus Package”—that
saved the US and European economies; the highly
praised monetary policy instrument of the DSGE
model, interest rates, utterly failed to function, even if
pushed to a “zero” rate, and in some countries even
to negative values (The Economist, 2021). The policy
of the “Stimulus Package” has also been observed
again during the related economic shock caused by
COVID-19 . Thus, it is imperative for African Central
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Banks and MoF/EP not to rely solely on the DSGE
but to: (i) explore different models; (ii) assess whether
the specific models accurately capture the actual
function of the individual economies; and (iii) use a
suite of applied models that build upon those already
in use (note: engaging expert advice to ascertain the
appropriate models for each task).
Thus, the RMCs and their respective Central Banks
and MoF/EP should not be restricted to one specific
type of model or attempt to apply a generic macro
model. They need to use a suite of models that vary
not only by function, as discussed above, but that allow
for unique country-specific classifications that affect
economic planning (e.g., resource-rich/poor, fragile,
conflict-affected, investment-driven, factor-driven)
(Geda and Yimmer, 2018). A three-pronged approach
is necessary.
First, develop the institutional framework for the
modelling task (Figure 13).
It might also be important to introduce a “Fiscal
Policy Committee”, which is similar to the MPC of
Central Banks, in MoF/EP. We found MPCs in many
African countries, partly because of the influence of
29
IFIs that considered the African macro predicament
to be a monetary management problem. However,
fiscal dominance is the basic feature of many African
economies, hence the need to have a “Fiscal Policy
Committee” similar to MPC as well.
Second, the capacity-building effort needs to be
based on models that the CBs and MoF/EP already
have.
Third, the modelling tools need to be developed with
the modelling unit staff, not for them.
The last two prongs are important to ensure the
modelling task is owned by the staff in the modelling
unit; this is crucial for sustainability. The suite of models
required may include:
i. Short-term, simpler forecasting tools (ARIMA,
VAR, DFM, Leading Indicators, etc.);
ii. A set of high-frequency models that suit the
Central Banks: such as DSGEs, QFM; and
iii. Macro-econometric models (including planning
tools such as the Medium-term Expenditure
Framework, especially for MoF/EP).
Notwithstanding the evidence discussed above, the
DSGE model does have valid uses. .
To address these issues and narrow the
macroeconomic modelling gaps, we proposed a
tractable DSGE model for Africa. The proposed
model should mirror the basic DSGE structure, as
Figure 13a: The Basic Structure of the Generic Modern DSGE Models
Source: Sbordone et al. (2010)
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
30
described in Annex V, which reasonably approximates
interlinkages among different sectors and
macroeconomic relationships feeding into a country’s
policy toolkit. The model should be underpinned
by basic theoretical principles in macroeconomics
but with robust empirical applications for practical
relevancy. The DSGE model can be used for ex-post
and ex-ante forecasts and should be flexible enough
to accommodate diverse economic structures,
emerging issues in the policy environment and
economic structure, and developments in the
external environment. It must be amenable to regular
updates at the desired frequency, as new data
becomes available.
The modern DSGE models (the New Keynesian Macro
Models), which are in use in many Central Banks
and research institutions in developed countries,
are derived from micro-foundations by assuming
a representative consumer and firm that carry
out optimization in an inter-temporal optimization
framework. This is crucial as it was central, among
other things, in addressing what is called the “Lucas
Critique” to the use of large-scale Keynesian macro-
econometric models for policy analysis in the 1960s
and 1970s. The DSGE models are also praised
for building macroeconomic models on a micro
foundation with deep parameters (parameters of
agents’ behavior and technological relation). They
are also essentially developed from real business
models and hence are meant to capture business
cycles. The basic structure and the workings of the
modern DSGE models are summarized in Figure 13a
while a version that could be employed in Africa is
given in Figure 13b.
In broad terms, the proposed model should encompass
interdependent relationships, capturing the dynamics
of each country’s economy, including the institutional
and structural aspects. In addition, there should be
feedback loops from key economic variables to the
rest of the sectors to complete the model structure;
these should be as disaggregated as possible, simple
in structure but rich enough to address the country’s
underlying key policy issues and development needs.
To adequately address structural and policy changes
and capture the realities of African economies, the
model should have various blocks that seek to meet
the challenges of countries with similar characteristics.
It should also be simple and easy to use but flexible
enough for customization to country- specific needs,
and its calibration must be cognizant of African data
challenges.
The flowchart and accompanying sectoral
disaggregation as depicted in Figure 13b show the basic
structure of the proposed model. The level of economic
disaggregation is determined by the objectives of the
model and data availability.

Figure 13b: Flowchart of the suggested DSGE model structure

The proposed basic DSGE model structure would
incorporate the following disaggregated elements:
I. Household Block: There are two types
of households namely:
o Pay taxes to the government
o Receive subsidies from the government
o Receive remittances from abroad

1. Ricardian households who have access to II. II. Firms Block: There are five types of
financial products, and firms operating in the following sectors:

2. non-Ricardian households who do not 1. Agriculture sector

have access to financial products
2. Mining/Oil sector
Characteristics of the household block:
3. Services
o Consume goods produced by the Firms
4. Manufacturing
o Supply labor to labor market
5. Other

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

31
Characteristics of the Firms block: o Domestic borrowing

o Produce goods and services o Foreign borrowing

o Pay wages to households o Provide subsidies to households

o Pay taxes to government o Provide subsidies to firms

o Participate in the Financial Market (through o Receive external grants

borrowing)
o Participate in the labor market
o Accumulate after-tax profits
III. Fiscal Policy Block: There is one
Fiscal Policy Authority, namely the
Government
IV. Monetary Policy Block: There is
only one Monetary Policy Authority,
namely, the Central Bank
Characteristics of the Central Bank
o Determines the level of money supply (Money
Targeting)

Characteristics of the Government o Sets the short-term interest rates (Inflation

Targeting Regime)
o Collect tax revenue (from households and firms)
o Set the exchange rates (Exchange Rate
o Collect non-tax revenue (from households and Targeting)
firms)
o Participate in the financial markets
o Determine spending needs
o Meet the borrowing needs of governments
o Recurrent spending and
o Set reserve ratios/requirements
o Development spending (fixed and non-
fixed development expenditure) o Domestic borrowing

o Participate in the financial markets to meet the o Foreign borrowing

borrowing needs
o Monitors the exchange rate developments

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

32
V. External Block: There are four 4. Debt distress
categories in this Block. These are:
VIII. Labour market Block: This block will
1. Exports have three (3) categories, namely;

o Agriculture sector 1. Aggregate and sectoral formal employment.

o Mining/Oil sector 2. Aggregate and sectoral informal employment.

o Services 3. Wage setting.

o Manufacturing IX. Financial Markets Block: This block will

have two types of financial markets that
o Other countries will select according to the
structure of their financial systems.
2. Imports
1. Developed financial markets
o Capital goods
2. Less-developed financial markets
o Commodity goods
X. Market Clearing: This block will set the
o Consumer goods
market clearing equations for the entire
Africa-Wide DSGE Model
o Relative import prices
XI. Model estimation/simulation
3. Remittances to households
The Bayesian estimation technique will be relevant for
4. Grants to governments and firms the African context since the posterior incorporates
judgement. Given data and many other modelling
VI. Prices Block: There are three types of challenges in Africa, judgement should not be divorced
Prices of Goods and Services, namely during the estimation process. The Octave and Dynare
software are suggested for this Model. The availability
1. Export Prices of this freely downloadable software is key for the
development of the Africa-Wide DSGE model since
o Oil prices indices some African economies are struggling with resources.
Alternatively, the model could be developed in a freely
o Mineral price indices downloadable web application such as the R-shiny
package on R-studio. This will make the model easily
o Agriculture commodity price indices accessible for RMCs to update, contextualize and use.

o Services price indices For implementation, it would be better to identify

common features of particular economies and develop
o Manufacturing prices indices a DSGE model that speaks to that group of countries.
For example, mineral-rich economies should have a
o Other Exports price indices model that is rich in natural resource dynamics. The
main objective of the proposed model is to improve the
2. Domestics Prices quality of the output and guide inclusive development
policy management in Africa. A model of this nature
3. Import Prices can help African policy makers to deduce relevant
and consistent policy interventions, given the unique
VII. Debt Sustainability Block: This block challenges they face. The development and training
will have four classifications that will in the use of the model should be systematically
structured, for instance, conducting synchronous
vary depending on a country’s latest
training of officials from countries with largely similar
results of the debt sustainability economic structures. This systematic approach may
analysis. help in getting the parameterization of the model to be
as close to reality as possible.
1. Low risk of debt distress
Lastly, it should be noted that the model development is
2. Moderate risk of debt distress costly, and sometimes, it is unsustainable. The process
should therefore be participatory and consultative to
3. High risk of debt distress enhance ownership and credibility, as noted above.

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

33
6 CONCLUSION &
RECOMMENDATIONS
Summary
This report has presented the status of macroeconomic
models and frameworks used for macroeconomic
policy management by policy institutions—the Central
Banks and Ministries of Finance/Economic Planning
(MoF/EP)—in Africa. It has outlined capacity gaps
in the modelling units of these institutions. All data
was obtained from responses to a questionnaire
that was administered across Central Banks and
MoF/EP. The questionnaire focused on establishing
the type of macroeconomic models used by these,
development and maintenance of the tools of the
models, macroeconomic software usage, challenges
faced by macroeconomic modelling units, and the
capacity gaps that exist in the area of macroeconomic
modelling.
The survey results point to similarities in the
macroeconomic models in both the Central Banks
and MoF/EP, perhaps because they are suited
to addressing somewhat similar challenges that
all African countries face. However, adaptability,
and ease of use vary, which can be attributed to
jurisdiction-specific constraints, including constraints
associated with model development, model
maintenance, and to some extent, challenges of
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
34
domestication of the models to the country context,
gaps in modelling skills, and data. Importantly, there
is evidence, in some jurisdictions, to suggest that
these models have been successful in addressing
some of the challenges, while others are flexible
enough to accommodate emerging issues. However,
further analysis suggests that models have not
been expanded to accommodate issues affecting
the conduct of macroeconomic management
such as natural disasters, climate change, gender
mainstreaming, and economics of pandemics.
The results also show that most modelling units
faced similar challenges of inadequate/unreliable
macroeconomic data, lack of enabling hardware and
software, high staff turnover, and in some cases, low
levels of macroeconomic modelling skills, particularly
intermediate-to-advanced skills.
The outcomes of the study led to several
recommendations to address the identified capacity
gaps and, in the process, improve the state of
macroeconomic modelling in Africa. This, however,
should be carried out on a case-by-case basis
because, as detailed in individual country reports,
the depth of these constraints varies from country
to country. The recommendations are presented in
tabular format in the next section.
Table 1: Capacity Areas and Recommendations
CAPACITY AREA
Strengthening Human Capacity/
Skill Development
Developing Advanced
Macroeconomic Modelling Tools
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
RECOMMENDATION(S)
The AfDB could consider a holistic and sustainable human and insti-
tutional capacity development strategy to develop the required skills.
It remains useful to support the modelling units in RMCs with short-
to medium-term training on various areas related to macroeconomic
modelling and forecasting, including: Introduction to Econometrics;
Intermediate Macroeconomic Modelling and Forecasting; Advanced
Macroeconomic Modelling and Forecasting; Macroeconomics; Mathe-
matics; Statistics; Accounting, Banking, and Finance; Introduction to
Microsimulations; Introduction to Social Accounting Matrix (SAM) and
Input-Output Tables; Financial Programming and Policy Frameworks;
Advanced Microsoft Excel; Panel Data modelling; Medium Term Fiscal
Frameworks; Model Performance and Evaluation; Conditional Fore-
casting & Bayesian Analysis.
A detailed curriculum and course outline for this is provided in Annex
VI.
The AfDB could also consider helping modelling units in RMCs to
identify and provide opportunities for long-term training such as Mas-
ters and PhD degrees, in areas related to macroeconomic modelling
and forecasting.
This, however, is unlikely to address the core challenge of high staff
turnover as the new MA/MSc and PhD graduates might seek more re-
munerative employment in the private sector and/or with development
partners. Thus, a holistic approach to capacity development, inclu-
ding ensuring competitive remuneration to the technical/macro-mo-
delling teams should be considered. Moreover, given that some RMCs
already have a decent pool of technical expertise while others — par-
ticularly the fragile states — are not as equally endowed, a capacity
needs assessment is necessary to ensure equitable capacity deve-
lopment. Such scrutiny of existing capacity gaps could inform appro-
priate remedial actions.
The AfDB could consider assisting modelling units in RMCs to develop
a suite of advanced macroeconomic modelling tools including the fol-
lowing: Quarterly Projection Model (QPM) of the Forecasting and Po-
licy Analysis System (FPAS); Dynamic Stochastic General Equilibrium,
(DSGE), Computable General Equilibrium (CGE), and Dynamic Factor
models (DFM); Artificial Intelligence/Machine Learning; and develop-
ment of a Social Accounting Matrix (SAM).
While the sophistication of the analytical tools is a crucial issue, a
concomitant issue is the efficiency of the institutional arrangements
underpinning the modelling routine (i.e., how open and timely is the
data exchange between relative departments such as the statistics
institute, tax agency, customs, and relevant line ministries; as well as
how often the model is maintained and data updated). Excel-based
models should be promoted for simpler modelling tasks.
35
CAPACITY AREA RECOMMENDATION(S)

The AfDB could consider assisting and/or intensifying its support to

Training on Macroeconomic
Software and Programming
Language
RMCs in the acquisition of relevant econometric software to support
macroeconomic modelling and forecasting efforts. This includes, but
is not limited to: EViews programming language; R, R-shiny, and
R-studio; MatLab/ Octave; Stata; Dynare/Iris; Stata; PC-give; and
GAMS.
The AfDB could consider developing introductory, intermediate,
and advanced courses in macroeconomic modelling and relevant
programming languages. This should be followed by in-country TA
missions to each country to consolidate the gains.

The AfDB could consider assisting modelling units in RMCs by

strengthening capacity for data management through short-to-
medium- term training on data management and related topics like:
data cleaning; data exploration; addressing structural breaks; seasonal
adjustment of series; now-casting techniques and developing high-
frequency indicators; creating a consistent macro database; building
input-output tables; and social accounting matrices.
The AfDB could consider helping modelling units in RMCs to develop
skills in advanced data techniques in situations where official data is
released with longer time lags.
Strengthening Data Quality and
The AfDB could consider creating a centralized repository for
Management
macroeconomic data that is constructed similarly for different African
countries (and possibly include vintages for each release). This
might go a long way to making a positive difference in teaching,
capacity development, macroeconomic model development, and
implementation in policy-making institutions.

Incorporating Emerging Issues in
existing Macroeconomic Models/
Frameworks
This, however, would not address the challenge of data gaps and data
unavailability. This needs to be tackled at the data collection stage
by assessing capacity gaps in RMCs’ Statistical Agencies with a
view to designing and implementing a holistic approach to capacity
development in these institutions.
The AfDB could consider supporting training (at the regional and/
or country levels) in RMCs to develop or improve existing models
to accommodate the analysis of emerging and pressing economic
issues.
AfDB could also provide technical and/or financial support to develop/
design macro-models for those countries without dynamic macro-
models.

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36
CAPACITY AREA
Strengthening Institutional Arran-
gements, Coordination, and Com-
munication.
Improving research and report
writing/ Methodology of Economic
Research
Developing an Africa-wide
macroeconomic model
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
RECOMMENDATION(S)
The AfDB could consider assisting in the creation of modelling units in
the Central Banks and Ministries of Finance/Economic Planning that
do not have one.
The AfDB could consider coordinating the capacity-building efforts
of various Regional Economic Communities (RECs) and regional
capacity-building institutions—such as the IMF’s Africa Training
Institute, the AFRITACs, MEFMI, and CMI—in macroeconomic
modelling and forecasting to achieve a more systematic approach
to macroeconomic modelling and forecasting. This will enhance
acceptance and eventually support the transition to a customized
Africa-wide macroeconomic model.
Regional Economic Communities (RECs) have agreed to convergence
criteria on various themes including macroeconomic stability. Thus,
RECs provide a good starting point for developing macro modelling
capacities as the partner states under a REC have typically already
subscribed to convergence criteria that can consistently be modelled
across partner states using a bespoke framework to accommodate
any country-specificities, among others.
Successful harmonizing of modelling standards across member states
in a REC would eventually support the transition to a customized Africa-
wide macroeconomic model. Furthermore, building communities of
practice (or ‘Modelling Technical Hub’) would be easier starting with
RECs, as several working groups focusing on various themes are
already in place, which creates incentives to build synergies with on-
going macroeconomic work streams.
The AfDB could consider helping institutional arrangements
(institutionalizing the modelling task) in RMCs in macroeconomic,
modelling, and forecasting.
The AfDB could consider assisting modelling units in report writing
and data visualizations, complemented with assistance in organizing
the units along research modalities in different aspects (blocs) of the
models.
The AfDB could consider assisting modelling units in RMCs by guiding
the staff to consult targeted topical research journals to help strengthen
the research function in the region.
The AfDB could consider developing a customized Africa-wide
macroeconomic model that can address structural and policy changes
and capture the realities of African economies. The model should be
able to help African policy makers to design applicable informed policy.
37
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ANNEXES

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39
 ANNEX I:
MACROECONOMIC
MODEL/FRAMEWORK
PERFORMANCE

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

40
 ARIMA Model Performance

Sectoral/ disaggregated analysis 20% 30% 50%

Simulations 25% 50% 25%

Policy Analysis 13% 50% 25%

Forecasting 0% 40% 60%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

ARIMAX Model Performance

Sectoral/ disaggregated analysis 1

Simulations 0

Policy Analysis 0

Forecasting 1

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Bank’s CashFlow Forecasting Model Performance

Sectoral/ disaggregated analysis 100% 0%

Simulations 0% 100% 0%

Policy Analysis 0% 100% 0%

Forecasting 0% 100%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Bank Liquidity Froecasting Model Performance

Sectoral/ disaggregated analysis 20% 80% 0%

Simulations 20% 60% 0%

Policy Analysis 40% 20% 40%

Forecasting 0% 40% 40%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

41
 CGE Model Performance

Sectoral/ disaggregated analysis 50% 0% 50%

Simulations 0% 100% 0%

Policy Analysis 0% 100% 0%

Forecasting 0% 50% 0% 25%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Dynamic Factor Model Performance

Sectoral/ disaggregated analysis 100% 0%

Simulations 0%

Policy Analysis 0%

Forecasting 0% 0% 67% 33%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Debt Sustainability Analysis Model Performance

Sectoral/ disaggregated analysis 0%

Simulations 100% 0%

Policy Analysis 100% 0%

Forecasting 0% 100%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

DSGE Model Performance

Sectoral/ disaggregated analysis 0% 100%

Simulations 0% 100%

Policy Analysis 0% 67%

Forecasting 40% 60%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

42
 FPP Framework Performance

Sectoral/ disaggregated analysis 13% 25% 50% 13%

Simulations 13% 63% 13% 13%

Policy Analysis 13% 38% 50% 0%

Forecasting 11% 22% 67% 0%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Inflation Forccasting Model Performance

Sectoral/ disaggregated analysis 17% 83%

Simulations 33% 67%

Policy Analysis 33% 67%

Forecasting 17% 67%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Leading Economic Indicators Model Performance

Sectoral/ disaggregated analysis 0% 67% 33%

Simulations 0% 67% 33%

Policy Analysis 0% 67% 33%

Forecasting 25% 25% 50%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Machine Learning Performance

Sectoral/ disaggregated analysis 0%

Simulations 0%

Policy Analysis 0%

Forecasting 100%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

43
 Macroeconomic Framework Performance

Sectoral/ disaggregated analysis 11% 11% 56% 22%

Simulations 14% 21% 57% 0%

Policy Analysis 7% 29% 57% 0%

Forecasting 7% 7% 64% 14%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Macroeconomic Model Performance

Sectoral/ disaggregated
analysis
11% 11% 33% 44%

Simulations 10% 20% 20% 50%

Policy Analysis 0% 9% 36% 55%

Forecasting 0% 15% 23% 31%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

MTFF Framework Performance

Sectoral/ disaggregated analysis 0% 100%

Simulations 100% 0%

Policy Analysis 0% 100% 0%

Forecasting 0% 100% 0%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

NearTerm Forecasting Model Performance

Sectoral/ disaggregated analysis 100% 0%

Simulations 100% 0%

Policy Analysis 0% 100%

Forecasting 0% 100%

0% 20% 40% 60% 80% 100%

Ranking Poor Below Average Average Good Excellent

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44
 QPM Performance
Sectoral/ disaggregated
9% 27% 64% 0%
analysis

Simulations 0% 33% 67% 0%

Policy Analysis 0%8% 75% 17%

Forecasting 0%8% 67% 25%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Real Effective Exchange Rate Model Performance

Sectoral/ disaggregated analysis 100% 0%

Simulations 100% 0%

Policy Analysis 0% 100% 0%

Forecasting 0% 100% 100%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

Threshold 21 Model Performance

Sectoral/ disaggregated analysis 100% 0%

Simulations 50% 50%

Policy Analysis 100% 0%

Forecasting 100% 0%

0% 20% 40% 60% 80% 100%

Ranking Poor Below Average Average Good Excellent

VAR Model Performance

Sectoral/ disaggregated analysis 29% 0%14% 57%

Simulations 14% 14% 43% 29%

Policy Analysis 14% 14% 43% 29%

Forecasting 0% 33% 67%

0% 20% 40% 60% 80% 100%

Poor Below Average Average Good Excellent

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

45
 ANNEX II:
COUNTRY SURVEY REPORTS

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

46
A Profile of Macroeconomic Models/Frameworks for BENIN
1. Introduction
This West African coastal country is one of several
underdeveloped African economies dependent on
subsistence agriculture — cotton production — and
port activity. Economic activity growth averaged
4.3% in the period 2010-17, peaking to 6.9% in
2019, mainly due to strong port and agricultural acti-
vity. In the following year, activity contracted sharply
to 2.0%due to the impact of the COVID-19-induced
health and economic crisis.
Annual consumer price index (CPI) inflation averaged
1.6% between 2010-17, decelerated sharply to -0.9%
in 2019 and, although it rose to 3% in 2020— based
on supply-side bottlenecks arising from the COVID-19
crisis—it remained within West African Economic
and Monetary Union (WAEMU) regional limit of 3%.
The fiscal deficit averaged 2.3% of GDP in the period
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2010-17, but narrowed significantly in 2019 to 0.5% of
GDP on the scaling down of public investment. Howe-
ver, as elsewhere, in 2020, the fiscal deficit deterio-
rated to 4.9% of GDP, surpassing the ceiling on WAE-
MU convergence criterion due to COVID-19 -related
recurrent expenditure needs. This was coupled with a
sharp decline in revenues occasioned by lockdowns
and the general economic slowdown.
The ratio of public debt to GDP has consistently risen,
rising from an average of 26.2% in 2010-17 to 45.4%
in 2020. This is attributed to the continued reliance on
the regional financial markets for the financing of public
investment projects, albeit on less concessional terms,
and the granting of government guarantees to the na-
tional electricity company. The COVID-19 -related re-
current expenditure needs, coupled with a sharp de-
cline in revenues occasioned by lockdowns and general
economic slowdown in 2020 excavated the problem. In
47
contrast, and at least in the period before 2020, the
external current account, including grants, as a share
of GDP, sustained an improving trajectory, having im-
proved from -5.1% in the period 2010-17 to –4.0% in
2019, on a significant increase in cotton exports, but
persistent trade imbalances and late disbursement
of external aid flows remain challenging. In 2020, the
external current account deficit deteriorated to -4.7%,
amplified by the effects of the COVID-19 pandemic
(disruptions to domestic and regional trade and value
chains occasioned by lockdowns, together with similar
disruptions at the global level, which severely affected
trade for most countries).
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks at the Central Bank
of Benin
Survey data from the Central Bank of Benin indicate
that the Central Bank has an Integrated Macroeco-
nomic Forecasting Framework, coded CIPREM. The
framework is used for macroeconomic analysis, en-
compassing the generation of macroeconomic fore-
casts and simulations, and guiding policy analysis. The
tool is locally developed and maintained at the Central
Bank of West African States (BCEAO) modelling unit.
2.1.1 Modelling Unit and Staffing
The local BCEAO modelling unit (in Benin) has existed
for more than 20 years. It has a staff of four, all of
whom have at best Master’s degree-level training.
2.1.2 Software in Use
The CIPREM modelling tool is supported by the
EViews, Stata, and R-studio econometric software.
2.2. Challenges in Macroeconomic
Models/Frameworks in Benin
Despite the extensive support with periodic training in
the use of econometric modelling software, the staff
has indicated that there remain significant challenges
in macroeconomic modelling.
• Inadequate macroeconomic data and/or data
gaps particularly on leading indicators are com-
monly used to plug gaps in critical data, espe-
cially on GDP that comes with a lag. Moreover,
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
48
even when data is available, it is subject to re-
visions. This has to some extent undermined
efforts towards real-time economic analysis re-
quired for sound macroeconomic policy imple-
mentation.
• Whereas the Integrated Macroeconomic Fore-
casting Framework is reported as having a good
forecasting ability, and on the average good ca-
pacity for policy simulation, it is also reported not
to be robust enough to analyze emerging and re-
cent developments that may affect the conduct
of macroeconomic management.
• Whilst CIPREM model operations and use of
EViews, Stata, and R-studio econometric sof-
tware are supported by periodic training, the
staff require some intermediate to advanced mo-
delling skills. Thus, even though there is an indi-
cation that the current capacity in the unit is suffi-
cient to meet the modelling needs of the country,
there are, in our view, some capacity gaps that
the team needs to close. This includes the ca-
pacity to independently adjust the macroeco-
nomic framework to accommodate emerging
needs and repeated and regular training on other
macroeconomic modelling tools and techniques
to supplement the existing ones.
3. Conclusion
So far, the report has given the status of macroeco-
nomic modelling in Benin based on the data collected
from a survey administered at the office of the BCEAO
in Benin. Although the data is supportive of a locally
calibrated model supported by sufficient skill sets,
challenges persist. There is a need for both regular and
intermediate to advanced modelling training on other
macroeconomic modelling tools and techniques to
supplement the existing CIPREM model, particularly
models that can incorporate and address specific poli-
cy issues arising from emerging economic challenges.
Such models may include DSGE, QPM, and short-term
forecasting models such as VAR and ARIMA.
To this end, capacity developments should particu-
larly be geared towards understanding processes of
deriving the micro-foundation of the QPM behavioral
equations, at least at first. There is also a need to
develop composite indicators to complete delays in
data releases, as well as the need to invest in ade-
quate software and hardware to support the function
of macroeconomic modelling and forecasting
A Profile of Macroeconomic Models/Frameworks for
BOTSWANA
1. Introduction
Botswana is a small, open economy whose eco-
nomic activity is driven by mineral production, par-
ticularly diamonds. The mining sector is the single
largest contributor to economic activity, contributing
about 80% to total GDP. The economy grew by an
average of 5% per annum between 2010 and 2019,
with a real per capita income growth of 4% per an-
num (IMF, 2021). The current account surplus, which
is largely driven by mineral exports, averaged around
3% of GDP over the same period. The country has
also recorded impressive fiscal performance with an
average surplus of about 5% of GDP in the recent
past. This was supported by good governance and
prudent management of mineral receipts and South
African Customs Union (SACU) transfers, which ac-
count for a combined contribution of 70% to the go-
vernment resource envelope. Furthermore, the cre-
dibility of fiscal policy has been enhanced by strong
fiscal frameworks and good fiscal discipline. Even
though total debt levels have risen, at an average of
16% of GDP, they remain well below the statutory
limit of 40% (broken down into 20% internal and 20%
external borrowing) of GDP. The ratio of total spen-
ding to GDP was lowered from 40% to 30% in 2009
to promote more fiscal discipline.
The monetary policy stance has largely been accom-
modative, with an average inflation rate of 5%, remai-
ning within the Bank of Botswana’s inflation objective
range of 3-6%, while the crawling peg system has
helped to maintain adequate levels of international re-
serves. The non-mining and non-government activities
have also slightly expanded (though not fast enough
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
to speed up economic activity) due to good fiscal and
monetary policies. These developments, together with
the favorable terms of trade have led to strong fiscal
and external positions and in the process secured
macroeconomic stability.
Despite this impressive economic performance, the
over-reliance on mineral production has rendered the
country prone to external shocks similar to those wit-
nessed during the 2008/09 global financial crisis and
the recent COVID-19 pandemic. These events have
put an unprecedented strain on economic growth,
severely impacting macroeconomic conditions in
Botswana. For example, the reliance on the two highly
volatile and unpredictable sources of government re-
venue, coupled with the reduction in external diamond
demand and increased government-related health ex-
penditure, has worsened immediate macro-financial
risks. This has increased external imbalances, weake-
ned international reserves, and the fiscal position as
well as moving the current account from surplus to
deficit, amid structural constraints that are reflected
in a low level of human capital and limited economic
diversification.
These issues, among others, contextualize the model-
ling environment in Botswana and have largely shaped
the choice of models used to design economic policy
interventions. Strengthening the capacity of economic
modelling units in the country is critical in depicting the
accurate trends of the current and future performance
of the country. In this regard, the section that follows
describes the status of these models and the challen-
ges encountered in the area of macroeconomic mo-
delling in Botswana.
49
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks in Botswana
Survey data from the Ministry of Finance and Eco-
nomic Development indicate that, overall, a suite of
macroeconomic tools is used to quantify the conse-
quences of policy actions on the economy, tell a
consistent story, produce macroeconomic forecasts,
and guide fiscal and monetary policy analysis and im-
plementation. The suite includes using a combination
of the Medium-Term Fiscal Framework (MTFF) and a
Computable General Equilibrium (CGE) model, the Fi-
nancial Programming and Policy (FPP) framework and
the small EViews-based macro-econometric model.
The MTFF is currently used to estimate and forecast
aggregate government revenue and expenditure and
the medium stance of fiscal policy, while the FPP is
also used for fiscal policy analysis. The small-scale
macro-econometric model is used to estimate the na-
ture of aggregate demand in the Botswana economy.
Most of these tools were developed with technical
support from regional and international bilateral and
multilateral institutions. In light of this, model main-
tenance is largely dependent on external support,
particularly for the advanced models that require pro-
gramming languages, such as the CGE model. Much
of the support required is to improve understanding
and updating of the Social Accounting Matrix (SAM),
parametrization and recalibration of the micro-foun-
ded equations, expanding the models with additional
blocks as well as adjusting the models to incorporate
emerging issues. However, using the existing mo-
delling skills and inter-institutional support, the MTFF
and the FPP creation and adjustments are created
internally.
2.1.1 Modelling Unit and Staffing
There are two employees in the unit who are Mas-
ter’s degree holders. However, despite their advanced
education they are not proficient in the level of skills
in macroeconomics and macro-econometrics needed
for advanced modelling.
2.1.2 Software in Use
The statistical software used for modelling includes
EViews, General Algebraic Modelling Language
(GAMS), and Microsoft Excel.
2.2. Challenges in Macroeconomic
Model in Botswana
Despite external technical support from regional and
international bilateral and multilateral institutions, the
country has also received extensive capacity building
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
50
support in the area of macroeconomic modelling. Al-
though this support focused on introductory and inter-
mediate level training, there remain significant challen-
ges in macroeconomic modelling.
i. There is inadequate macroeconomic data, parti-
cularly leading indicators to complement the de-
lay in release of key macroeconomic data. This
has undermined efforts towards real time econo-
mic analysis required for sound macroeconomic
policy implementation. Furthermore, where data
is available, it is not centralized or highly aggre-
gated and its updating does not follow formal
updating criteria.
ii. The existing models, particularly the advanced
ones, are unable to adapt and address speci-
fic policy issues arising from emerging economic
challenges. This has led to rigidities in model out-
put and over-reliance on external experts, which
has cost implications.
iii. There is also a shortage of macroeconomic mo-
delling staff, which is exacerbated by high staff
turnover. This has led to sustainability issues and
some over reliance on external experts.
iv. There is low coordination of the macroeconomic
modelling efforts between the Ministry of Finance
and Economic Development and other policy
institutions, particularly on advanced macroeco-
nomic models.
v. Financial resources to support and maintain
adequate hardware and software required for
macroeconomic models are lacking.
3. Conclusion
The status of macroeconomic modelling discussed
here is based on the data collected from a survey ad-
ministered at the Ministry of Finance and Economic
Development. The data suggest that there is some
progress in macroeconomic modelling, but challen-
ges persist. Specifically, there is a need for a syste-
matic capacity-building plan that addresses ongoing
needs of the Ministry.
In particular, the capacity-building plan needs to
focus on knowledge development of macroecono-
mic programming languages, expanding the MTFF
towards a Medium-Term Expenditure Framework
(MTEF), using advanced Microsoft Excel skills, and,
to some extent, public policy research skills. There
is also a need to develop composite indicators to
complete delays in data releases. Furthermore, there
is a need to improve coordination within and across
institutions. Finally, the Ministry does need to invest
in adequate software and hardware, to support
macroeconomic modelling and forecasting.
A Profile of Macroeconomic Models/Frameworks for
BURKINA FASO
1. Introduction
Burkina Faso’s economy is mainly driven by the agri-
cultural sector which contributes almost 30% to GDP
and absorbs more than 3/4 of the workforce. Mineral
activities, particularly gold production, also play a key
role in the country’s economic profile. The latest data
from the IMF database indicates that the economy
grew on average by 5.5% between 2014 and 2019,
mainly on account of growth in both of these sectors.
During the same period, the current account deficit
narrowed from 7.1% of GDP to 4% due to a positive
trade balance. This was brought about by favorable
commodity prices for the country’s main exports of
gold and cotton, and low international oil prices. The
deficit of the government budget was on average
around 3.6% of GDP owing to security and non-secu-
rity spending while the stock of public debt averaged
increases from 26.5% to 37.7% of
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
GDP. Despite the increases in expenditure, inflation
remained subdued. similar to the rest of Africa, the
country has been affected by the COVID-19 pande-
mic. Measures taken to contain the spread of the pan-
demic slowed economic activity across sectors, parti-
cularly those involving person-to-person contact such
as trade, transport, tourism, and the tourism-support
sectors. In this instance, overall economic growth de-
celerated to 0.8% in 2020 from 5.7% realized in 2019.
The slow economic activity translated to less tax col-
lection, while the accommodative fiscal policy sup-
port increased government expenditure. This led
to the deterioration in the budget deficit of 5.2% of
GDP in 2020 after a deficit of 3.5% of GDP recorded
in 2019. Overall, public debt reached 44% of GDP in
2020 from 42.7% in 2019. However, despite the in-
creases, Burkina Faso’s risk of debt distress remains
moderate, making the debt situation sustainable. The
51
developments in the external sector continue to mirror
the pre-COVID period. Gold and copper prices conti-
nue to increase well into 2020 reducing the current
account balance deficit further. Inflation increased to
1.8% on account of an increase in global food prices
but remained well below the region’s inflation target of
3% due to rising food prices.
Beyond 2020, a rebound in the economy is expec-
ted as global economic conditions improve. The eco-
nomy is forecast to grow by 4.3%; 5.2% and 5.6% in
2021, 2022, and 2023, respectively. The recovery is
premised on improved economic activity across sec-
tors. Increases in public investment, favorable gold
and cotton prices are also expected to contribute to
this growth. The twin deficits of fiscal and current ac-
count balance are expected to reduce in the short to
medium term, while inflation is anticipated to remain
below the region’s target.
These issues, among others, largely guide the model-
ling environment and the choice of macroeconomic
models used to analyze the macroeconomy in Burki-
na Faso. In this regard, the section that follows des-
cribes the status of these models and the challenges
encountered in the area of macroeconomic modelling
in Burkina Faso.
2. Survey Findings
2.1. Status of Macroeconomic Models
in Burkina Faso
Survey data from the Ministry of Economy, Finance
and Development indicate a suite of models is used
to model, forecast, and simulate the impact of policy
actions and shocks on the economy. These include:
• Automated Forecasting Instrument (AFI),
which is a macroeconomic framework used
for forecasting growth.
• Computable General Equilibrium Model
(CGE), which is used for simulating so-
cio-economic impacts of a public policy.
• Threshold 21, which is used for long-term
impact simulation on economic growth.
Except for the AFI model, which is developed, main-
tained, and updated by the local team, the develop-
ment, maintenance, and updating of the Threshold 21
model is foreign supported. The CGE model is sup-
ported by both the local and foreign teams. The AFI,
the CGE, and the Threshold 21 models are operated
with reasonable flexibility that accommodates tuning
or calibration for features peculiar to the local econo-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
52
mic environment and emerging policy issues. Howe-
ver, while the AFI model is excellent at forecasting and
good for sectoral/disaggregated analysis, it is rated
poor for policy analysis and simulation.
2.1.1 Modelling Unit and Staffing
Macroeconomic modelling at the Ministry is hosted in
a modelling unit, which has existed for 10 years. At the
time of the survey, the unit had a staff of eight, all with
Master’s degree-level training. This staffing capacity
is reported as insufficient to fulfil the institutional mo-
delling requirements capacity-building interventions in
macroeconomic modelling, econometrics, computer
programming, dynamic system modelling, and the
use of statistical software is needed. Hence, several
efforts such as short-term training, advanced Excel
skills, visual basics, general linear model, macroeco-
nomic and demo-economic modelling have routinely
been undertaken to address the macroeconomic mo-
delling capacity constraints.
2.1.2 Software in Use
The models are implemented via a host of econome-
tric software, including EViews, Stata, Gams, Jdeme-
tra, and Rapid Model.
2.2 Challenges in Macroeconomic
Model in Burkina Faso
The Ministry of Economy, Finance and Development
has benefitted from extensive TA support, particu-
larly with the development and operationalization of
Threshold 21 and the CGE model tools. Despite this,
as noted above, significant challenges in macroeco-
nomic modelling persist. These include low levels of
modelling knowledge and skills in the modelling unit;
over-reliance on foreign experts to build and/or im-
prove the models/frameworks; data gaps/unavailabi-
lity and inconsistencies which have limited the use of
models; and the modelling unit/team does not have
the requisite software resources.
3. Conclusion
The status of macroeconomic modelling in Burkina
Faso, based on the data collected from a survey ad-
ministered at the Ministry of Economy, Finance, and
Development, suggests that there is notable progress
in the area of macroeconomic modelling, indicating ef-
forts aimed at short-term training, advanced Microsoft
Excel, visual basics, general linear model, macroe-
conomic and demo-economic modelling to plug the
macroeconomic modelling capacity gaps. Challenges
persist, however; there is a need for a structured-sys-
tematic capacity-building plan that takes into conside-
ration the specific capacity needs of the Ministry.
A Profile of Macroeconomic Models/Frameworks for
CAMEROON
1. Introduction
Cameroon’s economy is diversified, with a reliance on
oil and agricultural commodities. Crude oil has been
the largest export in recent years, with crude petro-
leum exports amounting to USD1.34 billion in 2017.
The agricultural sector has also been a large and stable
contributor to GDP, with 14.1% in 2010, and 15.2% in
2020. The nature of Cameroon’s economy makes the
country highly susceptible to shocks typical of small
open African economies. In particular, oil price shocks
and commodity price shocks have had a substantial
impact on growth. In addition to these shocks, econo-
mic activity has been affected by the COVID–19 pan-
demic, which has resulted in the contraction in world
demand. This has seen GDP decline by 2.4% in 2020
from growth of 3.7% in 2019. Inflation has been fairly
stable and has been kept under the CEMAC threshold
of 3%, with an inflation rate averaging 2.5% and 2.4%
in 2019 and 2020 respectively.
The export sector’s reliance on oil exports has pre-
sented vulnerabilities stemming from volatile oil prices.
The decline in oil remittances has strained both the
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
external balance and the fiscal balance, with the cur-
rent account deficit increasing to 5.2% of GDP in
2020 from 3.1% of GDP in 2019. Similarly, the bud-
get deficit has increased from 3.6% of GDP to 4.9%
of GDP over the same period. This increase in fiscal
and current account deficits has also increased debt
financing of the deficits. Over-indebtedness is a cause
for concern, despite Cameroon being a beneficiary of
the Heavily Indebted Poor Countries (HIPC) initiative
in 2006. Debt increased from 12% of GDP in 2007 to
45.8% of GDP in 2020.
The compounded effects of the macroeconomic
shocks faced by Cameroon, as well as vulnerabilities
arising from the security situation in Cameroon require
programs to address the resulting economic conse-
quences. The authorities in Cameroon have adopted
a comprehensive economic reform program aimed at
restoring both external and fiscal sustainability. The
program is meant to promote inclusive growth, which
is driven by the private sector, and is supported by
multilateral institutions. The program is reliant on tech-
nical support and the use of several macroeconomic
models that ensure sustainability.
53
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks in Cameroon
Macroeconomic models are maintained by both the
Central Bank and the Ministry of Finance and Planning
and have been in existence since 2018. The modelling
team is staffed with three members.
Monetary policy models used include a Short-Term
Integrated Forecasting System (STIFS) demand mo-
del, which is used to project very short-term inflation
forecasts. Bayesian Vector Autoregressive (VAR) mo-
dels are also used to generate medium-term inflation
forecasts. Both of these models are developed, main-
tained, and updated locally by the modelling team.
A Dynamic Stochastic General Equilibrium (DSGE) mo-
del is used to simulate the effects of monetary policy
and the effects of exogenous shocks in the economy.
This model is developed locally, with the assistance
of foreign expertise, and requires foreign expertise for
maintenance and updating.
A DFM is also used for generating short-term GDP fo-
recasts, which is developed locally with the assistance
of foreign experts. To forecast other macroeconomic
variables, medium-term forecasts are generated using
a QPN model. Like the DFM and DSGE model, the
QPM model is also developed locally with the support
of foreign experts; it too requires foreign expertise to
update and maintain it.
While the STIF and DFM are highly effective for fore-
casting, the DSGE model proves most effective for
policy analysis. However, there is a gap as the current
models are not used effectively for simulations and the
analysis of disaggregated/sectoral data.
2.1.1. Modelling Unit and Staffing
Although the modelling department is new and
small, it is staffed by highly skilled individuals, two
of whom hold PhDs, and one who holds a Master’s
degree. However, although these individuals are
highly trained, the size/capacity of the teams makes
it difficult to meet the modelling requirements of the
Central Bank or Ministry of Finance/Planning. The
capacity gap has so far been bridged by training of
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
54
officers in appropriate institutions and collaboration
with foreign experts.
2.1.2. Software in use
Software used by the modelling unit to implement
models includes EViews, Stata, Matlab/ Dynare, and
Excel.
2.2. Challenges in Macroeconomic
Models/Frameworks in Cameroon
TThe modelling team faces challenges that range from
high staff turnover, unavailability of data, weak colla-
boration between the modelling team and partners
and funders in the region, and a lack of research in-
terest. In addition, the team does not have the requi-
site software and hardware needed to undertake the
modelling tasks, and not all the staff can utilize the
models. While funding and ownership of the techni-
cal tools would assist the modelling unit, the capacity
challenges could also be addressed by providing trai-
ning in the following areas:
• Programming using Matlab.
• Use of Dynare.
• DSGE modelling with the change of regime;
• Varieties of dynamic factor model.
• Econometrics and panel data analysis.
3. Conclusion
The macroeconomic modelling unit in Cameroon
is small and recently created. Although the unit has
made impressive progress in the last two years since
it came into existence, the country still faces macroe-
conomic instability. Strengthening the modelling unit
would help equip researchers and policy makers
to address macroeconomic challenges. Capacity
constraints prevent the full utilization of models at the
team’s disposal, and as such, capacity building aimed
at developing and enhancing the skills of the model-
ling team would assist in meeting the goal of macroe-
conomic stability. As the modelling unit is small, ca-
pacity building needs to be rigorous and intensive to
stimulate a research interest.
A Profile of Macroeconomic Models/Frameworks for
CENTRAL AFRICAN REPUBLIC
1. Introduction
The Central African Republic (CAR) is one of the
poorest and most fragile countries in the world, despite
its abundant natural resources and climatic conditions
conducive to agriculture and livestock. It also has a high
potential for export and industrial crops such as coffee,
cocoa, and cotton. For over 40 years, the country has
been caught in a cycle of recurrent violence such that
more than one million people have been displaced. The
cycles of violence have contributed to the mismanage-
ment of natural resources by a few elites.
Economic activity has been affected by violence; real
GDP averaged 3%–4% over the last decade. The
more recent political crisis, which occurred in 2013,
resulted in a recession of 36.7% but the economy re-
bounded to around 3% growth in 2019 propelled by a
recovery in the agriculture, mining, and transport sec-
tors. However, there was a slowdown in economic ac-
tivity again, mainly due to the impact of the COVID-19
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
pandemic in 2020, but growth remained positive at
about 0.8%, more than 2 percentage points below
its 2019 level,. The CAR’s economic activity is mainly
driven by the agriculture sector. Political instability and
violence deter the implementation of any economic re-
forms that can promote sustainable growth recovery.
Domestic revenue collection is far below expenditures,
such that the fiscal budget has been running deficits,
which are financed by borrowing. Hence, CAR’s debt
distress risk remains high due to the structural trade
imbalance, heightened by the country’s chronic ins-
tability. The CAR’s financial sector is underdeveloped
and dominated by a few banks located in Bangui.
There are four commercial banks and five approved
Microfinance Institutions (MFIs), which are mainly lo-
cated in Bangui on account of the concentration of
economic activities and relative security. The private
sector is in its infancy and consists of small and me-
dium-sized enterprises mostly operating in the infor-
mal economy.
55
The CAR is a member of the Central African Economic
and Monetary Community (CEMAC). As such, moneta-
ry policy is determined by the Bank of Central African
States (BEAC), which mainly prioritizes inflation control.
Its currency, the CFA Franc, has a fixed rate to the Euro.
Inflation dropped from 11.6% in 2014 to 2.3% in 2020,
due to improvements in the system of supplies from
Cameroon and the resumption of food production. This
inflation level remains below the convergence criterion
set at 3.0% in the CEMAC zone.
Post-electoral disputes and the related waves of in-
security are expected to slow the economy in 2021,
owing, among other things, to the blockade of the
Bangui-Douala corridor, which adversely affected
economic activity and tax revenues. Due to insecu-
rity, supply chains remain constrained by low agricul-
tural sector productivity, advanced deterioration of
infrastructure (particularly in the energy sector), and
limited access to credit. Growth in the banking sector,
estimated at 2.5%, remains shaky, while the recove-
ry in trade and transport accounts for tertiary sector
growth estimated at 6% in 2016.
2. Survey Findings
2.1 Status of Macroeconomic Models
The office/unit of the BEAC in CAR has a monetary
programming model which is used for estimating and
forecasting macroeconomic aggregates. The model
was developed locally without the support of external
consultants.
The Ministry of Finance has only two models: a Qua-
si-accounting model, which is used for the compu-
tation of annual GDP, developed with the assistance
of the AFRITAC Centre; and the TABLO model deve-
loped by AFRISTAT , but it is not used due to a lack
of data. Hence, at the time of the survey, only one
model was available for macroeconomic planning.
2.1.1. Modelling Unit and Staffing
The office/unit of the BEAC in CAR has a modelling
unit that has been in existence for about twenty years
with a staffing of only two people who hold Master’s
degrees. The Ministry of Finance has a modelling unit
that was established in 2019 by presidential decree
but the unit has operated sub-optimally due to inade-
quate resources. The unit has 10 officers with Mas-
ter’s degrees. The present capacity of the Ministry is
said to be inadequate.
2.1.2. Software in Use
The models for the Central Bank and the Ministry of Fi-
nance are both operated on EViews and Excel platforms.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
56
2.2. Challenges in Macroeconomic
Models/Frameworks in the Cen-
tral African Republic
The key challenge faced by the CAR is low staffing
levels. Other challenges have to do with high staff tur-
nover, low modelling skills, funding gaps, data gaps
and data unavailability, shortage of reliable hardware
(computers), and poor coordination between the mo-
delling unit and the other stakeholders.
Inadequate knowledge and specialized training of staff
has led to an overreliance on experts in the MoF. This
is compounded by inadequate hardware and software
to undertake the macroeconomic modelling to guide
policy. The solutions to address these challenges, in-
clude:
• Financial support for the operation of the macroe-
conomic and budgetary framework committee.
• Training support on the model (QAM-RCA); EWM
for team members; and support for the improve-
ment of the QAM model.
3. Conclusion
The CAR is a member of CEMAC. Its economic acti-
vity is largely driven by minerals but the informal sec-
tor remains large. The modelling environment is, the-
refore, partly influenced by the nature of the economy
and regional participation. Data suggests that there is
some progress in the area of macroeconomic model-
ling, but challenges persist.
There is a need for a structured, systematic capa-
city-building plan that aims to create and sustain a
macroeconomic modelling unit. In particular, the mo-
delling unit needs to be well-resourced and supported.
Intervention is needed to support the development of
a host of other macroeconomic modelling tools and
techniques as is the case with other Central Banks
to supplement the existing Excel and EViews-based
financial programming and policy framework. Such
models may include the now widely acceptable FPAS
framework as well as short-term forecasting VAR and
ARIMA class model tools. Moreover, there is a need
to improve coordination within and across institu-
tions and the need to invest in adequate software and
hardware, to support the function of macro-eco nomic
modelling and forecasting.
From the Ministry’s point of view, a significant drawback
in the modelling work is the non-functionality of the
CAR’s macroeconomic framework team although the
decree establishing this committee has existed since
2019. In addition, the team lacks financial resources
(the budget allocated by the State is insignificant).
A Profile of Macroeconomic Models/Frameworks
for DEMOCRATIC REPUBLIC OF CONGO

1. Introduction Modelling Unit and Staffing

The Democratic Republic of Congo (DRC) faces The Central Bank’s modelling unit has 15 officers, all
considerable development challenges despite its rich holding Master’s degrees. However, this number is still
natural resource base. It is a fragile state marked by considered insufficient to undertake modelling.
political instability, weak institutional capacity, and
poor governance. Most of its nine bordering coun- 2.1 Software
tries have faced violent conflict with spillover effects
to DRC. The country has experienced episodes of The Central Bank uses E-views, Stata, and MATLAB
violent conflict since independence in 1960 and a full- as the main software.
scale civil war from 1997 to 2001. Since the end of the
civil war, efforts have been made to rebuild the state 2.2. Challenges in Macroeconomic
and transition to democracy, but public management Models/Frameworks
and institutions remain weak and vulnerable. The on-
going violent conflicts have led to a humanitarian crisis The modelling team noted several significant challen-
with over five million displaced people and widespread ges in executing tasks. As such, the following needs
violence against civilians. Poverty is widespread with should be addressed:
poor social indicators amidst a high population growth
rate of around 3% a year. • Development of appropriate models.
• Provision of training opportunities.
The country has grappled with Ebola disease, political • Enhancing capacities that have led to an overre-
transition, and falling oil, copper, and cobalt prices, all liance on foreign experts.
of which affect fiscal and real sector performance. Real • Improving identification and collection of data to
GDP growth has averaged around 4% between 2016 remove gaps.
and 2020, with the extractive industry in the dominant • Strengthening collaboration between units.
position. Inflation was recorded at 3.2% in 2016 before
sharply rising to 43% and 29.8% in 2017and 2018, Capacity building and/or training needs include: ad-
respectively. By 2020, inflation was significantly down vanced training in DSGE modelling, advanced training in
to 4.8%. On the external front, the country remains CGE modelling, advanced training in Time Series Analy-
vulnerable as it depends on international prices of its sis, Advanced Macroeconomics training, and training in
main export products, namely oil, copper, and cobalt, Advanced Microeconomics.
which have fluctuated radically in the past five years.
The terms of trade had worsened by 0.6 percentage
points by 2020. The fiscal sector also underperforms,
3. Conclusion
with an overall balance that has remained largely ne-
The DRC is lagging in terms of model development
gative since 2016 and was recorded at - 0.1% of GDP
and application. Interventions would require both
in 2020. The proliferation of taxes and tax institutions,
hastening the setup of modelling infrastructure and
widespread fiscal exemptions, a narrow tax base, and
scaling up the skill levels of staff.
long, porous borders are the underlying factors affec-
ting revenue performance. External debt has broadly
been improving with the 2020 position recorded at
12.1% of GDP from 17.6% in 2016. The business cli-
mate remains difficult due to a wide range of factors,
notably the complexity of taxes, and judicial vulnerabi-
lities while weak infrastructure results in high produc-
tion costs.

2. Survey Results
Status of Macroeconomic Models/
Frameworks

The Central Bank of the Democratic Republic of

Congo has no official macro model. However, they
have a small-scale econometrics model (VECM) for
forecasting inflation and the exchange rate.

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57
A Profile of Macroeconomic Models/Frameworks for EGYPT
1. Introduction
Egypt’s economy, the second largest in Africa, is
classified as diversified. Growth relies on agriculture,
petroleum, natural gas, and tourism. Revenues from
the Suez Canal and remittances constitute the core
sources of foreign currency. It has been identified by
the IMF as one of the top countries in the world, in
terms of the economic reforms that began after un-
dergoing the balance-of-payments pressures, high
debt profile and low growth of 2010. Policy makers
embarked on a home-grown program with the IMF
in 2016 after facing an urgent and long-standing
structural challenge. The IMF supported Egypt with
USD12 billion through the Extended Fund Facility
(EFF) program over three years. The reforms aimed
at achieving more sustainable, inclusive, and pri-
vate-sector-led growth that would improve the living
standards of all Egyptians. Egypt’s economic reforms
have helped strengthen growth, reduce unemploy-
ment, increase foreign exchange reserves, and put
public debt on a downward path.
Monetary policy is used mainly to target inflation,
which averaged almost 30% in 2017—after the Egyp-
tian pound’s flotation—but eased to 14.4% in 2018
and reached 5.3% in 2021. This allowed the Central
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
58
Bank of Egypt (CBE) to cut policy rates by 200 basis
points in 2018, with a further 100-basis-point cut in
February 2019. An eventual decline in inflation trends
after COVID-19, accompanied by real currency ap-
preciation and interest rates moving down globally,
led the CBE to opt for a loose monetary policy stance
that led to improved credit conditions. Production
from the Zohar gas field, which came on stream at
end-2017, has sharply reduced the need for fuel im-
ports. Egypt is on a trajectory towards self-sufficien-
cy in gas bolstered by the discovery of large offshore
gas fields. Increasingly, domestic gas production
should improve electricity supply and support eco-
nomic activity in the coming years.
The fiscal policy stance improved after the bold mea-
sures that were adopted by the government. Fol-
lowing the 2016 reforms, energy subsidies were set
to be replaced gradually by a market-based pricing
system, in addition to structural revenue enhance-
ment measures including new taxes on real estate,
capital gains, and dividends, as well as higher taxes
on alcoholic beverages and cigarettes. In line with the
increasing budget allocations to health and educa-
tion to comply with the constitutional requirements,
spending on social safety nets and infrastructure also
has risen.
2. Survey Findings
2.1. Macroeconomic Modelling
Background
The Central Bank of Egypt uses a suite of macroeco-
nomic tools to quantify the consequences of policy
actions on the economy, tell a consistent story, pro-
duce macroeconomic forecasts, and guide fiscal and
monetary policy analysis and implementation.
On the monetary policy side, the key policy framework
is the Forecasting and Policy Analysis System (FPAS)
which is underpinned by the canonical Quarterly Pro-
jection Model (QPM). Other macroeconomic tools em-
ployed are the Autoregressive Integrated Moving Ave-
rage (ARIMA) model and a macro-econometric model.
These tools are aimed at policy analysis, simulation,
and forecasting of inflation along with producing other
necessary macroeconomic indicators, for example,
the real effective exchange rate, in order to facilitate
the policy decision-making process. Most of these
tools were established first through a foreign technical
assistance mission but currently they are developed,
upgraded, and managed internally through a colla-
boration between various departments of the Central
Bank of Egypt. In light of this, model maintenance is
largely well equipped, particularly the advanced mo-
dels that require programming languages such as the
QPM and the ARIMA model. The models are flexible
and sufficient to accommodate the analysis of emer-
ging policy issues.
Much of the support is required in understanding and
updating the parametrization and recalibration of the
micro-founded equations and expanding the models
with additional blocks as well as adjusting the models
to incorporate shocks and unforeseen issues. The
staff of the CBE acknowledge that the models used
for forecasting inflation, the real exchange rate, and
macroeconomic framework are solid with good out-
puts. However, the staff stated clearly that the ARI-
MA and QPM models need more attention, and their
performance should be improved to reach the desired
outputs.
2.1.1. Modelling Unit and Staffing
The modelling unit has been in existence since
2006 and consists of seven economists who hold
Master’s degrees, headed by one PhD holder. The
CBE has realized that a key requirement for suc-
cessful macro-prudential policy is to be able to link
the surveillance data and tools with models that cor-
rectly calibrate them and time interventions without
creating new problems because of complexity and
interdependence interactions that are not well un-
derstood.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Software in Use
The CBE uses MATLAB, EViews, and Stata software.
2.2. Challenges in Macroeconomic
Model/Framework
The Survey found that the present capacity is not
enough to fulfil the institution’s modelling require-
ments. The areas highlighted by the staff that need
to be addressed and contribute to capacity building
include:
• Increasing the number of qualified econometri-
cians.
• Providing training and technical assistance from
experts.
• Enhancing access to sophisticated software
and the practices commonly used.
• Providing assistance to address data gaps/
unavailability. (This was highlighted as a priority
area that has limited the ability of the CBE staff
to yield concrete outputs from modelling.)
• Expanding the low levels of modelling knowledge
and skills in the unit. (This will alleviate over-re-
liance on foreign experts to build and/or improve
the models/ frameworks and improve the user
inputs to address the inability of the models/
frameworks to provide accurate forecasts).
For this purpose, the Central Bank needs to invest in
human capital to create a qualified team of staff who
fully understand the functioning of the economy and
are familiar with the requirements of an inflation-tar-
geting regime. Forecasting techniques are also crucial
and need to be improved. Producing forecasts of the
trends in the main macroeconomic indicators and ma-
king projections of inflation dynamics requires the de-
velopment of macroeconomic modelling capabilities,
as well as collecting and refining the data needed to
implement them.
3. Conclusion
Outstanding progress has been made on macroeco-
nomic modelling in Egypt. Several features, from mo-
del adaptability to data constraints, hinder maximizing
the benefits from Macro-modelling frameworks. A mo-
del’s sustainability can be assured by harmonizing it
and ensuring that employees from different stakehol-
ders interact with it frequently. The current state of
Macro-modelling in Egypt highlights the need for ca-
pacity building that must be continuous but well-tar-
geted to resolve challenges.
59
A Profile of Macroeconomic Models/Frameworks for
ETHIOPIA
1. Introduction
Ethiopia has experienced high levels of growth that
have been driven by the service and industry sectors
over the past decade. Due to Ethiopia’s reliance on the
service sector, the economy is susceptible to shocks
emanating from low investor confidence, which is part-
ly due to sporadic domestic conflicts. The economy is
also affected by the weakness in global growth, espe-
cially following the COVID-19 pandemic, and climate
change. GDP growth was 8.4% in 2019 and came
down to 6.1% in 2020. Despite this high growth, howe-
ver, the export sector has had some challenges. While
the main exports in 2020 were gold, flowers, and coffee,
which resulted in an increase in export revenue of 12%.
However, generally weaker exports in recent years, due
to lower global demand and weaker commodity prices,
have resulted in shortages of foreign currency, which
has resulted in liquidity pressure in the economy.
Despite the weaker export results, the current account
deficit narrowed to 4.5% of GDP in 2018/2019. This
was due to a decline in imports which outweighed
the weaker exports, and tight controls on the accu-
mulation of external debt to finance the current ac-
count and fiscal deficits. The tight controls on external
borrowing have also resulted in a reduction in debt to
55% of GDP in 2020 from a high of 61% of GDP in
2018. On the other hand, while the fiscal deficit was
1.3% of GDP in 2010, it declined from 3% of GDP in
2018 to 2.5% of GDP in 2019. The decline in the fis-
cal deficit has been accompanied by a decline in tax
revenue collection of 10%, which was mainly due to
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
60
the weak performance of Ethiopian Airlines. Alongside
these challenges on the fiscal front, the monetary front
has not fared any better. Double-digit inflation has
been the trend, with a rate of 20.4% in 2020.
Against this background, policy authorities are now
engaging in tighter monetary policy measures to curb
inflation. To implement tighter monetary policy and
debt reduction measures, the authorities in Ethiopia
are undertaking a home-grown economic reform plan
to control inflation and macroeconomic instability. This
plan includes a mix of macroeconomic, structural, and
sectoral policies and requires the technical expertise
of macroeconomic modelling experts to ensure sus-
tainability targets are met.
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks
Macroeconomic modelling is done by the National
Bank of Ethiopia in a modelling unit staffed by six
members. It has been in place for the last 10 years.
Time series models are used for monetary policy ana-
lysis, with the ARIMA model used for short-term fore-
casting. This model generates monthly disaggregated
inflation and exchange rate forecasts and is locally de-
veloped. Medium-term quarterly inflation forecasts, on
the other hand, are generated from a locally developed
macroeconomic inflation model. Lastly, a liquidity fore-
casting framework is used to obtain short-term weekly
liquidity forecasts and long-term structural liquidity fo-
recasts. This liquidity forecasting framework was lo-
cally developed with the IMF’s assistance.
The most used model for forecasting GDP and other
macroeconomic aggregates is a macro-econometric
model. This model is used for policy simulation, gene-
rating medium to long-term forecasts of macroecono-
mic variables and evaluating alternative policy options.
This model was developed locally with the assistance
of foreign consultants. In addition to the macro-eco-
nometric model, a Composite Indicator of Economic
Activity (CIEA) which is based on an elastic net pena-
lize regression is also used. This model is particular-
ly useful for nowcasting and for forecasting GDP by
sector for major economic sectors. The CIEA model
was locally developed with the IMF’s assistance under
East AFRITAC. The macro-econometric model, CEIA,
macroeconomic inflation model, ARIMA and Daily Li-
quidity Forecasting model are all locally maintained
and updated. Other macroeconomic models for fo-
recasting and policy analysis however require foreign
expertise for maintenance and updates. The most
useful models in terms of forecasting, policy analysis,
and simulations have been the CIEA model and the
Liquidity forecasting framework. The performance of
the macro-econometric model framework, the ARIMA
model, and the Macroeconomic inflation model has
been average and could be improved with training and
capacity building.
2.1.1. Modelling Unit and Staffing
Although the modelling unit has been in existence for
10 years, its capacity is not sufficient to meet the ins-
titution’s modelling requirements. Of the six members
of the unit, four hold Master’s degrees while two hold
Bachelor’s degrees, which leaves a capacity gap in
the department. The National Bank of Ethiopia has
tried to bridge this gap by providing software trai-
ning, providing modelling software, and computers.
The National Bank has also allowed modelling unit
members to attend IMF training sessions. However,
despite these efforts, a capacity gap still exists, as
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
members of the modelling unit do not have sufficient
experience and require higher-level academic training,
such as PhD-level training.
2.1.2 Software in use
Software used by the modelling unit to implement
these models includes EViews, R-Studio, and MAT-
LAB.
2.2. Challenges in Macroeconomic
Models/Frameworks
The most pressing challenges faced by the modelling
team include a high staff turnover and low levels of
modelling knowledge and skill in the modelling unit.
Although training opportunities have been provided,
these have not been sufficient and more workshops
and training opportunities are needed, especially since
only a few of the unit members can adequately utilize
the existing models. The lack of experience and skill of
the modelling unit has meant that models sometimes
provide inaccurate forecasts and cannot be relied
upon. In addition, top management cannot fully use
model results for policy analysis, a problem that could
be addressed through capacity-building programs.
3 Conclusion
The macroeconomic modelling unit in Ethiopia, though
relatively small, is well established and has been in
existence for 10 years. While the unit has made great
strides in modelling, it faces challenges that mainly
stem from weak skills, low training, and a weak unders-
tanding of the models. Given the background of slower
growth, high debt levels and double-digit inflation, ca-
pacity building is necessary to enhance the skills of
the modelling unit and equip them to fully harness the
benefits of the macroeconomic models in use. Capa-
city-building efforts should focus on providing training
on models and software, providing opportunities for
unit members to pursue higher education levels, and
assigning experienced staff to the department who can
transfer knowledge to the existing staff.
61
A Profile of Macroeconomic Models/Frameworks for
Republic of GABON
1. Introduction
Gabon recorded strong economic growth between
2010 and 2019. During this period, the economy
grew, on average, by 4%, driven by both the oil and
non-oil economic activities (agricultural, forestry,
and transportation sectors), which recorded positive
growth during this period. Furthermore, the govern-
ment budget was fairly balanced while the stock of
public debt as a percentage of GDP averaged 42%.
The average current surplus was around 4%, on
account of strong exports, while inflation hovered
around 2% (IMF, 2021). However, in 2020, macroe-
conomic conditions in Gabon deteriorated due to the
global economic slowdown linked to the COVID-19
pandemic. In 2020, real GDP contracted by 1.8%
due to a dip in oil production, global oil prices, and
reduced economic activity in the non-oil sectors.
The adverse effects of the developments in the glo-
bal oil market, the COVID-induced operating environ-
ment, and supply-side disruptions put pressure on
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
62
the fiscal and external balances. The former, which
is largely driven by oil receipts, was overwhelmed
due to competing spending needs, including spen-
ding on health and social protection expenditures. In
this regard, the budget balance worsened and re-
corded a deficit of 1.7% of GDP in 2020 compared
to a surplus of 2.1% in 2019. The stock of public
debt also increased from an average of 61% of GDP
recorded between 2010 and 2019 to 102% of GDP
in 2020. (AfDB, 2021). The current account deficit as
a percentage of GDP widened from 1.8% to 5.1%
between 2019 and 2020.
Gabon’s economy is expected to rebound, in line with
the anticipated global economic recovery. This should
improve Gabon’s macroeconomic conditions in the
short-to-medium term. Growth is expected to pick up
to 3.5% by 2023, while the fiscal and external balances
are expected to be balanced during the same period. In
addition, public debt levels are expected to reduce from
78% of GDP to 68% of GDP on account of prudent
fiscal and debt management policies. The downside
short-term risks to these expectations are the possibility
of protracted impacts from the COVID-19 pandemic.
These issues, among others, guide the modelling en-
vironment and the choice of macroeconomic models
used to analyze the macroeconomy.
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks
Survey data from the office of the BEAC in Gabon in-
dicates that the bank has a mix of monetary program-
ming, FALB, and ICAE models, that are used to guide
the conduct of macroeconomic management encom-
passing the generation of macroeconomic forecasts
and simulations and guiding policy analysis.
Three models are in use: a monetary programming
model as its macroeconomic framework to forecast
macroeconomic aggregates; the FALB model for fo-
recasting bank liquidity; and the ICAE model for esti-
mating infra-annual macroeconomic indicators. All of
these are developed, fitted, and maintained locally.
2.1.1 Modelling Unit and Staffing
The office does not have a dedicated modelling unit.
2.1.2 Software in Use
The above models are implemented in Matlab,
EViews, STATA, and R-studio econometric software.
2.2 Challenges in Macroeconomic
Models/Frameworks
Despite the extensive local effort in the operatio-
nalization of the modelling frameworks, staff have
indicated that the inflexibility of these models is an
issue and that there are significant challenges in
macro-econometric modelling.
The models/frameworks in use are inappropriate for
the modelling needs of the country, as they are inade-
quate for achieving information needed to perform
forecasting, policy analysis, simulation, and sectoral
analysis, in other words, they are not robust. Moreo-
ver, they lack the flexibility to accommodate the ana-
lysis of specific policy issues arising from emerging
economic challenges, leading to rigidities in model out-
put and over-reliance on external expertise.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
The other challenge relates to inadequate and/or
unavailability of macroeconomic data, particularly
the high frequency and leading indicators to plug
gaps associated with key macroeconomic data that
come with a lag or are subject to frequent revisions.
As it is, efforts towards real-time economic analysis
required for sound macroeconomic policy imple-
mentation are undermined. Whilst the capacity of
model operators is not indicated, responses point
to some capacity gaps, including skills in mathe-
matics, statistics, macroeconomics and macroe-
conomic modelling and tools, and programming
techniques to supplement the existing knowledge.
Another challenge singled out is low and/or weak
collaboration of modelling efforts with similar agen-
cies and funders in the region, particularly on ad-
vanced macroeconomic models.
3. Conclusion
The report has given the status of macroeconomic
modelling in Gabon based on the data collected
from a survey administered at the office of the BEAC
in Gabon. The data suggests that there is some
progress in the area of macroeconomic modelling,
but more is needed, namely:
• A structured-systematic capacity-building plan
that aims to create and sustain a macroecono-
mic modelling unit. In particular, the modelling
unit needs to be well-sourced and include sup-
port for medium-to-intermediate-to advanced
skills training in macroeconomic modelling.
• Technical assistance interventions to support
the development of a host of macroeconomic
modelling tools and techniques, as exist in
other Central Banks, to supplement the exis-
ting ones. Such models may include, the now
widely acceptable FPAS framework, DSGE, as
well as short-term forecasting VAR and ARIMA
class model tools.
• Development support for high-frequency and
leading indicators, such as a composite index
of economic activity, to compensate for delays
in data releases. Improvements in coordination
within and across institutions and investment
in adequate software and hardware to support
the function of macroeconomic modelling and
forecasting.
63
A Profile of Macroeconomic Models/Frameworks for GHANA
1. Introduction
Economic activity in Ghana, which has been driven by
the service, industrial, and agriculture sectors was on
an upward trajectory prior to the COVID-19 pandemic.
These sectors contribute about 50%, 28%, and 22%
to GDP, respectively. The latest available data from the
IMF indicates that the country grew by an average of
6.7% between 2010 and 2019. This growth was at-
tributed to strong external and domestic demand as
well as growth in the industrial sector. During the same
period, as a percentage of GDP, government revenue
and government expenditure, averaged 13.4% and
20%, respectively. These fiscal developments led to
an average fiscal deficit of 6.6% during this period. As
a result, the stock of public debt as a share of GDP
rose from 34% in 2010 to 62% in 2019. The current
account balance in Ghana narrowed from 6% of GDP
in 2010 to about 2% of GDP in 2019 due to a strong
trade balance realized throughout the period.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
64
Ghana recorded single-digit inflation between 2010
and 2012. However, inflation rapidly increased after
that, peaking at 17% in 2016. Inflation has subse-
quently been on a downward trend reaching 7% in
2019.
In 2020, macroeconomic conditions in Ghana were
adversely affected by the COVID-19 pandemic. Real
GDP slowed to 0.4% from 6.5% recorded in 2019.
This slowdown in economic growth is mainly attri-
buted to COVID-19 containment measures and weak
global macroeconomic conditions, as well as low ex-
ternal and domestic demand. In the same vein, re-
venue collection reduced while expenditure pressures
increased and, in the process, widened the fiscal defi-
cit to 15.7% of GDP from 7.2% realized in 2019. Fur-
thermore, the stock of public debt as a share of GDP
increased from 63% in 2019 to 79% in 2020. The cur-
rent account deficit also widened due to low external
demand which affected export growth while inflation
increased to 9.8%.
Going forward, improved global macroeconomic
conditions, strong domestic demand, and growth in
capital expenditure are expected to lead to the reboot
of economic activity in Ghana. Furthermore, the ea-
sing of COVID-19 pandemic restrictions and impro-
ved COVID-19 vaccine access are also anticipated
to improve growth beyond the COVID-19 era. In this
connection, the real GDP in Ghana is expected to
grow by 4.7%, 6.2% and 4.7% in 2021, 2022, and
2023 respectively. This positive growth is expected to
boost revenue collection and narrow the fiscal defi-
cit, which as a percentage of GDP is expected to be
14.5%, 11%, and 10.3% in 2021, 2022, and 2023,
respectively. However, despite this positive growth,
the stock of debt as a percentage of GDP is expected
to remain high, averaging 85% during this period. In
addition, inflation is expected to reach 9.2% in 2021
and reduce to 7.9% by 2023, while the current ac-
count deficit will average 3.3% over the same period.
These issues, among others, largely guide the model-
ling environment and the choice of macroeconomic
models used to analyze the macroeconomy in Ghana.
In this regard, the section that follows describes the
status of these models and the challenges encounte-
red in the area of macroeconomic modelling in Ghana.
2. Survey Findings
2.1 Status of Macroeconomic
Models/Frameworks at the
Central Bank of Ghana
Survey data from the Central Bank of Ghana reveal
a suite of macroeconomic tools used for macroeco-
nomic management. This includes the Quarterly Pro-
jection Model (QPM), which was developed locally
with external support, and is used for medium-term
macroeconomic forecasting, simulation, and poli-
cy analysis. There is also a suite of models such as
VAR, ARIMA, and Dynamic Factor Models as well as
Machine Learning for nowcasting inflation and GDP.
The Bank also uses a Macroeconomic framework that
was both developed by local and foreign experts. This
framework is used to generate medium-term fore-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
casts for key macroeconomic variables. In addition,
there is also a Debt Sustainability Analysis Framework
(DSA) to analyze the debt dynamic and profile in Gha-
na. The DSA was also developed by both local and
external experts. Lastly, the Central Bank highlighted
that, generally, all their models are flexible enough to
accommodate emerging issues.
2.1.1 Modelling Unit and Staffing
The modelling unit has existed for more than 19 years.
It has a staffing of eleven 11 people. Five of the staff
members have PhD degrees while the rest have Mas-
ter’s degree-level training. The capacity of the Central
Bank was deemed adequate to support the function
of macroeconomic modelling.
2.1.2 Software in Use
The following software is used by the Central Bank
of Ghana: Matlab, EViews, R-Studio, and Microsoft
Excel.
2.2 Challenges in Macroeconomic
Models/Frameworks
Despite the extensive support with continuous tech-
nical support from the IMF and training on various
macroeconomic modelling courses organized by the
IMF and other regional Central Banks, the staff has in-
dicated that the most significant challenge in macroe-
conomic modelling are the occasional significant revi-
sions of GDP figures. The staff also indicated that the
changing macroeconomic structure in Ghana requires
additional satellite models as inputs into the QPM.
3. Conclusion
Macroeconomic modelling in Ghana appears to be on
the right track. One area of improvement should be
enhancing the capacity of the staff on suitable expan-
sions of the QPM to allow for responsiveness to the
changing economic structure. Another is to enhance
the capacity of staff on methods to control for the
constant revisions of GDP data.
65
A Profile of Macroeconomic Models/Frameworks for GUINEA
1. Introduction
Guinea mainly exports bauxite, for which it holds the
largest known reserves. Other exports are iron, gold,
diamonds, oil, and coffee. Guinea’s GDP is, therefore,
driven by mining activities followed by the non-mining
sector which employs the majority of the population.
Bauxite production has steadily increased since 2010
moving from around 15 million tonnes to around 84
million tonnes. Guinea has a population of about 13
million people. Its history of military regimes affects the
economy. The country’s GDP growth has averaged
around 6% since 2019 with the mining sector sho-
ring up the major part. Inflation averaged 10% in the
3 years leading to 2021 and is largely driven by food
prices which contribute over 80%.
The country’s overall fiscal balance has largely been
negative (2.5% in 2021). Tax revenue accounts for
over 90% of fiscal revenues. As a result of the deficit,
the debt-to-GDP ratio has steadily been rising from
about 25% in 2012 to over 30% of GDP in 2020.
The external sector performance remains weak as
the country has run current account deficits in the 6
years to 2020 with the average deficit estimated at
around 10% during the period. This is reflected in the
exchange rate behavior which has steadily crept up
from around GNF 9 200 per USD to GN F1 000 by
mid-2021.
The Central Bank of Guinea is strengthening its mo-
netary policy framework and is migrating to an interest
rate-based regime. The modernization is constrained
by fiscal injections which are not systematically steri-
lized leading to high growth of the monetary base.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
The Ministry of Finance in Guinea has a model called
Guinean Economy Simulation Model (MSEGUI). It is
used for medium-term forecasts, simulation of shocks,
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
66
drafting of national development plans including the
budget, and analysis of Medium-Term Debt Strategy
(MTDS). The model was developed using foreign ex-
pertise. It is flexible and can be adapted to analyze
emerging shocks.
2.1.1. Modelling Unit and Staffing
The Ministry of Finance of Guinea has a modelling unit
that was established in 2006 and has a staffing level
of 16 officers, of which 12 have Master’s degrees and
4 have Bachelor’s degrees. However, the number of
officers is deemed inadequate. Deficiency has been
noted in the knowledge of financial programming, ge-
neral macroeconomic management, econometrics,
use of General Equilibrium Models as well as ad-
vanced knowledge in Microsoft Excel.
2.1.2. Software in Use
The MSEGUI is run on Excel and E-views platforms.
2.2. Challenges in Macroeconomic
Models/Frameworks
The biggest challenges are low levels of modelling
knowledge, the small number of staff operating the
model, overreliance on foreign experts to build the
models, uncoordinated efforts in the process of mo-
delling, data gaps, and shortages of software and
hardware. Other challenges include the unavailability
of a technical committee to validate the macroeco-
nomic framework, as well as inadequate financial
resources to collect data from public and private
enterprises.
3. Conclusion
The Ministry relies more on one model (the MSE- GUI)
rather than a suite of models. There is, therefore, no
comparator. The cited challenges suggest the need
for intervention in terms of the macroeconomic mo-
delling as well as financial programming and assis-
tance with the establishment of an appropriate struc-
ture to vet macroeconomic data and projections.
A Profile of Macroeconomic Models/Frameworks for KENYA
1. Introduction
Kenya is a market-based economy with a few state
enterprises. Major sectors include agriculture, fo-
restry, fishing, mining, manufacturing, energy, tourism,
and financial services. As of 2020, Kenya had the
third-largest economy in sub-Saharan Africa, behind
Nigeria and South Africa. The agricultural sector is the
backbone of the economy, contributing approximately
33% of Kenya’s GDP, employing more than 40% of the
total population and 70% of the rural population.
From 2015-2019, Kenya’s economic growth averaged
5.7%, making it one of the fastest-growing econo-
mies in sub-Saharan Africa. The performance of the
economy has been boosted by a stable macroeco-
nomic environment, positive investor confidence, and
a resilient services sector. The COVID-19 shock on
the back of ongoing drought has reversed this trend
and the economy is estimated to have contracted by
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
1.4% in 2020 from 5.4% growth in 2021. Inflation re-
mains within the authorities’ target range (5 ± 2.5 %).
A drought-induced sharp rise in food prices pushed
headline inflation above the target range. Although the
food inflation rate continues as the drought throughout
the horn of Africa remains, core inflation has remained
below 5% since late 2016.
While the current account deficit has fallen from its peak
several years ago (5.6% in the mid-1990s), it worsened
to around 4.4% of GDP during the COVID-19 crisis.
The increase reflected higher food and fuel imports due
to the drought and rising global oil prices. This outwei-
ghed a strong improvement in export growth. On ba-
lance, the external position appears to be weaker than
Kenya’s fundamentals and desirable policy settings.
Public debt surged to 72% of GDP in 2020 from 61% in
2019, driven mainly by public investment in infrastruc-
ture, debt management–related challenges, and the
COVID-19 crisis.
67
2. Survey results
2.1. Status of Macroeconomic Models/
Frameworks
The Central Bank of Kenya has a Forecasting Policy
Analysis System (FPAS) with the Quarterly Projection
Model (QPM) as the key model. The model is used
for forecasting, policy analysis, and simulations. The
model was developed with technical assistance from
the International Monetary Fund.
Other models include the Composite Index of Eco-
nomic Activity (CIEA), which is used for nowcasting
GDP. The CIEA was jointly developed by the Cen-
tral Bank and Macroeconomic and Financial Ma-
nagement Institute for Eastern and Southern Africa
(MEFMI). The Central Bank also has univariate and
multivariate time series models, namely, ARIMAs,
VAR, VECM, and DFM. These models, which were
developed locally, are used for forecasting key
macroeconomic variables. Kenya also has a Finan-
cial Programming model used for forecasting and
macro consistency checks. The model focuses more
on forecasting monetary aggregates; it was deve-
loped with assistance from the IMF. The CBK uses a
proprietary Macro-econometric model which is also
used for forecasting, policy scenarios, and simula-
tions. This model was developed internally but was
reviewed by an external expert.
The models that are updated locally include: FPAS-
QPM, CIEA, univariate and multivariate time series
models, FPP, and the CBK Macro-econometric mo-
del. The Bayesian vector autoregression (BVAR), FA-
VAR, and DFM models require external assistance.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
68
2.1.1 Modelling Unit and Staffing
The Central Bank has a Modelling Unit that has been in
existence for 10 years, and it has a staff complement
of 8 officers, of which 3 have PhDs, 2 have Master’s
degrees and 3 have Bachelor’s degrees. However, the
staffing level of the unit is deemed insufficient.
2.1.2 Software in Use
The Central Bank of Kenya uses MATLAB, Stata,
R-Studio, and SPSS.
2.2 Challenges in Macroeconomic
Models/Frameworks
The most significant challenges include the limited nu-
mber of staff competent to work with the models; data
gaps and data unavailability; as well as weak collabora-
tion between entities.
Going ahead staff consider they need technical assistan-
ce in developing a strong micro-founded New Keynesian
Model as a necessary ingredient to policy analysis. Other
areas of training interventions include BVAR, FAVAR, and
DFM.
3. Conclusion
Kenya has made significant progress in the area of
modelling. It is one of the few countries with a suite of
models to help in the process of policy analysis. As with
South Africa and Ghana, Kenya can also be used as
a benchmark case for peer learning for many Central
Banks in Africa. The fact that the country is experimen-
ting with advanced models suggests that it can benefit
from frontier analysis in macroeconomic modelling.
A Profile of Macroeconomic Models/Frameworks for
LESOTHO
1 Introduction
Lesotho’s economy is largely driven by the mining
industry, textiles and clothing, construction, and the
service sector. However, its proximity to South Africa
makes it susceptible to developments within its much
larger and economically diverse neighbor and thus,
the contagion effects of external shocks experienced
within it. Remittances from South Africa play a signifi-
cant role in the balance of payments, as do the SACU
customs receipts, which contribute to about 55% of
government revenue and 78% of recurrent spending
to the government resource envelope. Beyond the
region, international developments, such as global
crises and the COVID-19, pandemic also impact eco-
nomic performance due to its openness to trade. In
light of these factors, among others, real GDP slowed
from 5.1% recorded in 2010 to 1.1% realized in 2019
(IMF, 2021). The slowdown in economic activity im-
pacts revenue collection, amidst spending pressures.
The fiscal deficit as a percentage of GDP averaged 4%
in the past decade, while the stock of public debt rose
from 34.2% in 2010 to 49.1% in 2019. The average
current account, as a percentage of GDP, was 6.6%,
between 2010 and 2019 due to low remittances, low
export receipts, and SACU revenues. Inflation rose
from 3.5% in 2010 to 5.2% in 2019.
Macroeconomic conditions have been affected
by the COVID19 pandemic. Measures to curb the
spread of the disease, such as reduced economic
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
activity and the closure of key strategic entry points,
exacerbated the already existing structural, macroe-
conomic, and social challenges. In 2020, the eco-
nomy was estimated to contract by 5.4%. Increases
in health expenditure—in the presence of low tax
collection and low SACU revenues—stretched the
public finances and the current account. In this re-
gard, both the fiscal deficit and current account,
as a percentage of GDP, are expected to widen by
7.5% and 15.5%, respectively. The stock of public
debt, while still well below the SADC convergence
criterion of 60% of GDP, increased to 50.9% while
inflation is expected to remain below the 6% re-
corded in 2020.
Going forward, the developments in the water sec-
tor, particularly the second phase of the Lesotho
Highlands water project and the Lesotho lowlands
water development projects, are expected to am-
plify economic growth. These capital projects, com-
plemented by the recovery in the diamond and tex-
tile sectors, as well as positive sentiments about the
global economy as the COVID-19 pandemic eases,
are also expected to boost economic activity. Real
GDP is expected at 3.5%, 4.3% and 3.9% in 2021,
2022 and 2023, respectively. Slight improvements
are expected in the fiscal space as the stock of debt
as a percentage of GDP reaches 47% by 2023. Du-
ring the same period, inflation is also expected to
be subdued at around 4.9% by 2023 while fewer
improvements are expected in the external sector.
69
These issues, among others, largely guide the model-
ling environment and the choice of macroeconomic
models used to analyze the macroeconomy. The fol-
lowing section describes the status of these models
and the challenges encountered in macroeconomic
modelling.
2 Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks
Survey data from the Ministry of Finance of Lesotho
indicate that the ministry has a Financial Program-
ming (FPP) Framework and Macro-econometric mo-
del which were both developed locally with foreign
support. The FPP is currently used to generate me-
dium-term macroeconomic forecasts, particularly for
key variables such as GDP and inflation forecasts
among others. The Macro-econometric model is also
used to produce medium-term macroeconomic fore-
casts for GDP and inflation as well as other variables,
including fiscal balance, current account balance, re-
serve assets, net international reserves, and money
supply. The data also shows that the output from both
macroeconomic tools is satisfactory to guide macroe-
conomic management. For model maintenance, the
FPP is maintained locally while the econometric model
requires foreign expertise.
2.1.1 Modelling Unit and Staffing
The macroeconomic modelling unit has existed for more
than 10 years. It has a staff of 14 officials, 4 of whom
have Master’s degree-level training while the rest have
Bachelor’s degrees. The staff indicated that the present
capacity of the macroeconomic unit team is not suffi-
cient to fulfil the institution’s modelling requirements. To
minimize the capacity gaps, the unit indicated that they
require training in five areas, especially in:
(i) macroeconomic modelling techniques;
(ii) understanding of different modelling software
(e.g., PC GIVE);
(iii) capacity building in policy analysis;
(iv) model building and model updating; and
(v) upgrading academic qualifications to Master’s
degrees.
2.1.2 Software in Use
The macroeconomic modelling tools are supported by
the EViews and the Microsoft Excel software.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
70
2.2. Challenges in Macroeconomic
Models/Frameworks
Despite the extensive support provided to staff
through both in-house training and workshops as
well as allowing employees to further their studies
in economics and related fields, the staff have indi-
cated that there still remain significant challenges in
macroeconomic modelling. The following are the key
challenges faced by the staff:
• Over-reliance on foreign experts to build and/or
improve the models/ frameworks, which is not
sustainable in the long run.
• Inadequate macroeconomic data and/or data
gaps undermining effective macroeconomic
modelling and forecasting.
• Lack of the requisite hardware and software
resources making the conduct of macroecono-
mic modelling and forecasting difficult.
• Weak collaboration between the modelling
units in the country and region promoting a silo
approach to conducting macroeconomic mo-
delling and forecasting.
• The lack of reliable prior information from sec-
tors, which limits the capacity and quality of fo-
recasts produced by the FPP Framework and
the delay in the release of key macroeconomic
data which undermines real-time economic de-
cisions.
3. Conclusion
The report describes the state of macroeconomic
modelling in Lesotho based on the data collected
from a survey administered at the Ministry of Finance
of Lesotho. Although the data suggest some pro-
gress in the area of macroeconomic modelling both
to strengthen skills in macroeconomic modelling by
exposing the modelling unit to other macroeconomic
modelling tools and techniques to supplement the
existing FPP and the econometric model. There is
also a need to train staff on modelling techniques
that use real-time data such as nowcasting to sup-
plement the delays in macroeconomic data releases.
Lastly, there needs to be an investment in adequate
software and hardware to support the function of
macroeconomic modelling and forecasting, as well
as improve internal coordination in the macroecono-
mic modelling among key economic institutions.
A Profile of Macroeconomic Models/Frameworks for LIBYA
1. Introduction
Libya is almost entirely covered by desert (90%) It is
also an oil-rich country. However, despite having the
largest reserve of oil in Africa, this has not led to in-
frastructure development. It is characterized by a
weak infrastructure and an undiversified economy,
which relies on oil and gas for over 60% of aggregate
economic output and over 90% of both fiscal revenue
and merchandise exports. The Libyan economy faces
major challenges from repeated turmoil in the oil and
gas sector, fragmentation of state institutions, and on-
going conflicts. Due to supply chain disruptions and
active parallel markets, the prices of most products
and services remain high. Over the previous four years,
cumulative inflation has harmed real earnings, causing
them to lose more than half of their purchasing power.
This has very definitely driven more Libyans into po-
verty and misery, while also exacerbating inequality.
Aggravated by the COVID-19 crisis, the 2020 perfor-
mance of the Libyan economy was the worst in re-
cent records. A nine-month deadlock that began in
January 2020 has reduced national crude oil prices
to less than one-sixth of 2019 levels, which impaired
the country’s external balance and fiscal position. Ac-
cording to the Central Bank of Libya (Tripoli), the loss
in fiscal revenues—as a result of the sudden halt to oil
production and exports—amounted to approximately
USD 11 billion annually, which in turn reduced govern-
ment spending. These problems were exacerbated by
the COVID-19 pandemic that caused further econo-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
mic and social turmoil in war-torn countries already
suffering from poor health care systems. Overall, Li-
Libya’s GDP collapsed by 2020 as the contraction
was estimated at 31% in the real economy. However,
in 2021, oil production recovered to 2019 levels (1.2
million barrels per day). Besides, the devaluation of the
Libyan Dinar in January 2021 has eradicated the gap
between the black-market rates and the official rate.
Authorities have also endeavored to bring together
competing for public institutions in the eastern and
western parts of the country, but challenges remain.
A financial review of the Tripoli and Bayda Central
Bank branches has been completed. The next step
requires balance sheet standardization, political deci-
sion-making, regulatory and supervisory processes,
operational business, as well as political consensus
on unity under a single decision-making body. Efforts
to pass the first unified 2021 budget since 2014 have
been prolonged, with several drafts submitted by the
Government of National Unity (GNU) and rejected by
the House of Representatives in March 2021.
Although the World Bank projection for Libya’s GDP
growth in 2021 was 78.2%, it was based on meeting
several conditions that were not met, thus it was ad-
justed to 31.4%. However, the trade and recurring ba-
lances are projected to be in the double-digit surplus
as a percentage of GDP due to the sharp recovery in
oil production and exports. The devaluation of curren-
cies reduced public sector salaries bills but raised the
cost of goods and services denominated in USD.
71
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
The Central Bank of Libya (CBL), recognizing the need
for analysis and forecasting of macroeconomic trends
and development scenarios at national as well as sec-
toral and regional levels, has recently started esta-
blishing a modelling unit, so they are still in an early
stage of building a Macroeconomic Model. In the first
six months, the unit secured three staff with Master’s
degrees, which illustrates staffing capacity knowledge
regarding the need for highly skilled experts to set the
roadmap and contribute to the building, updating, and
testing of the macro-models for the unit. The CBL has
indicated, however, that it is aware that capacity buil-
ding is insufficient.
In addition, the CBL has suggested upgrading the mo-
delling unit with the features needed for a well-equipped
team that is capable of modelling the macroeconomic
behavior of the Libyan economy. Accordingly, the CBL
has started a process of communicating with different
international bodies to seek assistance in capacity buil-
ding. They have engaged successfully with USAID in
technical assistance activities, among others. Also, the
software used and reported by the staff is expected to
be simple and friendly to users - like EViews and Stata
- given that the staff is starting the exploring stage. The
practitioners in the CBL recognize the shortcomings
of the current framework used in accommodating the
analysis of macro policy issues.
2.2 Challenges in Macroeconomic
Models/ Frameworks
Through the lens of its staff, the building a modelling
unit in the CBL has highlighted challenges that should
be prioritized. These include data gaps and the una-
vailability of time-series analysis and the limits this
imposes on modelling. They also noted that there is
a need to strengthen collaboration between the mo-
delling unit/team with similar partners and funders in
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
72
the region. These most challenging aspects should be
reconciled first, before laying the foundation of an effec-
tive modelling unit. However, high staff turnover in the
unit with low levels of modelling knowledge and skills
suggests inadequate utilization of the models’ sophis-
ticated frameworks. Indeed, limited access to training
and technical assistance has been significantly impai-
ring efforts to build a reliable modelling unit. The CBL
recognized that cooperation with foreign experts to
build and improve the models/frameworks is a means
of moving forward, rather than an obstacle to progress.
3. Conclusion
The CBL’s main objectives are to conduct the analysis
of macroeconomic tendencies and regional disparities,
forecast economic performance, and design govern-
ment economic policies that further secure economic
growth and development. One of the main impediments
in moving ahead was the challenge of attracting and re-
taining well-qualified researchers and economic policy
analysts. It will take a long time to build the required
capacity of the modelling unit to support policy makers
as this process is complex and time-consuming.
Accordingly, the Central Bank of Libya should be crea-
ting short- and medium-term plans that include time-
lines and road map to achieve their macroeconomic
modelling goals. This should address procedures and
methods to enable the unit, such as acquiring the ne-
cessary expertise and institutional capacity to pursue a
significant role in shaping economic policies. Besides,
improving coordination with national and international
partners in the area of regional and local development
to achieve synergy, macroeconomic experts should
work with the CBL to design and implement an inte-
grated macroeconomic model for the country. The team
should then adopt a participatory approach, consulting
with key stakeholders at every stage of the process to
ensure the model meets their needs. The model has
also to be backed by an extensive capacity-building
program to help promote its uptake and continued re-
finement, supporting its sustainability beyond the life of
the initiation project.
A Profile of Macroeconomic Models/Frameworks for
MADAGASCAR
1. Introduction
Madagascar is largely an agricultural economy—
mainly vanilla and coffee—with mining, fishing, and
clothes production as supplementary sectors, which
exposes the country to hazards of nature and interna-
tional commodity shocks. As with several economies
globally, 2020 GDP growth shrank sharply, (by 4.2%)
from all-time high of 4.4% in 2019 and 2.7%, on ave-
rage, in the 7 years to 2017. Annual Consumer Price
Index (CPI) inflation decelerated from a peak of 8.6%
in 2018 and an average of 7.3% in the 7 years to 2017
to 4.2% in 2020.
Madagascar’s fiscal deficit including grants, as a share
of GDP—measured against the COMESA conver-
gence criteria of ≤5.0% of GDP—has historically been
well contained. However, this has been achieved
through lower public investment. This is partially due
to lack of fiscal space or disruptions of donor-funded
projects (due to political turbulence), under-execution
of planned budget spending, as well as containment
of the wage bill and transfers. The fiscal deficit, in the
7 years to 2017, averaged 2.1% of GDP, and 1.3%
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
and 1.4% of GDP in 2018 and 2019, respectively.
It slipped to an all-time low deficit of 4.2% in 2020
on COVID-19-related recurrent expenditure needs,
coupled with a sharp decline in revenues occasioned
by lockdowns and a general economic slowdown.
Madagascar’s public debt stock has averaged 40.1%
of GDP per year for the period 2016 – 2019, rising
to 43.6% of GDP in 2020. These ratios remain below
the IMF’s Policy Support Instrument (PSI) benchmark
on public debt stock of 50% of GDP, and suggest,
as with the country’s 2019 Debt sustainability analy-
sis (DSA), that the risk of Madagascar’s overall public
debt distress remains moderate.
Prior to 2020, Madagascar’s external current account
including grants, as a share of GDP, sustained an im-
proving trajectory, improving to -2.2% in 2019, from
an average of -3.9% in the 7 years to 2017. The ex-
ternal current account deficit reflects persistent trade
imbalances due to a combination of declining export
demand and relatively inelastic import bills, and, in
some cases, late disbursement of external aid flows.
These features characterize most African countries. In
2020, the external current account deficit deteriorated
73
to -6.5%. The effects of the COVID-19 pandemic,
including disruptions to domestic and regional trade
and value chains occasioned by lockdowns, together
with similar disruptions at the global level, amplified
the deficit.
External reserve cover has seen considerable impro-
vement during the decade, keeping within the Asso-
ciation of African Central Banks criteria of ≥ 3 months
of imports of goods and services. It increased to 5.2
months of imports of goods and services in 2019, up
from 4.3 months in 2018 and 3 months on average in
the period 2010-17. External reserve cover fell slight-
ly, relative to 2019 levels, to 4.9 months of import of
goods and services in 2020 but remained, overall,
within the limits of the Association of African Central
Banks (AACB) benchmark. The slight dip in 2020
reflects considerable pressure faced by countries in
2020 to provide for foreign exchange to support the
importation of COVID-19 health-related equipment
and drugs and smoothing disruptive volatility in the
exchange rate. The average of over 4 months of future
imports covered over the last 10 consecutive years is
a testimony to Madagascar’s prudent monetary and
exchange rate policies.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
Survey data from the Ministry of Economy and Fi-
nance/Directorate of General Economy and Planning
reveal, overall, a suite of macroeconomic tools that are
in use for gauging the macroeconomic implications of
the finance law or, in general, the consequences of
policy actions on the economy, macroeconomic fore-
casting, and shock simulations to guide fiscal policy
formulation and implementation.
As reported for the survey, the country’s fiscal side
uses a combination of a framework, forecasting, and
the DSGE models. The framework model is used for
gauging the macroeconomic implications of the fi-
nance law, generating, as its output, a framework of
four sectors: real, public finance, the monetary sector,
and the balance of payments. The forecasting model
is used for generating short-term forecasts of econo-
mic growth, while the DSGE is deployed for shock
simulations informing the implications for GDP and
other parameters of the shocks.
The framework and forecasting model tools are local-
ly developed and maintained. The intensity involving
coding and programming language means that the
DSGE model is technically supported by international
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
74
bilateral and multilateral institutions. However, the flexi-
bility of these models remains an issue as their perfor-
mance is rated as between “poor” and “average”.
2.1.1 Modelling Unit and Staffing
Modelling in the Ministry is supported by the model-
ling unit which has existed for 15 years. At the time of
this profiling, the modelling unit had a staff of six, half
of whom had Master’s degree-level training, while the
other half were Bachelor’s degree-level holders. This
capacity was indicated as insufficient in light of the
modelling needs of the country.
2.1.2 Software in Use
The analysis is supported in EViews, MatLab/IRIS, R-
studio, and Dynare econometric software.
Challenges in Macroeconomic Models/
Frameworks
Despite the extensive TA support for the operationali-
zation of the DSGE model tool kit and the use of eco-
nometric modelling software and local efforts in the
operationalization of the framework, staff indicated that
the flexibility of these models remains an issue and that
there remain significant capacity challenges in macroe-
conomic modelling. This includes the need to:
• Enhance modelling capacity of the Ministry to
close gaps in macroeconomics and advanced
econometrics, as well as honing skills in macroe-
conomic modelling and the use of econometrics
software, programming, and coding.
• Develop appropriate models/frameworks sui-
table for the modelling needs of the country,
which can adapt to and address specific policy
issues arising from emerging economic challen-
ges. This will alleviate rigidities in model output
and over-reliance on external experts and the at-
tendant costs.
• Improve the data quality and/or availability of
macroeconomic data, particularly of the high
frequency and leading indicators to plug gaps
associated with key macroeconomic data that
come with a lag or are subject to frequent re-
visions. This would augment efforts toward
real-time economic analysis required for sound
macroeconomic policy.
• Address shortages in staff complements and
deficiencies of staff to advance macroeconomic
modelling skills as only a few staff can adequa-
 tely understand, run and maintain the models.
High staff turnover (either due to secondments
to regional and international organizations or in-
ternal rotations) affects model sustainability and
leads to an over-reliance on external experts.
The skills gap is further undermined by a signifi-
cant shortage of requisite software resources.
• Expand coordination efforts of the macroeco-
nomic modelling unit with similar agencies and
funders in the region, particularly on advanced
macroeconomic models.
3. Conclusion
The review of the state of macroeconomic modelling
in Madagascar is based on the data collected from a
survey administered at the Ministry of Economy and
Finance/Directorate of General Economy. The data
suggest that there is some progress in macroecono-
mic modelling, but challenges persist. In this regard:
i. There is a need for a structured-systematic ca-
pacity-building plan that aims to ensure the sus-
tainability of macroeconomic modelling efforts. In
particular, the modelling unit must be supported
by medium- to intermediate- to advanced-skills
training in macroeconomic modelling:
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
ii. In the interim, there is a need to maximize repeated
and regular TA to help with parameterization and
recalibration of the micro-founded equations and
expanding the models with additional blocks as
well as adjusting the models to incorporate emer-
ging issues. In this way, the modelling unit will
have the capacity not only to independently do-
mesticate but update and adjust the macroeco-
nomic frameworks, in a manner that particularly
captures features of the local economic environ-
ment and accommodates emerging needs.
iii. Technical assistance could aim to support the
development of a host of other macroeconomic
modelling tools and techniques to supplement
the existing ones. Such models may include, the
MTFF, FPP framework, construction of the SAM,
and the short-term forecasting VAR and ARIMA
class models.
iv. There is also a need to support the development
of high-frequency and leading indicators, such as
a composite index of economic activity to substi-
tute for delays in data releases. Moreover, there is
a need to improve coordination within and across
institutions and the need to invest in adequate
software and hardware, to support the function of
macroeconomic modelling and forecasting.
75
A Profile of Macroeconomic Models/Frameworks
for MALAWI
1. Introduction
Malawi’s GDP is broadly driven by agriculture acti-
vities which contribute approximately 30% to GDP
followed by wholesale and retail trade and manufac-
turing sectors. Due to the nature of the economy, it
is highly susceptible to shocks via weather and in-
ternational commodity prices. Since 2010 real GDP
growth has averaged 4% with the worst performance
of 0.9% in 2020 due to the COVID-19 crisis. Inflation
remains high and volatile averaging 15.8% in the past
10 years. Inflation developments mimic the structure
of the economy where agriculture dominates. Food
prices contribute 45% to the national consumer price
(CPI) basket with the rest accruing to non-food prices.
Malawi’s imports are dominated by petroleum, phar-
maceuticals, and fertilizer products, which are consi-
dered critical and non-responsive to exchange-rate
developments. Export performance has remained
relatively low and volatile with tobacco as a key ex-
port earner. The structure of international trade has
remained largely unchanged from colonial times and
has resulted in persistent depreciation of the curren-
cy which is trading at MWK 840/USD in 2021 from
MWK 150/USD in 2006. Domestic under production
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
76
is complemented by imports, a feature which has left
the current account in perpetual deficit, estimated at
around 15% in 2020.
The country’s fiscal sector has persistently underper-
formed with fiscal deficits averaging around 3%, rea-
ching an all-time low in 2020 at 5.7% due to higher
fiscal spending and constrained revenue generation
triggered by the Covid-19 crisis. Due to persistent
fiscal deficits, the public debt-to-GDP ratio has risen
from around 32% during the HIPC period to around
60% in 2020.
Malawi is engulfed in macroeconomic instability that
requires a multifaceted approach. Attendant macroe-
conomic programs have largely been supported by
the IMF, which provided special financial programs
aimed at adjusting the economy towards sustaina-
bility. Reforms have been implemented both on the
monetary and fiscal sides to rebalance the economy
and aid the recovery processes. These reforms have
been supported by technical assistance that has led
to the development of several macroeconomic mo-
dels to support monetary, fiscal, and macro-prudential
policies.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
This section provides a consolidated view of the state
of macroeconomic models in Malawi based on the
survey results. The models can be grouped into three
categories:
i. Fiscal Policy Models/Frameworks
The Malawi model (Malmod) is a complex macro mo-
del built on a troll platform with numerous sector-spe-
cific equations. The model, housed in the Ministry of
Finance, is used for projecting all key sectors of the
economy. The Ministry also uses ARIMA models for
similar purposes and is also planning to introduce
SAM, CGE, and DSGE models. A recently established
National Planning Commission is also working on de-
veloping a fully fledged modelling unit with external
assistance.
ii. Monetary Policy Model/Frameworks
The liquidity forecasting model is Excel-based and
domiciled in the Financial Markets Department of the
Reserve Bank of Malawi. It was fully developed with
assistance from the IMF around 2004/05. This model
is currently operational. Its use is minimal due to dif-
ficulties in forecasting government components and
low staff compliments. This framework is key in sup-
porting monetary policy reforms through the Quarterly
Projection Model.
The small/ medium scale macro-econometric model
was designed to support the design, formulation, ana-
lysis, and implementation of monetary policy. It was de-
veloped using technical assistance from Norges Bank
and the IMF in 2009. The model was composed of five
equations: inflation, money supply, exchange rate, in-
dustrial production, and lending rates. They were used
to give short to medium-demand-side projections
of GDP and its components. Equations were largely
backward-looking and have been overtaken by reform
processes towards more forward-looking analysis.
For Financial Programming and Policy, the Central
Bank has a financial programming model which ope-
rates on an Excel platform. The model resonates well
with the IMF given that Malawi still uses reserve money
targeting. Training on this model has been given by
the IMF and MEFMI. However, when monetary policy
reforms aiming at adopting inflation targeting started
around 2012, this framework was operationally
de-emphasized. Currently, the Central Bank does
not critically use the output from this framework
even though it is a bulwark against the fiscal domi-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
nance which characterizes Malawi. The Ministry
however uses it to project government revenue and
expenditure.
The Forecasting and Policy Analysis Systems (FPAS)
is being actively used by the Central Bank. It was de-
veloped with technical assistance from the IMF over
three years between 2015 and 2017. The core model
in this system is the quarterly projection model (QPM).
The QPM is a standard forward-looking new Keyne-
sian model used to project inflation and GDP and de-
cide on the course of monetary policy.
The Small-scale Vector Autoregression (VAR) is a mo-
del which is used to forecast overall inflation, food in-
flation, as well as non-food inflation, which are used as
near-term forecasts in the Quarterly Projection Model.
iii. Macro prudential Models/Frameworks
Four models, the Capital assessment model (Basel),
Risk model, Stress testing model, and Domestic Sys-
temically Important Banks Model are used in bank su-
pervision and are housed in the Bank Supervision De-
partment of the Reserve Bank of Malawi. All models
were developed with technical external assistance.
2.1.1. Modelling Unit and Staffing
Macroeconomic modelling was first adopted by the
Reserve Bank of Malawi and has been in existence
for over 15 years. Recently, all officers in the Econo-
mic Policy Research Department where modelling is
domiciled have been actively involved in economic
research, which is conducted jointly with the Depart-
ment of Economics at two local universities.
The Reserve Bank of Malawi has a well-established
modelling division. The division is one of the four di-
visions in the Economic Policy and Research Depart-
ment. The department is headed by a PhD holder and
all four heads of divisions hold PhDs, many of whom
have specialized in monetary policy. The modelling
division is supported by four officers who have Mas-
ter’s degrees in economics. The team has undergone
extensive training primarily given by the IMF. The mo-
dels have been jointly managed by staff and the IMF.
The Ministry of Finance has no specialized modelling
division. However, modelling is undertaken under the
Economic Affairs Department which is also headed
by a PhD holder. Many of the staff under this division
have vast training and also hold Master’s degrees.
2.1.2. Software in Use
The software used in the Central Bank includes
Matlab, E-views, and Excel while at the Ministry of
Finance they mostly use Excel, supported by Stata
and Troll.
77
2.2. Challenges in Macroeconomic
Models/Frameworks
The greatest challenges are consistency in working
with models, staff rotation, and multiple assignments
for modelers, which render modelling duties non-
core. From the Central Bank perspective, finances
have not been a major hindrance although this ap-
pears to be the case in the Ministry. In some cases,
there is inadequate staff and delayed acquisition of
requisite modelling skills.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
78
3. Conclusion
Remarkable progress has been made on macroeco-
nomic modelling in Malawi. Despite a prolonged pe-
riod of evidence-based policy conduct, the country
remains in the grip of macroeconomic instability.
Several features hinder the uptake of modelling ran-
ging from the adaptability of models to financial
constraints. Harmonization of models and ensuring
that personnel from different government depart-
ments interact frequently might assist model sustai-
nability. Targeted intervention that ensures the sus-
tainability of key models would also be useful. Due to
natural attrition, capacity building in modelling must
be continuous but well-targeted.
A Profile of Macroeconomic Models/Frameworks
for MAURITIUS
1. Introduction
Mauritius has achieved a real GDP growth average of
3.8% in the past 5 years. Overall, the country’s eco-
nomy is driven by the services sector, which accounts
for around 67.7% of GDP, with tourism (catering, ac-
commodation, leisure, etc.) and financial services being
the most vital sectors, while offshore financial activity,
the textile industry, and sugarcane are also important.
The industrial sector accounts for almost one-fifth of
GDP, while the agricultural sector contributes around
3%. The tourism and hospitality sector account for
around 24% of GDP and 22% of employment with si-
gnificant spillover effects on the whole economy (trans-
port, agriculture, wholesale and retail trade, and admi-
nistrative and support services). The sector was heavily
affected by the pandemic. Key exports are seafood,
textiles and apparel, and sugar.
Public expenditure increased by 53% in targeted so-
cial and economic safety nets in 2020 as a response
to the pandemic. This, coupled with lower tax receipts
because of the economic downturn, led to a more than
doubling of the fiscal deficit to about 8% from 3.2% in
2019. The current account deficit widened to 12.9%
due to the decline in export and tourist receipts. Inflation
more than tripled, to 2.5% in 2020 from the pre-pande-
mic low of 0.5%, fueled by an increase in prices of im-
ported products and the depreciation of the rupee. The
monetary policy stance has largely been accommoda-
tive. The Bank of Mauritius is currently modernizing its
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
monetary policy framework from monetary aggregate
targeting to a more forward-looking framework.
The country has over the years accumulated sufficient
reserves to ensure a stable external balance. Despite
this impressive economic performance, over-reliance
on the services sector has rendered the country prone
to external shocks such as those caused by the CO-
VID-19 pandemic.
2. Survey Findings
The responses were only received from the Ministry of
Finance. Therefore, the information presented below
does not cover the Central Bank. The Ministry of Fi-
nance in Mauritius has a modelling unit but no official
model. The unit is relatively new having been establi-
shed five years ago; it has three officers who all have
Master’s Degrees. For ad hoc modelling, the team uses
E-views software. The survey data shows the need
for more qualified staff dedicated to modelling and in-
creased training in software. The shortage of reliable
hardware resources is the single biggest problem fol-
lowed by data gaps and the absence of requisite sof-
tware to undertake modelling assignments.
3. Conclusion
Modelling work is not fully developed within the Mi-
nistry of Finance partly due to the limited demand of
modelling work.
79
A Profile of Macroeconomic Models /Frameworks
for MOZAMBIQUE
1. Introduction
Mozambique’s economy is heavily dependent on
rain- fed agriculture, but the country is also one of
the most vulnerable to natural disasters and climate
change. Growth decelerated from 6.2%, on average
in the period 2010-17, to 2.3% in 2019 on account of
a combined effect of lower mining growth, losses to
agricultural production, and disruptions to transport,
communications, and services caused by the Tropical
Cyclone Idai and the resultant supply shock. Amplified
by COVID-19 mitigation measures, Mozambique’s
GDP contracted sharply, in 2020, to -0.5%. Inflation
declined from a peak of about 8.9%, on average in the
period 2010-17, to 3.1% in 2020 and 5.7% in 2021,
attributed to tight monetary policy, exchange rate sta-
bilization, and food price stability.
The fiscal deficit including grants, as a share of GDP,
deteriorated from 4.9% in the period 2010-17, on ave-
rage, to 6.8% in 2018 due to lower tax collections in
the cyclone-hit areas and higher spending related to
emergency relief and reconstruction. It improved to
0.1% of GDP in 2019 but deteriorated to 5.4% in 2020
on the impact of Tropical Cyclone Idai, compoun-
ded by the COVID–19-related recurrent expenditure
needs and a sharp decline in revenues occasioned by
lockdowns and the general economic slowdown.
Reflecting a confluence of large fiscal deficits, the CO-
VID-19-related crisis, and a subdued economy, Mo-
zambique’s public debt is in distress although arguably
sustainable. The stock of public debt, as a percentage
of GDP, rose rapidly from 66.7% on average in the
period 2010-17, to in excess of 100% of GDP during
2018 and 2019 and further to 122.2% in 2020. Simi-
larly, the current account deficit worsened from 30.7%
of GDP on average in the period 2010–17, to 60.6%
of GDP in 2020. This was the result of persistent trade
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
80
imbalances due to a combination of lower exports and
higher megaproject imports of services, late disbur-
sement of external aid flows, and the effects of the
COVID-19 pandemic.
External reserve cover remains only moderate, relative
to the Association of African Central Bank’s (AACB)
revised criteria of at least three months of imports of
goods and services. It has risen only marginally from
3.2 in the month of imports of goods and services, on
average, per year during 2010-17 to 3.7 months by
2019, but declined to 3.3 months in 2020, reflecting
considerable pressure to provide foreign exchange to
support the importation of COVID-19 health-related
equipment and drugs and smoothing disruptive vola-
tility in the exchange rate.
2. Survey Findings
2.1 Status of Macroeconomic
Models/Frameworks
Survey data from the Ministry of Finance of Mozam-
bique and the Bank of Mozambique indicate that a
suite of macroeconomic tools is used for macroe-
conomic forecasting, policy simulations, and analy-
sis. On the fiscal side, Mozambique uses the Finan-
cial Programming and Policy (FPP) framework for
Macroeconomic projections and policy experiments.
The frameworks produce projections for the real sec-
tor (GDP, estimation of value added by sector) and
fiscal sector indicators (revenues, expenditure, and
fiscal balances). On the monetary side, the data in-
dicates that the main macroeconomic modelling tool
is the canonical Quarterly Projection Model (QPM) to
guide the forward-looking monetary policy framework
by generating medium-term projections of inflation,
GDP, interest rate, and exchange rate. The QPM is
complemented by Autoregressive Models (AR) like
the Autoregressive Moving Average (ARMA) and the
Vector Autoregressive (VAR). The data also shows that
the FPP framework was developed locally with foreign
support while the QPM and the AR models were de-
veloped by foreign experts. Thus, model maintenance
is largely externally supported except for the FPP
framework. In addition, the officials have indicated that
these macroeconomic tools are not flexible enough to
accommodate the analysis of emerging policy issues.
2.1.1 Modelling Unit and Staffing
The macroeconomic modelling units in the Ministry of
Finance of Mozambique and the Bank of Mozambique
have existed for more than 10 years. The former unit
has 15 officials, 5 of whom have Master’s degree-level
training while the rest have Bachelor’s degrees. The
latter modelling unit has four employees, (two holding
Master’s degrees and two with Bachelor’s degrees).
The staff from both institutions indicated that the pre-
sent capacity of the macroeconomic unit team is not
sufficient to fulfil the institution’s modelling require-
ments. To minimize the capacity gaps, the units indi-
cated that they require (for the Bank of Mozambique)
continuous training on advanced technology like
the Dynamic Stochastic General Equilibrium Models
(DSGE) and other macroeconomic modelling tech-
niques that use MATLAB software, among others. The
Ministry of Finance staff indicated that they require fur-
ther training in quantitative macroeconomics, econo-
metrics, the use of programming languages, and data
mining. The Ministry of Finance also suggested that
there is a need to improve the structure of incentives
to attract PhD economists, encourage staff from the
macro-modelling unit to conduct research, and provi-
de scholarships for staff seeking to obtain post-gra-
duate training in economics.
2.1.2 Software in Use
Macroeconomic management tools are supported
by the EViews and Stata software (at the Ministry of
Finance) and the EViews, Microsoft Excel and MAT-
LAB software (at the Bank of Mozambique).
2.2. Challenges in Macroeconomic
Models/Frameworks
Despite support by providing continuous training on
macroeconomic modelling and forecasting the staff
have indicated that there remain significant challen-
ges in macroeconomic modelling including:
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
• High staff turnover in the modelling unit, espe-
cially at the Bank of Mozambique, which delays
the progress in macroeconomic modelling and
forecasting.
• Inadequate macroeconomic data and/or data
gaps, which make macroeconomic modelling
and forecasting extremely challenging.
• Lack of the requisite hardware and software re-
sources, which makes the conduct of macroe-
conomic modelling and forecasting difficult.
• Low levels of modelling knowledge and skills in
the modelling unit, which also delays the pro-
gress in macroeconomic modelling and forecas-
ting.
• Over-reliance on foreign experts to build and/
or improve the models/ frameworks, which, to
some extent, is not sustainable in the long run.
• Weak collaboration between the modelling units
in the country and regions, which increases the
silo approach to macroeconomic modelling and
forecasting.
• The appropriate models and frameworks have
not been developed, which undermines the cre-
dible macroeconomic policy analysis, design,
and implementation.
3. Conclusion
The study reports the state of macroeconomic model-
ling in Mozambique based on the data collected from a
survey administered at the Ministry of Finance and the
Bank of Mozambique. The data suggests that there is
some progress in the area of macroeconomic modelling.
However, there is a need to improve overall macroeco-
nomic modelling skills to reduce the dependence on
foreign experts. There is also a need (especially for the
Bank of Mozambique) to build capacity and train staff
in the macroeconomic modelling units in intermediate
and advanced macroeconomic modelling techniques
to complement existing tools. Furthermore, there is a
need to explore incentivizing the existing staff and to find
innovative ways to attract new skilled staff to minimize
the high staff turnover. There is also a need to consider
adopting nowcasting modelling techniques to supple-
ment the delays in macroeconomic data releases. Finally,
there needs to be an investment in adequate software
and hardware as well as the development of appropriate
macroeconomic modelling tools to support the function
of macroeconomic modelling and forecasting.
81
A Profile of Macroeconomic Models/Frameworks
for NAMIBIA
1. Introduction
Namibia is a member of the Southern Africa Customs
Union (SACU). It is a small, commodity-dependent
economy with high exposure to external shocks ema-
nating mainly from its dependence on volatile SACU
receipts, fluctuations in commodity exports, and the
peg of the currency to the South African Rand (ZAR).
Growth in Namibia’s economy has contracted since
2018. While growth in real GDP remained resilient
in the period 2010-17, at 3.9% on robust SACU
receipts, it decelerated thereafter to 1.1% in 2018,
shrinking further to -1.6% in 2019 despite a sharp
increase in mining production. The negative impact
of the COVID-19-induced health and economic crisis
caused Namibia’s GDP to contract sharply, in 2020,
by 7.2%.
Namibia’s inflation over the decade was well
contained, when weighed against the Association of
African Central Banks (AACB) revised convergence
criteria of at most 7%. It consistently eased from
5.5% on average per year in the first 7 years of the
decade, to 2.5% in 2020, helped by the peg of the
currency to the ZAR. The fiscal deficit, as a share
of GDP, including grants when weighed against the
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
82
AACB revised convergence criteria of at most 5% of
GDP, has remained large. From an average of 6%
per year in the first 7 years of the decade, it impro-
ved somewhat to 5.1% of GDP in 2018 before rising
to 5.5% in 2019 on the decline in SACU revenue.
The COVID-19-related recurrent expenditure needs,
coupled with a sharp decline in revenues occasioned
by lockdowns and general economic slowdown am-
plified the problem, leading to a further deterioration
in the deficit to 9.1% of GDP in 2020. Reflecting a
confluence of large fiscal deficits, a subdued eco-
nomy, and volatile SACU revenues, Namibia’s public
debt stock has more than doubled over the decade.
It rose from an average of 31% of GDP per year for
the period 2010–17, to 65.7% by 2020, but remains
near the AACB revised threshold of 65% of GDP
and broadly in line with the level of similarly rated
sub-Saharan African peers.
Relative to levels seen in the period 2010-17, the
current account deficit narrowed in the three years to
2020. It narrowed from 7.6% of GDP on average per
year in 2010-17 to 3.3% of GDP in 2018, and further
to 1.7% of GDP, ending 2020 at 0.6% of GDP. This
was helped by weak imports and rising commodity
exports, which, over the period, more than offset a
decline in SACU receipts. External reserves cover,
on the other hand, remains low, compared to the
AACB’s revised criteria of at least three months of im-
ports of goods and services. It fell from 2.5 months,
on average, per year during 2010-17 to 2 months in
2018 and to 3 months in 2019. The reserve cover
position declined further to 1.8 months in 2020, re-
flecting considerable pressure to provide for foreign
exchange to support the importation of COVID-19
health-related equipment and drugs and to smooth
disruptive volatility in the exchange rate.
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks
Survey data from the Ministry of Finance of Namibia
indicate that the ministry has a macro-econometric
model (the Macroabc Model) which was developed
by external experts. The model is currently used to
generate medium-term macro-fiscal forecasts. The
data also shows that the output from the Macroabc
Model is satisfactory to guide macroeconomic mana-
gement in Namibia. For model updating and mainte-
nance, the data shows that the former is solely done
by the internal staff while the latter requires external
support.
2.1.1 Modelling Unit and Staffing
The macroeconomic modelling unit has existed for
more than 20 years. It has a staff of four officials, two
of whom have Master’s degree-level training, while
the rest have Bachelor’s degrees. The staff indicated
that the present capacity of the macroeconomic unit
team is not sufficient to fulfil the institution’s model-
ling requirements. To minimize the capacity gaps, the
unit indicated that (i) efforts are ongoing to expand
the modelling unit; (ii) there is continuous training on
various macroeconomic modelling courses for the
current staff; and (iii) the ministry continues to pro-
mote retention of institutional memory.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2.1.2 Software in Use
The macroeconomic modelling tool is supported by
the EViews and the Microsoft Excel software.
2.2. Challenges in Macroeconomic
Models/Frameworks
Despite the extensive support provided to staff
through both in-house training and workshops, as
well as allowing employees to further their studies in
economics and related fields, the staff has indicated
that there remain significant challenges in macroeco-
nomic modelling. The following are the key challenges
faced by the staff:
• Over reliance on foreign experts to build and/or
improve the models/ frameworks which to some
extent is not sustainable in the long run.
• Inadequate macroeconomic data and/or data
gaps which undermine real-time policy analysis.
• High staff turnover in the modelling unit under-
mines its progress.
3. Conclusion
The study reports the state of macroeconomic modelling
in Namibia based on the data collected from a survey
administered at the Ministry of Finance of Namibia. Al-
though the data suggest some progress in the area of
macroeconomic modelling and forecasting, challenges
persist. In particular, incentives to attract and retain staff
to minimize challenges related to high staff turnover are
needed. Training to reduce reliance on both external ex-
pertise and support would also strengthen the model-
ling unit. Introducing modelling tools and techniques to
supplement the Macroabc Model would add depth to
the macroeconomic framework. Finally, consideration
should also be given to training the modelling unit on
techniques that use real time data such as nowcasting to
supplement the delays in macroeconomic data releases.
83
A Profile of Macroeconomic Models/Frameworks for NIGER
1. Introduction
Niger’s economy is driven by mostly subsistence agri-
cultural activities, which account for almost 40% of
GDP and generate about 80% of employment in the
country. Mining production, particularly gold and ura-
nium, has a much smaller economic role, representing
about 8% of GDP. The latest available data from the
IMF indicates that in the recent period prior to the CO-
VID-19 pandemic, the economy grew on average by
5.8%. The growth was attributed to investment projects
funded by private investors and development partners.
This support from the international partners contributed
to the total investment, which as a percentage of GDP
marginally increased from 29% to 30.2% between
2014 and 2019. During the same period, average in-
flation was 0.1%. The current account was in deficit,
averaging about 15% of GDP and it remained in deficit
throughout the period, due to low commodity prices
and internal disruptions in the extractive industries. On
the fiscal side, foreign donor resources account for a
large proportion of the government resource envelope.
Much of the expenditure has been channeled towards
public investments, leading to an average public deficit
of about 4.5% of GDP. The uptake in public investment
also contributed to the increase in the stock of public
debt from 22% of GDP in 2014 to 39.8% in 2019.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
84
In 2020, the COVID–19 pandemic weighed heavily on
macroeconomic conditions. Real GDP slowed to 1.2%
from 5.9% in 2019 while inflation increased to 3.4% as
result of supply-side disruptions. The stimulus package
adopted in a bid to minimize the adverse effects of the
pandemic widened the fiscal deficit to 5.8% of GDP IN
2020 from 3.5% in 2019, while the stock of public debt
rose to 44.2% of GDP. However, various initiatives such
as the Debt Service Suspension Initiative shielded the
country against debt distress. The pandemic also affec-
ted export earnings, thus widening the current account
deficit further to 13.3% in 2020 from 12.3% in 2019.
Beyond 2020, the economy is expected to improve
due to the resumption of major infrastructure projects
such as the public investment in the Niger-Benin Crude
Oil Pipeline. The pipeline is expected to be completed
in 2023 and contribute significantly to oil exports. The
construction of the pipeline is also providing backward
and forward linkages to the construction, mining, and
services sectors. Niger’s economy is therefore forecast
to grow by 6.9%; 12.8% and 11.1% in 2021, 2022 and
2023, respectively. Oil exports and the associated reve-
nues are expected to narrow the fiscal and current ac-
count deficits during this period. The former is expec-
ted to improve from a deficit of 4.4% of GDP in 2021 to
2.5% of GDP in 2023 while the current account deficit
is anticipated to reach 7% of GDP in 2023 from 16.9%
recorded in 2019. In the short to medium term, infla-
tion is expected to hover at around 2%, well below the
region’s inflation target of 3%.
These issues, among others, largely guide the model-
ling environment and the choice of macroeconomic
models used to analyze the macroeconomy in Niger.
2. Survey Findings
2.1. Status of Macroeconomic Models
Survey data from the Central Bank of West African
States (BCEAO) indicates a suite of macroeconomic
models, bank liquidity, and cash-position tools are
used to model, forecast, and simulate the conse-
quences of policy actions and shocks on the eco-
nomy.
The BCEAO deploys a suite of models including:
i. The Bank Liquidity Forecasting Model (global
model for WAEMU) to generate weekly forecasts
of bank liquidity and autonomous factors for the
money market.
ii. The Inflation Forecasting Model (model available
for WAEMU and all 8 member states) to generate
periodic inflation forecasts (overall index and in-
flation by components) in the short term (3 mon-
ths) and medium-term (24 months).
iii. The Bank’s Cash Flow Forecasting Model (glo-
bal model for WAEMU) for quarterly forecasts of
BCEAO overall cash flow.
iv. The Macro-Econometric Forecasting and Si-
mulation Model - MAPRES (model available for
all eight of the member states) for forecasts of
shortand medium-term macroeconomic indica-
tors, impact analyses of exogenous shocks and
economic policy effects.
v. The Integrated Macroeconomic Forecasting
Framework-CIPREM (framework available for all
eight member states; aggregation for WAEMU)
for disaggregated macroeconomic forecasts du-
ring the annual macroeconomic framework exer-
cises.
vi. The Dynamic Stochastic General Equilibrium
Model DSGE (aggregate model for WAEMU) for
conducting studies on the foreseeable macroe-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
conomic impacts of various shocks on econo-
mies; while the QPM-WAEMU model (global mo-
del for WAEMU) is being finalized.
Except for the DSGE whose maintenance and updating
are reported as requiring foreign expertise, the rest of
the models are developed, maintained, and updated by
the local team, with reasonable flexibility that permits
tuning or calibration for features peculiar to the local
economic environment and emerging policy issues.
2.1.1 Modelling Unit and Staffing
Macroeconomic modelling at BCEAO is hosted in a
modelling unit, which has existed for over 25 years. At
the time of this profiling, the unit had staff of approxi-
mately 120, including 50 at the headquarters and 70
in BCEAO’S national offices. Approximately 40 staff
are PhD holders, while another 40 have Master’s de-
gree-level training. The staffing capacity is re-ported
as sufficient to fulfil the institutional modelling requi-
rements.
2.1.2 Software in Use
The models are implemented in a host of econometric
software, including EViews, Matlab, JDEMETRA+, R-
studio and Stata.
2.2. Challenges in Macroeconomic
Model
No modelling-related challenges have been re-
ported as the state of the macroeconomic modelling/
framework in the country is well organized and in-
cludes several proactive measures, such as:
• The creation of organized units, with qualified
staff, in charge of studies, forecasting, and mo-
delling.
• Periodic updating of the main tools and models
developed.
• The continual permanent capacity building of
agents through their participation in seminars
and various training sessions.
3. Conclusion
The BCEAO’s modelling unit is well capacitated with
adequate model technicians and modelling tech-
niques, and, unlike elsewhere, data appears to be
available in sufficient amounts and frequencies.
85
A Profile of Macroeconomic Models/Frameworks
for RWANDA
1. Introduction
Rwanda’s growth averaged 7.2% over the decade
to 2019, while per capita gross domestic product
(GDP) grew at 5% annually. The lockdown and so-
cial distancing measures, critical to controlling the
COVID-19 pandemic, sharply curtailed economic
activities in 2020. GDP fell by 3.4% in 2020, the first
recession since 1994. Rwanda heavily relies on large
public investments (12.3% of GDP in 2019). The ser-
vices sector—including tourism—generates almost
half of GDP (46%) and has grown at an average an-
nual rate of around 10% in recent years. Rwanda’s
industrial sector contributes around 19% to GDP
and employs less than 3% of the population. Inflation
averaged 4.2% between 2016 and 2021.
The country is highly import-dependent, and it faces
chronic and large current account deficits. In 2020,
imports totaled USD 3.109 billion compared to USD
2.725 billion in 2019, an increase of 14% due to in-
creased imports of consumer goods. Imports of ca-
pital and intermediary goods increased by 5% and
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
86
6%, respectively, while energy product imports de-
creased by 33% over the past 2 years. China, Eu-
rope, Kenya, India, the United Arab Emirates, and
Tanzania are among Rwanda’s major suppliers.
Rwanda’s principal exports (coffee, tea, cassiterite,
coltan, wolfram, hides and skins, and pyrethrum) de-
creased 10% in value and 8% in volume between
2019 and 2020 due to reduced global demand from
the COVID–19 pandemic. Major markets for coffee
exports are the United States and Europe, while
Middle Eastern countries and Pakistan are the main
buyers of Rwandan tea. The current account ba-
lance has remained negative and averaged 9.8% of
GDP between 2016 and 2021. Gross international
reserves have averaged 4.6%.
The overall fiscal balance has averaged -5.3%
between 2016 and 2021. The percentage of fo-
reign assistance (external grants and loans) in the
country’s annual budget has dropped from over 80%
a decade ago to 33% in the 2021/2022 National
Budget. Consequently, the debt-to-GDP ratio rose
to 56.7 percent in 2019 (from 19.4% in 2010) and
is estimated to have reached 71.3% of GDP in 2020
and is estimated to reach 81% in 2023 on account
of reduced revenue, the need to support a struggling
private sector, households impacted by lockdowns,
and general government expenses.
In 2007, Rwanda joined the East African Community
(EAC) and is also a member of the Common Market
for Eastern and Southern Africa (COMESA). In 2009,
Rwanda became the newest member of the Com-
monwealth. Rwanda is a member of the Northern
Corridor initiative, which includes Kenya, Uganda,
South Sudan, and Ethiopia as core members and
the Democratic Republic of Congo (DRC), Burundi,
and Tanzania as observers. Rwanda is also at the
forefront of the Central Corridor initiative, which also
includes Burundi, DRC, Tanzania, and Uganda. The
large infrastructure projects (such as rail transporta-
tion) envisioned under these initiatives could help to
reduce the cost of conducting business and trans-
porting goods across the region.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
The National Bank of Rwanda (BNR) transitioned
to a new monetary policy framework on January 1,
2019, moving from a framework targeting moneta-
ry aggregates to an interest rate-based framework.
Macroeconomic models in use include the Quarterly
Projection Model (QPM), Dynamic Factor Model and
Bridge Equations, VARs, and ARMA. These models
are used for GDP nowcasts and inflation forecasts
for the near term. Except for the QPM, all models are
updated using local expertise. The models are consi-
dered flexible enough to address emerging challen-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
ges. Despite the number of models in use, capacity
needs relate to improving understanding of macroe-
conomic theory, econometrics, and macroeconomic
modelling.
2.1.1. Modelling Unit and Staffing
The BNR has a modelling unit that has been in exis-
tence for 10 years with a staff complement of five , all
with Master’s degrees. This staffing complement is,
however, considered inadequate to fulfil institutional
requirements.
2.1.2. Software in Use
The models are run on MATLAB and EViews Plat-
forms.
2.2. Challenges in Macroeconomic
Models/Frameworks
The following are the notable challenges experienced
by the modelling unit:
• inadequate hardware and software;
• weak collaboration among different stakeholder
units; and
• underdeveloped models.
3. Conclusion
Rwanda appears to have made substantial progress
on modelling. Additional training to domesticate the
QPM model as well as refresher training in macroe-
conomic theory and modelling using various software
would be useful.
87
A Profile of Macroeconomic Models/Frameworks for SAO
TOME AND PRINCIPE
1. Introduction
The population of São Tomé and Príncipe is about
220,000. The economy is dominated by agricultural
production, much of which is carried out on govern-
ment land. Real GDP growth averaged 3% in the 3
years leading to 2019 and remained at 3% in 2020.
A steady decline in GDP growth has been witnessed
from over 6% in 2010 to the current levels. This out-
come reflects the fact that the country largely relies
on tourism, which was severely affected by the CO-
VID–19 pandemic. The volatile inflation rate has ave-
raged around 7.3% in the 4 years leading to 2020.
Inflation has displayed an upward trend since 2016,
with food inflation remaining relatively elevated.
The current account balance has been gradually
improving since 2010 from around 30% of GDP to
-14% of GDP. Gross international reserves have re-
mained healthy at around five months’ worth of im-
ports since 2010, mainly supported by inflows from
development partners to support the public budget.
The public debt-to-GDP ratio averages around 30%.
Monetary policy focus is on supporting the Dobra
(STN)/EUR peg.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
The Central Bank of São Tomé and Príncipe uses
a model called the Macroeconomic Model of São
Tomé and Príncipe (MME-STP). The MME-STP
is a quasi-accounting model of macroeconomic
framework, comprising four interdependent blocks,
namely the real sector, the public sector (TOFE), the
monetary sector, and the external sector (balance of
payments).
MME-STP allows macroeconomic forecasting and
the impact assessment of supply shocks on the re-
source-employment balance, fiscal revenues, external
balance, monetary assets, and liabilities. The model is
run on the E-views platform and was developed with
technical assistance from the IMF -AFRITAC.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
88
Further intervention is required in the following areas:
• Forecasting models in general, based on time
series analysis;
• Forecasting methodologies for key macroecono-
mic variables;
• Medium-term projection models (3 to 5 years);
• Econometric and statistical estimation; and
• Macroeconomic models.
Staff training for the Central Bank is provided through
the Bank of Portugal.
2.1.1. Modelling Unit and Staffing
The modelling unit was developed in 2017 and is
composed of sectoral officials from the Central Bank,
the Ministry of Planning and Finance, and the Institute
of National Statistics. It has a staffing complement of
10 people, of which 2 have Master’s degrees while the
remainder hold Bachelor’s degrees. The staff comple-
ment for the modelling unit is deemed insufficient.
2.1.2. Software in Use
EViews econometric software is the only software
used by the modelling unit.
2.2. Challenges in Macroeconomic
Models/Frameworks
The Major challenges include low levels of modelling
knowledge, high staff turnover, unavailability of op-
portunities to participate in training, data gaps, inade-
quate software, and weak collaboration between mo-
delling units.
3. Conclusion
The practice of macroeconomic modelling requires
enhancement in São Tomé and Príncipe especially in
training in modelling and software usage.
A Profile of Macroeconomic Models/Frameworks
for SENEGAL
1. Introduction
Senegal’s economy is driven by mining, construction,
and services. Services account for 62% of GDP, the
industrial sector, which includes construction, ac-
counts for some 23% of GDP, while the primary sec-
tor, which includes agriculture, accounts for 15% of
GDP. Increases in global commodity prices, drought,
security threats, and the increase in the cost of bor-
rowing all pose risks to the economy. The economic
effects of the COVID-19 pandemic were significant
and compounded by reduced growth in the agricul-
tural sector caused from late rains and drought. Solid
performance in the construction and services sectors
offset some of the decline in GDP but could not re-
verse it. Hence, GDP growth still declined from 7.4%
in 2017 to 0.87% in 2020. The decline in growth was
also caused by a decline in tourism of 17%, the trans-
port sector by 8.8%, and in trade by 0.6%.
The increase in global commodity prices reduced ex-
port demand, and the current account deficit widened
from 4.2% of GDP in 2016 to 10.3% in 2020. Inflation
increased from 0.9% in 2019 to 19% in 2020. This
was a result of restrictive measures aimed at mana-
ging with the effects of the pandemic. In addition, cre-
dit growth has also been slow due to the repayment
of large loans.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Fiscal spending has been characterized by an increase
in health spending and declines in tax revenue. This
resulted in a widening of the fiscal deficit from 3.7% of
GDP in 2019 to 6% of GDP in 2020. The deterioration
of the current account balance has been financed by
debt; FDI flows and remittances have declined. As a
result of current account deficit financing and declines
in tax revenue, debt increased from 61.4% of GDP in
2018 to 68.6% of GDP in 2020. Despite the increase
in debt, the risk of debt distress remains moderate.
To manage debt levels, authorities are engaged in a
Medium-Term Revenue Mobilization Strategy aimed at
ensuring fiscal sustainability through a reform of the
debt management framework.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
Macroeconomic modelling in Senegal is conducted
through several models. The modelling unit is staffed
by 10 members and has been in place for the last 15
years. Senegal is a member of the Central Bank of
the West African States (BCEAO), and monetary po-
licy modelling falls under the mandate of the BCEAO.
However, several models are used for policy analysis
and forecasting of economic variables.
89
Seven models are used for forecasting, simulation,
policy analysis, and sectoral analysis. These models
are generally viewed by the modelling team as flexible
enough to deal with emerging policy issues. An expla-
nation of each follows.
i. Quasi-accounting models of real sector projec-
tions - migrating from TES to TRE - and TOFE.
These are used to generate projections of pro-
ductive sectors and deflators as well as TOFE.
The model generates short- to medium-term
projections and twice-yearly revisions of nomi-
nal and real values of productive sectors, as well
as the TOFE (revenue, expenditure, financing,
deficit). The models are developed locally with
agents trained abroad and are locally updated
and maintained. They are considered to have
good performance in terms of forecasting and
sectoral disaggregation.
ii. Financial programming type models are used
for macroeconomic framing exercises. They are
used to ensure budgetary and monetary choices
are coherent through compliance with macroe-
conomic balances and are locally developed,
maintained, and updated. These models are
considered to have good performance in terms
of forecasting and policy analysis.
iii. Sub-annual growth forecasting models are used
with the aid of a calibration technique. These
models help in forecasting short-term economic
events that provide information needed to take
the appropriate policy measures. They are parti-
cularly useful in forecasting the expected growth
per quarter. They are also developed locally with
modelling agents being trained abroad. Mainte-
nance and updating require foreign expertise.
These models are considered to have excellent
performance in terms of forecasting and are
considered to have good performance in terms
of forecasting and sectoral disaggregation.
iv. CGE-type Impact Assessment models are
used for decision-making support. This is done
through impact analyses and simulations of eco-
nomic and trade policies and includes static, re-
cursive and intertemporal dynamics. The models
produce disaggregated effects for sectors and
households of short-term shocks and expected
effects of policy responses. These models are
locally produced with team members trained
abroad and are locally maintained and updated.
Forecasting capabilities are considered average,
simulation and policy analysis capabilities are
considered good, while sectoral disaggregation
capabilities are considered excellent.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
90
v. DSGE impact assessment models are used for
decision-making support through impact ana-
lyses, and economic and monetary policy simu-
lations. The model simulates the short-term eco-
nomic effects, including those at the micro-level
for the new multi-sectoral DSGE, of shocks, and
the short-term implications of different policies.
The model is locally produced with modelling
unit members trained abroad. The model is both
maintained and updated locally. This model has
average forecasting capabilities, while policy
analysis and simulation capabilities are conside-
red good. The model’s capabilities for disaggre-
gated analysis are considered average.
vi. The SIMPRES macro-econometric model is
also used for decision-making support through
impact analyses, and economic and moneta-
ry policy simulations. The model simulates the
short-term economic effects of shocks and the
short-term implications of different policies. It is
locally developed in partnership with Senegalese
universities.
vii. Lastly, the T21-iSDG-Senegal model is used to
offer decision-making support through impact
analyses and simulations of economic, environ-
mental, and social policies. The goal of the mo-
del is to develop an understanding of medium- to
long-term implications of structural policies and
it requires foreign expertise to maintain and up-
date. The model is considered to have average
performance in terms of forecasting and simula-
tion, while the capabilities for policy analysis and
sectoral disaggregated analysis are considered
good.
2.1.1 Modelling Unit and Staffing
Of the 10 members in the unit, 2 are PhD holders and
8 hold Bachelor’s degrees. The modelling unit views its
models as sufficient for dealing with emerging issues.
The capacity of the team is, however, not sufficient
to meet the modelling requirements of the institution.
Efforts have been made to increase the capacity of
the modelling team through a liaison with the state for
the acquisition of hardware and software. The unit is in
partnership with the IMF, World Bank, and local labo-
ratories for assistance in macroeconomic modelling.
While these partnerships are beneficial, they can lead
to external dependance.
2.1.2. Software in use
Software used by the modelling unit to implement
these models includes EViews, MATLAB, STATA,
GAMS, and SPSS, R, and Excel.
2.2. Challenges in Macroeconomic
Models/Frameworks
The main challenges faced by the unit include the lack
of opportunities to participate in model training and
workshops. The unit struggles with the unavailability of
and proper utilization of data. Partnership with funders
and stakeholders in the region is weak. In addition, the
work in the modelling unit is not on a full-time basis
as managers are called upon to do other work within
the department. As a result, managers generally view
the unit as less rewarding. This is compounded by the
lack of financial resources which hinders the provision
of continuous training to the majority of managers,
which results in high staff turnover.
3. Conclusion
The macroeconomic modelling unit in Senegal has
made great strides in the use of several models for
forecasting, simulation, disaggregated analysis, and
policy analysis. The unit is however still faced with
several challenges that deter the efficient utilization of
these models. To encourage efficient utilization of the
models, capacity-building efforts should focus on the
following measures:
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
• Continuous training of members of the modelling
unit to enhance skills.
• Study visits and internships in more advanced
countries to enhance collaboration and the sha-
ring of ideas.
• Provision of high-performance laptops and eco-
nometric software.
• Subscription to specialist journals for exposure
to high-quality research.
• Support for local partnerships, especially with
universities.
• Incentives to encourage managers to join the
research unit whose work is often seen as less
rewarding from a career perspective.
• Establishment of rigorous criteria for the selection
of managers to be assigned to the research unit.
• Establish partnerships with IFIs (IMF, World Bank,
etc.), and local laboratories in macroeconomic
modelling.
91
A Profile of Macroeconomic Models/Frameworks
for SEYCHELLES
1. Introduction
Seychelles has seen modest GDP growth of 4.7% in
2019. The services sector, especially tourism is the
main contributor to GDP, while fisheries, followed by
the industrial sector, are also drivers of growth. The
reliance on these sectors however makes Seychelles
susceptible to external shocks, especially given fluc-
tuating world prices and travel restrictions amid the
COVID-19 pandemic. Consequently, these sectors
experienced supply disruptions, leading to a contrac-
tion of the tourism and fisheries sectors. Due to lower
earnings from these sectors, household consumption
and investment have also declined.
Low external demand led to a decline in foreign ex-
change earnings, and consequently, a depreciation
of the exchange rate. Inflationary pressures have also
increased, with inflation increasing from 1.8% in 2019
to 4.1% in 2020. Pandemic-associated lockdowns
also caused a slowdown in business and, as a result,
non-performing loans have increased as businesses
struggle to repay their debts. Fiscal policy has been
characterized by pandemic-induced expenditure in-
creases and revenue losses. Tax revenue declined to
27% of GDP from a 5-year average of 32% of GDP.
Due to the loss in revenue and increased expenditure,
the fiscal balance deteriorated from a surplus of 2.9%
in 2018 to a deficit of 5% of GDP in 2020. The wide-
ning fiscal deficit was matched by a widening current
account deficit, with the external balance deteriorating
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
92
from a deficit of 15.9% of GDP in 2019 to 32.3% of
GDP in 2020. Due to the need to finance the widening
current account deficit and compensate for the de-
cline in tax revenue, debt increased from 57% of GDP
in 2019 to 85% of GDP in 2020. This increase in debt
is despite debt restructuring efforts that were aimed
at reducing debt from 150% to 50% of GDP over a
10-year period.
This recent increase in debt has renewed concerns
about debt distress, particularly during weak external
demand and slow growth. The prospects of continued
growth rest on a renewed focus on debt management
and revenue mobilization, and this requires the imple-
mentation of macroeconomic policy that aligns with
Seychelles’ macroeconomic economic fundamentals.
2. Survey Findings
Status of Macroeconomic Models/
Frameworks
The modelling unit at the Central Bank of Seychelles
has been in existence for five years and is staffed by
six members, two of whom hold Bachelor’s degrees
and two of whom hold Master’s degrees. Although the
unit is small and relatively new, they have made strides
aimed at building models that support sound macroe-
conomic policies for macroeconomic stability. Some
of these efforts have however been derailed by the
pandemic.
The main model used by the Central Bank of Sey-
chelles is the Forecasting and Policy Analysis System
(FPAS). The FPAS is underpinned by the Quarterly
Projection Model (QPM), which uses a combination
of tools and processes to provide a coherent and
consistent assessment of global and local economic
conditions. The model allows future policies and an-
ticipated risks to be incorporated, to recommend the
appropriate monetary policy stance for the upcoming
quarter.
The model is used to produce two outputs, a data
report, and a forecast report. The data report is com-
posed of historical indicators that include real GDP
composition, tourism arrivals and earnings, produc-
tion statistics, private sector credit, inflation, glo-
bal commodity prices, fiscal balances, public debt,
average wages, the balance of payments decom-
position, exchange rates, interest rates, monetary
policy sterilization volume, and minimum reserve
requirements.
The forecast report presents projections through a
one-year window for variables, once forecast as-
sumptions are incorporated. It consists of external
variables (e.g., cross nominal exchange rates), de-
composition of output gap, food prices, Consumer
Price Index (CPI), interest rates, wage inflation, and
fiscal variables. Some of the main macroeconomic
indicators are summarized in a table that is used in
the monetary policy presentation. In addition, charts
for alternate scenarios can also be generated. The
model is suitable for meeting the Central Bank’s mo-
delling requirements. Forecasting capabilities and
policy analysis are ranked as excellent, simulation
capabilities are ranked as good, and disaggregated
analysis is ranked as average.
This model is developed with the assistance of forei-
gn experts. While most elements of the model can be
locally updated, some ad-hoc structural changes in
the model infrastructure require foreign expertise for
updates and maintenance.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2.1.1 Modelling Unit and Staffing
The capacity of the modelling unit is viewed as suffi-
cient for meeting the Central Bank’s modelling requi-
rements. Efforts to fill capacity gaps include internal
peer learning sessions, frequent communication with
consultants, on-site missions that take place at least
once a year, and attending regional training sessions
with other users of the FPAS.
2.1.2 Software in use
Software used by the modelling unit includes MAT-
LAB, Excel, and EViews.
2.2 Challenges in Macroeconomic
models/Frameworks
Feedback from the modelling team indicates that
they do not face any significant challenges. However,
less pressing challenges are the unavailability of data
or data gaps, a low level of modelling knowledge and
skill in the unit, few staff with the capacity to ade-
quately utilize models, some inaccurate forecasts
produced by the model, and a reliance on foreign
expertise for some aspects of the model.
3 Conclusion
The macroeconomic modelling unit in Seychelles is es-
tablished, though small. While it has made progress in
the five years since it came into existence, the country
still faces macroeconomic instability, with the looming
threat of debt unsustainability. While the model in use
is considered sufficient for the Central Banks’ needs,
additional measures could be put in place to build fur-
ther on the modelling unit’s capacity. Such measures
could include further education of the modelling team
to include some PhD-level skills, and training on models
that are equipped to handle sectoral/disaggregated
data to enhance modelling capacity. These measures
would assist in policy analysis and would help the mo-
delling team towards the goal of supporting macroeco-
nomic stability by providing reliable data.
93
A Profile of Macroeconomic Models /Frameworks
for SIERRA LEONE
1. Introduction
Sierra Leone’s economy is largely driven by the agri-
culture sector, which accounts for almost 52% of
GDP. The services sector and the industrial sector
(particularly mining activities) play a major role in the
economy, accounting for about 34% of GDP and 15%
of GDP, respectively. The latest available data from
the IMF indicates that, prior to the Covid-19 pande-
mic (i.e., between 2010 and 2019), the economy in
Sierra Leone grew on average by 5% annually mainly
due to the growth in mining activities. Non-mining ac-
tivities also showed some growth, however, much of
the growth in these sectors was constrained by inade-
quate infrastructure, among other issues. Despite
this positive growth, economic conditions worsened
between 2014 and 2015 due to the outbreak of the
Ebola virus and low commodity prices which saw the
economy decline by 20%. On the fiscal side, between
2010 and 2019, on average, the ratio of total revenue
and total expenditure as percentages of GDP stood
at 15% and 20%, respectively, resulting in an overall
deficit of about 5% of GDP. The average stock of pu-
blic debt during this period stood at 46%. Average
inflation in Sierra Leone was 8.3% during the same
period while the current account was in deficit, avera-
ging about 24% of GDP.
In 2020, macroeconomic conditions in Sierra Leone
were heavily affected by the COVID-19 pandemic. Du-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
94
ring this period, real GDP contracted by 2% from 5%
in 2019. Much of this decline was due to Covid–19
containment measures and slow economic activity
in the mining, transport, trade and tourism sectors,
coupled with weak external demand and low exports.
This slowdown in economic activity affected revenue
collections while health-related expenses grew. In light
of this, the fiscal deficit widened to 5.6% of GDP from
3% recorded in 2019. The increase in the fiscal de-
ficit resulted in higher financing needs leading to an
increase in the stock of public debt. In this connection,
public debt as a share of GDP rose to 74% from 71%
in 2019. However, despite this poor performance, the
current IMF Extended Credit Facility (ECF), which is
geared towards supporting government’s efforts of
creating fiscal space, is expected to improve the fis-
cal situation in the medium term. Inflation remained
in double digits recording 13% due to disruptions in
supply value chains.
Beyond 2020, the economy is expected to rebound
as a result of improved global macroeconomic condi-
tions. The opening of other key domestic sectors and
the economic stimulus packages, as well as external
financial assistance in grants, are also expected to
support the growth in the medium term. Hence, the
country is expected to record positive growth of 3.2%
in 2021, reaching 4.4% in 2023. This positive growth,
together with the efforts of the ECF is expected to nar-
row the fiscal deficit to 3% in 2021 and 2% by 2023.
Furthermore, these developments are expected to re-
duce the stock of public debt from 71% of GDP in
2021 to 65% of GDP in 2023. In addition, inflation
is expected to reduce to 11% in 2021 and remain
around this level until 2023.
These issues, among others, largely guide the model-
ling environment and the choice of macroeconomic
models used to analyze the macroeconomy in Sierra
Leone.
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks
Survey data from the Central Bank and the Ministry
of Finance in Sierra Leone indicate that the Central
Bank has a suite of macroeconomic tools used to
guide monetary policy. This includes the ARIMA which
is used as the benchmark model to support policy
decision-making at the Quarterly Monetary Policy
Meetings. The model was developed locally and later
enhanced with support from the IMF AFRITAC WEST
2 and the Bank of England. The ARIMA model is com-
plemented by the ARIMAX. The latter, which was also
developed locally and enhanced with external support
from the IMF AFRITAC WEST 2 and the Bank of En-
gland, incorporates the Exchange Rate as an exoge-
nous component. The model is used to check the
impact of this exogenous component on the overall
outlook for inflation. The Central Bank also uses a lo-
cally developed VAR model. Lastly, the Central Bank
uses a Quarter Projection Model (QPM), which was
developed externally by the IMF AFRITAC WEST 2.
The model produces medium-term inflation forecasts
and supports policy decision making at the Quarterly
Monetary Policy Meetings.
With respect to the Ministry of Finance, the main
macroeconomic management tools are the Sierra
Leone Integrated Macroeconomic Model (SLIMM).
The model, which was developed by a Macro-fiscal
working group in consultation with a foreign expert, is
used to generate near and medium-term projections
for both macroeconomic and budgetary variables
such as GDP, inflation, BoP, government revenues,
total expenditures, and net lending.
Lastly, the Central Bank highlighted that, generally,
all their models are flexible enough to accommodate
emerging issues, while the Ministry of Finance stated
otherwise.
2.1.1 Modelling Unit and Staffing
The Modelling Unit in the Central Bank has been in
existence for over 10 years and has 2 staff members.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
One of the staff members is currently pursuing a PhD
program while the other has Master’s degree-level
training.
In the Ministry of Finance, macroeconomic modelling
has existed for over 11 years. It is done through a mul-
ti-ministerial and a multi-agency team in the form of the
Macro-fiscal working group. This group is made up of
all key stakeholders in key economic sectors involved
in macroeconomic management including the Bank
of Sierra Leone, National Revenue Authority, Statistics
Sierra Leone, Ministry of Finance, Ministry of Planning
and Economic Development, Ministry of Trade and
Industry, Ministry of Agriculture and Forestry, Ministry
of Fisheries, National Minerals Agency, Sierra Leone
Investment and Export Promotion Agency, National
Tourism Board academics from the Universities, and
the private sector. Within this group, there are 7 PhD
holders, 14 Master’s degree holders and 10 Bache-
lor’s degree holders. Nevertheless, this current capa-
city is considered by both the Central Bank, and the
Ministry of Finance as insufficient in light of the model-
ling needs of the country.
2.1.2 Software in Use
The Ministry of Finance has the EViews and STATA
software, while the Central Banks use the EViews,
STATA, Matlab, and Octave econometric software.
2.2 Challenges in Macroeconomic
Model
Efforts to address the inadequacy of macroeconomic
skills in Sierra Leone include:
• Leveraging international institutions (IMF, Bank of
England, and WAIFEM).
• continuous training in macroeconomic modelling
and basic econometrics including econometrics
packages like Eviews and STATA.
• Periodic and regular review and update of the mo-
del by both domestic and foreign consultants with
support from the Macro-Fiscal working group.
Despite these efforts, there remain significant challen-
ges in the country that make the conduct of macroe-
conomic modelling difficult.
These include:
• Data gaps and unavailability of data is cited as
the most significant challenge in both the Mi-
nistry of Finance and the Central Bank. Data ap-
pear to come with a lag, and sometimes it has
large structural breaks.
95
• The modelling units do not have adequate and/
or the requisite skills to undertake the advanced
modelling and analysis needed in the country.
• There is a significant shortage of reliable com-
puting resources (computers/laptops etc.) and
requisite econometric software. This is mostly
prevalent in the Ministry of Finance.
• There is a problem of weak collaboration
between the modelling unit with similar partners
and funders in the region. This challenge was
most prevalent in the Central Bank.
• Both Institutions also cited the unavailability
of opportunities to participate in training or
workshops as a significant challenge.
Over and above these challenges, the Ministry of Fi-
nance indicated that there is a need to move into other
areas of modelling like Macro-econometric modelling,
Computable General Equilibrium Models, and model-
ling other emerging issues like the effects of climate
change such as global warming, and an early warning
system for health shocks like COVID-19 and Ebola.
The Central Bank highlighted that there is insufficient
time to devote human potential towards model buil-
ding due to the low levels of staffing in the unit.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
96
3. Conclusion
This study reports the state of macroeconomic
modelling in Sierra Leone based on the data col-
lected from surveys administered at the Ministry of
Finance and the Central Bank. The data suggests
that macroeconomic modelling tools in the country
were developed through multi-partnership efforts
both internally and externally. However, there are
still some challenges that hinder effective macroe-
conomic modelling. There is a need to allocate
sufficient funding to support macroeconomic mo-
delling and forecasting by acquiring the necessary
hardware and software. Supplementing staff skills
through training opportunities, especially those that
would build capacity in both institutions with the in-
termediate to advanced modelling training needed
for sophisticated macroeconomic modelling and
techniques is also needed. There is also a need to
develop composite indicators to complete delays in
data releases. Improvements in internal and exter-
nal collaboration are necessary to yield the benefits
gained through cross-pollination of ideas as well as
those accrued through access to a wider network in
macroeconomic modelling. Lastly, where possible,
there is a need to increase the macroeconomic mo-
delling staff in the Central Bank.
A Profile of Macroeconomic Models/Frameworks for SOUTH
AFRICA
1. Introduction
South Africa is a middle-income emerging economy
with an abundant supply of natural resources; well-de-
veloped financial, legal, communications, energy, and
transport sectors; and home to Africa’s largest stock
exchange, which is among the top 20 in the world.
It has a labor force of about 54 million with around
70% occupied in services, 24% in industry and 5% in
Agriculture. In the early and mid-2000s, annual output
growth averaged about 4%, fiscal deficits turned to
small surpluses, and public debt declined to 27% of
GDP. By contrast, starting in the late 2000s, private
investment’s contribution to growth fell considerably,
and total factor productivity (TFP) growth became ne-
gative, dampening growth to slightly above 1%. Sou-
th Africa is the world’s largest producer of platinum,
gold, and chromium. It is also involved in automobile
assembly, metalworking, machinery, textiles, iron and
steel, chemicals, fertilizer, foodstuffs, and commercial
ship repair.
In 1994, the government sector, at 19.8%, contri-
buted the largest proportion to the economy, fol-
lowed by mining, manufacturing, and finance, all with
around 15%. Since then, finance has become the
largest sector, contributing about 22% to the ove-
rall GDP. It has an estimated per capita GDP of USD
6,354, while real per capita income growth remains
negative. The services sector has been growing
strongly but growth in other sectors has been poor.
Inflation has moderated and has averaged 5% since
2012 against the target 5%–2% band, as the infla-
tion targeting framework gained credibility. Fiscal de-
ficits have been persistently large due to continued
high expenditure despite weakening revenue perfor-
mance and State-Owned Enterprise (SOE) bailouts.
Fiscal performance has remained relatively weak with
the overall fiscal balance recorded at an average of -
5.1% since 2014. Weaknesses in public enterprises
are contributing to low service delivery compounding
the fiscal problems further. Tax revenues are esti-
mated at 27% of GDP.
With increasing interest payments to non-resident in-
vestors, the external current account deficit has wide-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
ned to 3.5% of GDP since 2014. The current account
deficit is largely financed by non-FDI inflows. South
Africa’s major exports are gold, diamonds, platinum,
other metals and minerals, machinery, and equipment.
The main export destinations are China (9.5%), US
(7.7%), Germany (7.1%), Japan (4.7%), India (4.6%),
Botswana (4.3%), and Namibia (4.1%). The country’s
major imports are machinery and equipment, che-
micals, petroleum products, scientific instruments,
and foodstuffs. The major import partners are China
(18.3%), Germany (11.9%), the US (6.6%), Saudi Ara-
bia (4.7%), and India (4.7%).
South Africa’s monetary policy has focused on
controlling inflation while empowering a broader eco-
nomic base. However, the country faces structural
constraints that also limit economic growth, such as
skills shortages, declining global competitiveness, and
frequent work stoppages due to labor strikes.
2. Survey Findings
The South African Reserve Bank (SARB) has a model-
ling unit that has been in existence for over 30 years.
The unit has a staff complement of nine with two offi-
cers holding PhDs, three with Master’s degrees, and
four with Bachelor’s degrees. The current staffing le-
vels are considered adequate for the modelling requi-
rements of the Central Bank. The SARB has a Quar-
terly Projection Model (QPM) that it uses for inflation,
interest rate, output, and exchange rate analysis and
forecasts for the monetary policy committee. This mo-
del was originally developed by the IMF but has, over
time, been amended by the local team. The model
runs on a Matlab platform.
3. Conclusion
South Africa has the longest history of modelling in
Africa. It has a suite of models but has recently relied
more on QPM. The African Development Bank may
consider facilitating workplace peer-to-peer learning
and additional capacity building in mathematical and
statistical skills, both of which would address the mo-
delling unit needs for upskilling in mathematical and
statistical competences.
97
A Profile of Macroeconomic Models/Frameworks
for SOUTH SUDAN
1. Introduction
Conflict, political instability, severe droughts and
floods, all of which have led to acute humanitarian
crises, have severely impacted economic growth in
South Sudan. Peace efforts, resumption in oil produc-
tion, along with an increase in oil prices has, in recent
years, put the economy on a recovery path. Conver-
sely, disasters, especially flooding have resulted in
supply-side shocks, which have derailed recovery ef-
fects resulting in a decline in GDP. The agriculture sec-
tor, which contributes 15% to GDP has been the most
severely affected. The oil sector, which contributes
70% to GDP has also been affected by a collapse in
oil prices. Together, these phenomena have resulted in
a decline in GDP growth from 3.3% in 2017 to -8.4%
in 2020.
On the monetary policy front, currency depreciation
was accompanied by double-digit inflation of 29.7% in
2020. Although inflation has come down from previous
levels of 380% in 2016, the inflation rate remains rela-
tively high and is projected to increase. The decrease
in oil prices affected fiscal policy, with government re-
venue deteriorating by 40%. This increased the fiscal
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
98
deficit to 4.9% of GDP in 2020 from 2.5% of GDP in
2019. The deterioration in revenue and capital flows
has meant a slowdown in credit and a widening of the
current account deficit to 4.5% of GDP in 2020 from
a deficit of 2.7% in 2019. Despite the need to finance
a wider current account deficit, debt restructuring ef-
forts have been successful, with external debt coming
down to 28.3% of GDP in 2020 from 38% in 2019.
The biggest risks for South Sudan are oil price shocks
and security threats. To ensure political stability, the
“Revitalised Peace Agreement” was put in place in
2018. However, for economic stability, peace efforts
must be matched by economic reforms, budgetary
discipline, and oil revenue management.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
Macroeconomic modelling in South Sudan currently
falls under the mandate of the Department of Re-
search and Statistics under the Ministry of Finance
and Planning. A modelling unit in the Macroecono-
mic Planning department, under the same Ministry
was in existence for a short time after indepen-
dence, but was disbanded due to the many challen-
ges faced in the new country. While it was in exis-
tence— between 2010 and 2012— it was staffed
with six employees.
During this time, the most commonly used models
were the South Sudan Model (SSMod) and the Hydro
Economic Analysis Tool Model. These models were
used for forecasting and generating estimates of oil
revenue and macroeconomic parameters and their fo-
recasting capabilities were ranked as good. The mo-
dels were developed with the assistance of foreign ex-
perts. Maintenance and updating of both models also
required foreign expertise.
The modelling unit in the Research and Statistics De-
partment has been in existence for one year and is
staffed by three members. It has mainly utilized uni-
variate models generated from ARIMA, VAR, and Mi-
crosoft Excel Spreadsheets. These models are used
for inflation, reserve money, and liquidity forecas-
ting. They are locally developed, and while the Excel
spreadsheets can be maintained and updated locally,
the ARIMA and VAR models require foreign expertise
for updates and maintenance. The models are not
considered sufficient for the needs of the modelling
unit and are ranked as average in terms of their fo-
recasting and policy analysis capabilities. They are
ranked as below average for simulation, and as poor
for sectoral / disaggregated analysis.
2.1.1 Modelling Unit and Staffing
The three members that make up the modelling unit in
the Department of Research and Statistics held Mas-
ter’s degrees. The capacity and size of the team was
not considered sufficient for their needs; in particular,
PhD level of knowledge and expertise were needed to
enhance the modelling tasks of the unit.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2.1.2 Software in use
Software used by the modelling unit to implement
these models includes EViews and STATA.
2.2 Challenges in Macroeconomic
Models/Framework
The main challenges faced by the Department of Re-
search and Statistics include high staff turnover, the
lack of an appropriate modelling tool/ framework, low
levels of modelling knowledge and skill, and a shor-
tage of reliable software and hardware. In addition to
these challenges, modelling in the institution is not
coordinated and monitored, the unit struggles with
data unavailability and there is weak collaboration
between the modelling units and funders. The biggest
challenge is that only a few of the staff members can
adequately utilize the existing models. The department
is also being remodeled and, as a result, there is a lack
of advisory support.
3 Conclusion
Macroeconomic modelling in South Sudan has been
sporadic and has not been operational long enough to
overcome any challenges. Significant institutional and
capacity-building measures are needed to revitalize
and support macroeconomic modelling units. Capa-
city-building efforts should focus on:
• Training of modelling unit staff in model develop-
ment, calibration, and simulation; as well as fore-
casting, data management, economic reporting,
and policy analysis.
• Provision of the necessary hardware and sof-
tware.
• Appointing a resident advisor to guide the staff.
• Provision of opportunities for staff to attend IMF
and regional training seminars.
99
A Profile of Macroeconomic Models /Frameworks for TOGO
1. Introduction
Togo’s economy is driven by agriculture, investment,
transport, and energy. Like other African economies,
growth in these sectors has slowed due to weak glo-
bal demand from the effects of the COVID-19 pan-
demic. Other shocks affecting Togo’s economy are
fragility, security risks, and terrorism threats.
As a result, Togo has experienced a slowdown in
trade and investment, both foreign direct invest-
ment and portfolio flows, which led to a slowdown
of capital inflows that has resulted in low growth.
Real GDP growth shrank from 5% in 2018 — a high
growth rate supported by strong performance in ex-
port-oriented sectors such as phosphate extraction,
coffee and cocoa, and cotton production—to 0.4%
in 2020 following the effects of the pandemic. Fis-
cal consolidation efforts have been successful, with
public debt declining from 80% of GDP in 2016 to
68.67% in 2019. The budget deficit, however, grew
from 0.8% of GDP to 4.7% between 2019 and 2020,
as a result of lower tax revenue and increased pan-
demic-related health expenditures. The slowdown
of exports caused an increase in the current deficit
from 2.2% of GDP in 2019 to 3.2% in 2020. Despite
efforts to conduct prudent monetary policy, inflation
has increased from 0.7% in 2019 to 6.8% in August
2021. The inflation increase has mainly been due to
the disruption of supply chains resulting from CO-
VID-19 lockdowns.
To address these macroeconomic challenges, the au-
thorities are implementing the National Development
Plan (NDP 2018-2022), which aims to achieve me-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
100
dium-term GDP growth of 5.5%. However, this has
been stalled by weaker-than-expected growth, parti-
cularly in exports, and high-security threats. The need
to meet NDP targets makes it necessary to ensure that
the modelling unit is well-equipped and well-trained to
facilitate policy modelling and analysis.
2. Survey Findings
2.1. Status of macroeconomic models/
Frameworks
Macroeconomic modelling covers both monetary and
fiscal policy. The monetary policy mandate falls under
the Central Bank for West African States (BCEAO),
while the fiscal policy mandate falls under the Ministry
of Economy and Finance (MEF). The modelling unit
under BCEAO is well established and has been in
existence for 25 years. It is staffed by approximately
120 individuals including 50 at headquarters and 70
in BCEAO’s national directorates. Their models are
considered efficient for their intended purposes. The
MEF’s modelling unit has been in existence for about
seven years and is staffed with three members; this is
where most of the modelling challenges lie.
Macroeconomic models used by BCEAO are mostly
deal with forecasting; the seven models used are dis-
cussed below.
i. The Bank Liquidity Forecasting model (the most
used model) is a global model for the West Afri-
can Economic and Monetary Union (WAEMU).
The model is used for forecasting autonomous
factors that relate to bank liquidity. It is developed
 locally and is used to generate weekly forecasts
of banks’ liquidity factors that are relevant to the
money market.
ii. The second most-used model is the Inflation
Forecasting model, which is available for the
WAEMU and for all eight Member States of the
BCEAO. This model generates short-term (3
months) to medium-term (24 months) inflation
forecasts and is used to produce periodic fore-
casts of inflation such as overall index and infla-
tion by components.
iii. The Bank’s Cash Flow Forecasting Model is also
used to forecast the BCEAO’s overall position.
This model produces quarterly forecasts of the
overall cash position of the BCEAO.
iv. A Macro-Econometric Forecasting and Simu-
lation Model (MAPRES) is also available for all
eight BCEAO Member States. This model is
used to generate aggregate-level forecasts of
the main macroeconomic variables represen-
ting various sectors of the economy. It also pro-
vides a quantitative assessment of the impact
of internal or external shocks as well as the ef-
fect of a specific economic policies on various
economic aggregates. The model produces
short- and medium-term macroeconomic indi-
cator forecasts, and traces out the impact of
exogenous shocks and the possible effect of
various economic policies.
v. An Integrated Framework of Macroeconomic
Forecasting is available for all BCEAO member
states and is used to obtain a disaggregated
macroeconomic forecasting framework. It pro-
vides disaggregated forecasts for the annual
macroeconomic framework.
vi. A Dynamic Stochastic General Equilibrium
(DSGE) Model is used as the overall framework
for WAEMU. It is used in the assessment of the
impact of various shocks on the future trends of
economic variables and their repercussions on
the WAEMU economies.
vii. Lastly, a QPM-WAEMU model is also used as an
overall model for WAEMU. It provides forecasts
for quarterly inflation and growth; this model is
currently being finalized.
All the models discussed above are locally developed
and maintained, except for the DSGE model which re-
quires foreign expertise for maintenance and updating.
To meet the goals of the NDP (2018-2022), the MEF
uses a Static Computable General Equilibrium model.
The model assists in the determination of the potential
effects of the implementation of the National Develop-
ment Plan on macroeconomic aggregates. It provides
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
simulations of medium-term growth, job creation, in-
cidences of poverty and inequality, and the effects of
various policy measures. The model can be used for
assessing the effects of an exogenous shock or a po-
licy measure on the economy, and on households and
firms. This model is developed locally with the assis-
tance of the WAEMU Commission. Maintenance and
updating are both done locally and with the assistance
of foreign experts. Togo’s MEF also used the Macroe-
conomic Accounts Forecasting model as a quasi-ac-
counting model. The model generates medium-term
macroeconomic forecasts for the real sector, public
finances, debt, balance of payments, and monetary
aggregates. It is developed with technical and financial
support from the European Union and UNDP. The mo-
del was designed by an international consultant. Main-
tenance and updating are both done locally and with
the assistance of foreign experts. A partial equilibrium
regression model is used by the MEF to assess the
sustainability of Togo’s fiscal policy. This model traces
the effect of public debt on the primary balance, and it
is locally maintained and updated. Lastly, the MEF uses
an Accounting Model for tax policy simulation to eva-
luate the proposal of a tax policy to reduce tobacco
consumption. The models provide a simulation of the
impact of tobacco taxation on the reduction of tobacco
consumption.
2.1.1. Modelling Unit and Staffing
The MEF’s modelling unit does not have sufficient
capacity as only one unit member holds a PhD and
the other two hold Master’s degrees. Capacity gaps
have been addressed by way of supporting the team
through assistance from AFRITAC West to produce
diagnostics of the business cycle monitoring and
macroeconomic forecasting. The authorities have also
recruited national consultants to provide modelling
support and provide training in research methods and
scientific presentation.
2.1.2. Software in use
Software used by the MEF unit to implement these
models includes EViews, GAMS, STATA, and SPSS,
with the most common software being EViews, GAMS,
and Advanced Excel. The BCEAO uses EViews, MAT-
LAB, JDEMETRA, R, and STATA.
2.2. Challenges in Macroeconomic
Models/Frameworks in Togo
Despite the efforts to support the modelling unit, the
MEF team does not have the capacity to carry out the
necessary modelling; it is characterized by low levels
of knowledge and skill. The biggest challenge is that
few of the staff can utilize the models/ frameworks.
Moreover, opportunities to participate in training
workshops are scarce. The modelling unit is also
faced with data unavailability issues, a lack of requi-
sitesoftware and hardware resources, and weak col-
101
laboration between the modelling unit and partners.
There is an overreliance on foreign experts to build
modelling frameworks, which suggests a strong need
for knowledge transfer to strengthen the capacity of
the local modelling unit.
In addition to these capacity challenges, challen-
ges exist with the quality of the models used. The
PRECOMAT model does not allow for the simulation
of the impact of economic policy measures, par-
ticularly on households (poverty), businesses, and
employment, which are thematic issues. This model
could, therefore, be completed by the addition of a
poverty module. With the CGE model, the disaggre-
gated effects of policy measures are not well deve-
loped. As a result, the performance of these models
is average.
Another challenge faced by the MEF modelling unit
is institutional. A decree was issued to restructure
the General Directorate of Economic Studies and
Analysis, which includes the team responsible for
managing the models. Among other things, the de-
cree provides for the creation of a forecasting de-
partment, a research department, and a business
cycle department. However, to date (end-2022),
this decree has not been implemented. All the res-
ponsibilities of these three directorates are assigned
to the Forecasting Division team, which is staffed by
seven people.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
102
3. Conclusion
The modelling unit in Togo’s MOFP has experienced
several challenges and there is a clear need for capa-
city building to enhance the knowledge and skills of the
modelling team. Possible suggestions to address the
challenges and build capacity include:
• Capacity building in the CGE model taking into
account emerging themes in the economy.
• Training in panel data econometrics;
• Technical assistance for the implementation of mi-
cro-simulation models in a dynamic framework.
• Opportunities to participate in economic policy re-
search seminars.
• Stabilization of the workforce to reduce high staff
turnover.
• Training in macroeconomic modelling and
macroeconomic forecasting techniques.
• Training in impact studies of policy measures or
shocks.
These measures would ensure that the unit has the
necessary knowledge and skills for efficient modelling.
A Profile of Macroeconomic Models/Frameworks
for UGANDA
1 Introduction
The economy of Uganda, as with many Sub Saharan
African countries, is heavily dependent on agricultu-
re as its mainstay supporting both livelihoods and a
diversified export base with predominantly regional
export destinations. Despite this, the sector’s contri-
bution to the country’s GDP has substantially declined
over time to 24%, while the services sector has grown
in importance, with its share in GDP now estimated
at 43%. The share of industry in GDP, has somewhat
stagnated at about 26%. Commercially viable oil re-
serves have been discovered, but domestic oil pro-
duction is in embryonic stages.
Uganda’s medium- to long-term development strate-
gy centers on infrastructure (to fill the infrastructure
gap), agriculture, industrialization, tourism, and deve-
lopment of the nascent oil sector. As a result, Uganda
has been scaling up infrastructure investment since
2012/13. The flagship Karuma and Isimba power ge-
neration projects are virtually complete, while some
newly constructed major oil and non-oil transport links
are operational, and investment for the oil sector (in-
cluding the refinery pipeline) is about to ramp up. The
main vulnerabilities to the Ugandan economy relate to
unfavorable weather conditions, domestic and regio-
nal political tensions, and further delays in the start of
oil production.
GDP growth shrank sharply in 2020 to -2.2%, from
highs of 8.0% in 2019 and 5.3%, on average, in the 7
years to 2017. Uganda’s inflation, over the greater part
of the decade, remained well anchored to both the au-
thorities’ target of 5% over the medium term and the
Association of African Central Banks (AACB)’s revised
convergence criteria of at most 7%. Inflation mode-
rated from 7.0% on average per year in the 7 years to
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
2017 to 2.6% and 2.9% in 2018 and 2019, respec-
tively, rising only modestly to 3.8% in 2020, helped by
robust monetary policy actions, notwithstanding the
COVID-19 induced crisis of 2020.
The fiscal deficit including grants, as a share of GDP,
has widened over the decade, from an average of
3.0% per year in the period 2010-17 to 4.8% in 2019
and further to 7.6% in 2020, driven historically by
public investments but also by a recent sharp de-
cline in revenues against a backdrop of reduction in
economic activity, tax payment postponements to
support business liquidity and shrinking trade, and
rising current spending to manage the COVID-19
pandemic. However, even with the increased fiscal
deficits, Uganda’s public debt is rated as remaining
at low risk of debt distress and below the AACB’s re-
vised threshold of 65% of GDP, but vulnerabilities are
increasing. The stock of public debt, as a percentage
of GDP, has risen rapidly from 24.5%, on average in
the period 2010-17, to 45.7% in 2020. In the autho-
rities’ view (Bank of Uganda’s State of the Economy
report for June 2021), incurring large deficits in the
near term—for the necessary investments in people,
communities, and businesses—should increase the
chance for a strong, widely shared economic reco-
very; and thus contribute to more rapidly shrinking
deficits in the future than would be the case without
such actions.
The external current account deficit has also in-
creased to 9.1% of GDP by 2020—mostly due to
increased imports of capital goods for public invest-
ment projects, oil projects, and FDI. Over the de-
cade, Uganda’s external reserve cover has remained
stable at four months of imports cover— securing a
sound buffer against external shocks, at least when
weighed against the AACB’s revised criteria of at
least three months of imports of goods and services.
103
 2. Survey Findings
2.1. Status of Macroeconomic Models
Survey data from the Bank of Uganda indicates a good
mix of a suite of near- and medium-term macroeco-
nomic model tools to model, forecast, and simulate
consequences of policy actions and shocks for the
economy. These have been the foundation of success-
ful monetary policy formulation and implementation,
particularly over the past decade.
The Central Bank concurrently uses a combination of
near-term and quarterly projection models. The one-to-
two-month output (near term) forecast feeds into the
quarterly projection model. In the class of near-term
projection, models are time series models, including, in
particular, VAR and ARIMA, which are suited and used
for near-term macroeconomic estimates and forecasts.
At the centre of the quarterly projection, the model is
the FPAS framework, underpinned by the canonical
QPM. The FPAS framework is used to perform me-
dium-term forecasts of inflation, output, interest rate,
and exchange rate, among others, as well as for policy
simulations.
All near-term forecasting models are developed and
fitted locally. The FPAS framework was originally de-
veloped by the IMF, but has, over time, been amended
and domesticated by the local team and is now locally
maintained. The models have been adjusted to allow
for reasonable flexibility, with fine-tuning for the fiscal
block, features peculiar to the local economic environ-
ment, and many kinds of shocks, including the CO-
VID-19 pandemic. However, modelling is yet to include
gender mainstreaming aspects of the economy.
2.1.1 Modelling Unit and Staffing
Macroeconomic modelling at the Bank of Uganda is
hosted in a modelling unit of the Research department,
which has existed for 14 years. At the time of this pro-
filing, the unit had staffing of eight, two of whom had
PhDs in Economics, while six had Master’s degree level
training in Economics.
2.1.2 Software in Use
The models are implemented in a host of econometric
software, including Matlab/IRIS, EViews, Stata, R- stu-
dio, and PcGIVE.
2.2. Challenges in Macroeconomic
Model in Uganda
Undeniably, the Central Bank has benefitted from exten-
sive TA support, particularly with the development and
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104
operationalization of the FPAS framework and the
use of Matlab/IRIS econometric modelling software,
for which now, reasonable local capacity has been
developed. Nonetheless, as noted above, signifi-
cant challenges in macroeconomic modelling persist.
These include:
• Gaps, lags, and inconsistencies in Macroeco-
nomic data remain a binding constraint. A key
variable in inflation projections, GDP, comes
with a lag, is inconsistent and/or is subject to
frequent revisions, making estimating the out-
put gap a difficult exercise. While the bank has
continuously developed and used high-frequen-
cy proxies, especially for data that come with
a significant lag, it is not yet clear how closely
the composite index of economic activity tracks
GDP. Thus, efforts towards real-time economic
analysis required for sound macroeconomic po-
licy implementation are undermined.
• While current staffing capacity seems to be a
good mix of intermediate, to advanced skills,
the unit is reported as having high staff turnover
due to secondments to regional and internatio-
nal institutions and internal staff rotations. As a
result, the unit has somewhat continued to rely
on foreign expertise. Outside the modelling unit,
limited modelling and forecasting knowledge is
reported for other bank staff, which limits the
unit’s ability to get constructive feedback on
their modelling work.
• The unit has also indicated the need to stren-
gthen their operationalization of the DSGE,
now-casting and artificial intelligence/machine
learning models, as well as new techniques and
methods. The staff noted a desire and need
for continuing education and training, including
from short- term training, technical level TA mis-
sions, and secondments to learn best practices
from other Central Banks and international ins-
titutions. In other words, they iterated a need to
be supported in continuous research endeavors
and to keep pace with emerging challenges.
3. Conclusion
The study reports the state of macroeconomic mo-
delling in Uganda based on the data collected from
surveys administered at the Ministry of Finance and
the Central Bank. The data suggests that there is no-
table progress in the area of macroeconomic model-
ling, but challenges still persist. In this regard, there is
a need for a structured, systematic capacity-building
plan that takes into consideration the specific capa-
city needs of the bank.
A Profile of Macroeconomic Models/Frameworks for ZAMBIA
1. Introduction
Zambia is a landlocked country that shares borders with
the Democratic Republic of Congo, Tanzania, Malawi,
Mozambique, Zimbabwe, Botswana, Namibia, and An-
gola. For more than a decade (2000-2010) the country
attained macroeconomic stability and achieved impres-
sive real growth averaging 7.7% per annum and lifting
Zambia above the threshold of lower Middle-Income
Countries. However, growth slowed during the period
2015 to 2017, due to falling copper prices, reduced
power generation, and depreciation of the Kwacha
(ZMW). Zambia’s lack of economic diversification and
dependency on copper as its sole major export make
it vulnerable to fluctuations in global commodities mar-
kets. Commodity prices turned downward in 2015 due
to declining demand from China. GDP growth picked
up in 2017 as mineral prices rose but have been rela-
tively low to an average of about 4%. The COVID-19
pandemic pushed into a recession an economy that
was already weakened by recent persistent droughts,
falling copper prices, and unsustainable fiscal policies.
The economy has been affected by a persistent fis-
cal deficit of more than 8% in recent years, which has
contributed to the rise in debt.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Zambia raised USD 7 billion from international inves-
tors by issuing separate sovereign bonds in 2012,
2014, and 2015. Concurrently, it issued over USD 4 bil-
lion in domestic debt and agreed to Chinese-financed
infrastructure projects, significantly increasing the
country’s public debt burden to more than 60% of GDP.
The government has considered refinancing $3 billion
worth of Eurobonds and significant Chinese loans to
cut debt servicing costs.
The Bank of Zambia introduced a benchmark policy
rate at 9% in April 2012 to improve transparency and
anchor inflationary expectations. The monetary policy
stance has largely been accommodative, with an ave-
rage inflation rate of 15.7% in 2020, outside the Bank
of Zambia’s inflation objective range of 6-8%, such that
the real interest rate has been negative for about 2
years. The increase in inflation was mainly due to the
pass-through from the sharp depreciation of the Kwa-
cha (ZMW) and upward adjustment in energy prices
(fuel pump prices and electricity tariffs).
Due to the recent decline in copper prices, the eco-
nomy’s supply of foreign exchange declined against
rising demand so that the exchange rate depreciated
by 41.7% in 2020. The overreliance on copper as a
105
major source of foreign exchange makes the economy
susceptible to external shocks. Further, domestic debt
conditions are affecting the accumulation of internatio-
nal reserves, which as of the end of 2020, were below
the three months of import cover. Public external debt
rose to 82.3% of GDP from 50.2% in 2019. The 2020
fiscal position continued to deteriorate, and this was
worsened by the unprecedented impact of COVID-19
which raised expenditure and weakened revenue. Pre-
liminary data indicate a cash fiscal deficit of 14.2% of
GDP or ZMW 46.6 billion against a target of 5.5%.
These issues, among others, contextualize the model-
ling environment in Zambia and have largely shaped
the choice of models used to design economic policy
interventions. Strengthening the capacity of economic
modelling units in the country is critical for depicting ac-
curate trends of the current and future performance of
the country. In this regard, the section that follows des-
cribes the status of these models and the challenges
encountered in the area of macroeconomic modelling
in Zambia.
2. Survey Findings
2.1. Status of Macroeconomic Models/
Frameworks
Zambia (Bank of Zambia) has the following models:
(i) Quarterly Projection model, which is used for es-
timating and forecasting inflation, real GDP, ex-
change rate, money supply, lending rates, and
the policy rate. The QPM model was developed
locally with the support of external consultants
through IMF technical assistance.
(ii) Macroeconomic Quarterly Model.
(iii) Other time series models, namely, the Autore-
gressive and Vector autoregressive).
The Macroeconomic Quarterly Model and other time
series models were developed locally and are also
maintained by local staff. The Quarterly models are
quite flexible to incorporate emerging issues, and the
QPM particularly is still under development. All the mo-
dels are used for forecasting and policy analysis.
The Ministry of Finance uses ZAMMOD (a Macro-eco-
nometric model with a detailed fiscal block that suits
the task of the Ministry of Finance) and the Macroeco-
nomic Framework, which are used for projecting and
analyzing GDP by production, income, and expenditure
(these are crucial in the course of budget preparation).
These models are developed locally but assisted by in-
ternational consultants.
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106
2.1.1. Modelling Unit and Staffing
The Central Bank of Zambia has a modelling unit
that has been in existence since 2014. It current-
ly has three officers with Master’s degrees. The
current staffing levels are deemed inadequate and
there is a need to increase the number of staff.
In this regard, the Central Bank is taking some steps
to address the challenge by exposing staff to short-
term training, and long-term training including at
the PhD level, as well as on-the-job training. The
Ministry of Finance has nine officers with five hol-
ding Master’s degrees and four with Bachelor’s de-
grees. This level of proficiency/education is deemed
insufficient.
2.1.2. Software in Use
The model is operated on EViews and MATLAB plat-
forms.
2.2. Challenges in Macroeconomic
Models/Frameworks
The key challenges experienced by the modelling
unit are lack of opportunities to participate in trai-
ning or workshops, institutional inadequacies (e.g.,
modelling in the institution is not coordinated and
monitored), and shortage of reliable hardware re-
sources. Apart from these, the other challenges in-
clude data gaps/unavailability and over-reliance on
foreign experts to build and/or improve the models/
frameworks.
The Ministry indicated that overreliance on foreign as-
sistance and lack of coordination are key problems
experienced.
3. Conclusion
The Central Bank of Zambia has demonstrated
remarkable commitment and progress towards
macroeconomic modelling. Modelling in the Mi-
nistry of Finance is also taking shape. They have a
suite of models aimed at addressing various needs
in the monetary policy formulation process. Howe-
ver, challenges abound, which include, unavailabi-
lity of opportunities for staff to participate in trai-
ning or workshops, shortage of reliable hardware
resources, data gaps/unavailability and over-re-
liance on foreign experts to build and/or improve
the models/frameworks. To support the function of
macroeconomic modelling and forecasting, inter-
vention areas may include the provision of training
in macroeconomic modelling and assistance with
requisite software and hardware.
A Profile of Macroeconomic Models/Frameworks for
ZIMBABWE
1. Introduction
The Zimbabwean economy is largely driven by mi-
neral resources and the agriculture sector. However,
the country has serious structural problems and the
macroeconomic imbalances and humanitarian crises
have been worsened by climate-related shocks. Real
GDP contracted by 7.4% in 2019 from the impres-
sive growth of 19.7% recorded in 2010 (IMF, 2021).
This deceleration in growth is attributed to a combi-
nation of supply-side and demand-side factors such
as protracted drought conditions, electricity and water
supply challenges, currency instabilities, low business
confidence, and ease of doing business challenges.
These issues have contributed to pre-existing fiscal
threats, leaving the country with little fiscal space to
maneuver. The fiscal deficit as a percentage of GDP
has averaged 6.5% in the recent period. However,
the country remains in debt distress, as shown by
the stock of debt to GDP ratio which increased from
47.6% in 2010 to 112% in 2019. Inflation has also
soared, chiefly due to the monetizing of the fiscal de-
ficit. In this regard, a 3-digit inflation rate of 225% was
recorded in 2019 from 3% in 2010. During the same
period, the current account deficit averaged 8% of
GDP.
In 2020, macroeconomic conditions worsened be-
cause of the COVID-19 pandemic. Measures geared
towards reducing the spread of the virus weighed
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
heavily on economic activity, particularly in sectors
such as manufacturing, non-mineral exports, hospi-
tality, trade, and transport. Real GDP is expected to
contract further by 8% while inflation is anticipated to
reach 557%. The increase in the demand for health
infrastructure-related imports, over and above the tra-
ditional imports of maize and electricity, did not exert
much pressure on the current account due to high re-
mittances inflows and a trade surplus. In this regard,
as a percentage of GDP, the current account surplus
is expected at 4.7% while the budget is anticipated to
be balanced.
Going forward, the economy is expected to recover
due to strong performance in the agriculture sector as
rains normalize. Furthermore, the easing of restrictions
meant to curtail the spread of COVID-19 measures
is expected to improve businesses and support eco-
nomic recovery. In these conditions, the economy is
expected to grow by 3.1%, 4%, and 2.5% in 2021,
2022, and 2023, respectively while inflation is expec-
ted to slow to 12.8% by the end of 2023. Risks to
this outlook include the resurgence of climate shocks
and a prolonged COVID–19 operating environment
that will further strain public finances, amidst limited
recourse to external financing.
These issues, among others, largely guide the model-
ling environment and the choice of macroeconomic
models used to analyze the macro economy.
107
2. Survey Findings
2.1 Status of Macroeconomic Models/
Frameworks
According to survey data from the Ministry of Finance
and Economic Development of Zimbabwe and the
Reserve Bank of Zimbabwe a suite of macroecono-
mic tools is used for macroeconomic forecasting and
policy simulations as well as policy analysis.
On the fiscal side, the country uses the Financial
Programming and Policy (FPP) framework to provi-
de forecasts for key macroeconomic variables such
as GDP, fiscal and external balance, as well as the
evolution of the monetary accounts. On the monetary
side, together with the FPP framework, they use short
forecasting models such as the VAR and Bayesian
VAR for forecasting inflation, exchange rate, money
supply, and gap forecasts. These are complemented
by a disaggregated ARIMA and state-space models.
Over and above, there is a consistent Microsoft Ex-
cel-based macroeconomic framework which largely
provides guidance for fiscal policy operations, the real
sector, and other key macroeconomic accounts.
Most of these tools were developed locally with tech-
nical support from regional and international bilateral
and multilateral institutions. Model maintenance is
largely conducted locally using the existing modelling
skills and inter-institutional support. Despite this, the
officials have indicated that these macroeconomic
tools are, in some instances not flexible enough to ac-
commodate analysis of emerging policy issues.
2.1.1 Modelling Unit and Staffing
The macroeconomic modelling units in the Ministry
of Finance and Economic Development of Zimbabwe
and the Reserve Bank of Zimbabwe have existed for
more than 10 years and 8 years, respectively. The for-
mer’s has seven officials, four of whom have Master’s
degree-level training, while the rest have Bachelor’s
degrees. For the Reserve Bank, the modelling unit has
eight employees (four PhD holders, three Master’s De-
gree holders, and one Bachelor’s degree holder).
The staff from both institutions indicated that the
present capacity of the macroeconomic unit team is
not sufficient to fulfil the modelling requirements. To
minimize the capacity gaps, the units indicated that,
among other needs, they require continuous training
on macroeconomic modelling techniques and where
possible, upgrading existing staff’s qualifications to
Master’s and PhD degrees.
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108
2.1.2 Software in Use
Macroeconomic management tools used at both insti-
tutions are supported by EViews and Microsoft Excel.
2.2. Challenges in Macroeconomic
Models/Frameworks
Despite the support provided to the modelling units —
such as in-house training, outsourcing some of the mo-
delling work to research institutions, recruitment of new
staff, and acquisition of attaining higher qualifications (in
the case of Reserve Bank) — the staff have indicated
that there still face significant challenges including:
i) High staff turnover in the modelling unit, espe-
cially at the Ministry of Finance and Economic
Development, which delays the progress in
macroeconomic modelling and forecasting.
ii) Inadequate macroeconomic data and/or data
gaps that make macroeconomic modelling and
forecasting consistent.
iii) Lack of the requisite hardware and software re-
sources, which makes the conduct of macroe-
conomic modelling and forecasting difficult.
iv) Low levels of modelling knowledge and skills in
the modelling unit, especially at the Ministry of
Finance and Economic Development, which also
delays the progress in macroeconomic model-
ling and forecasting.
3. Conclusion
The study reports the state of macroeconomic mo-
delling in Zimbabwe based on the data collected from
surveys administered at the Ministry of Finance and
Economic Development and the Reserve Bank. The
data suggests that while progress in economic mo-
delling is ongoing there are several factors needed to
enhance the capacity of the staff and broaden the out-
comes of the models. These include adding training
components to the macroeconomic modelling units in
intermediate and advanced macroeconomic model-
ling techniques to complement the existing tools, and,
concomitantly, providing access to PhD programs for
staff, especially for the modelling unit of the Ministry
of Finance and Economic Development. Technical
enhancements needed comprise adopting nowcas-
ting modelling techniques to supplement the delays
in macroeconomic data releases and investing in ade-
quate software and hardware, to support the function
of macroeconomic modelling and forecasting.
 ANNEX III:
LIST OF COUNTRIES
SURVEYED

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109
Survey Responses by Country, Economic Institution, Income Classification & Region

Central Ministry of
Bank Finance/Economic Income
Country Region
(23 Planning Classification
Responses) (16 responses)
1 Algeria Lower Middle Income North Africa
2 Angola Lower Middle Income Southern Africa
3 Benin Lower Middle Income West Africa
4 Botswana Upper Middle Income Southern Africa
5 Burkina Faso Low income West Africa
6 Burundi Low income East Africa
7 Cabo Verde Lower Middle Income West Africa
8 Cameroon Lower Middle Income Central Africa
9 Central African Republic Low income Central Africa
10 Chad Low income Central Africa
11 Comoros Lower Middle Income East Africa
12 Congo Lower Middle Income Central Africa
13 Côte d'Ivoire Lower Middle Income West Africa
14 Djibouti Lower Middle Income East Africa
15 DR Congo Low income Central Africa
16 Egypt Lower Middle Income North Africa
17 Equatorial Guinea Upper Middle Income Central Africa
18 Eritrea Low income East Africa
19 Eswatini Lower Middle Income Southern Africa
20 Ethiopia Low income East Africa
21 Gabon Upper Middle Income Central Africa
22 Gambia Low income West Africa
23 Ghana Lower Middle Income West Africa
24 Guinea Low income West Africa
25 Guinea-Bissau Low income West Africa
26 Kenya Lower Middle Income East Africa
27 Lesotho Lower Middle Income Southern Africa
28 Liberia Low Income West Africa
29 Libya Upper Middle Income North Africa
30 Madagascar Low Income Southern Africa
31 Malawi Low Income Southern Africa
32 Mali Low Income West Africa
33 Mauritania Lower Middle Income North Africa
34 Mauritius High Income Southern Africa
35 Morocco Lower Middle Income North Africa
36 Mozambique Low Income Southern Africa

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110
 Central Ministry of
Bank Finance/Economic Income
Country Region
(23 Planning Classification
Responses) (16 responses)
37 Namibia Upper Middle Income Southern Africa
38 Niger Low Income West Africa
39 Nigeria Lower Middle Income West Africa
40 Rwanda Low Income East Africa
41 Sao Tome & Principe Lower Middle Income Southern Africa
42 Senegal Lower Middle Income West Africa
43 Seychelles High Income East Africa
44 Sierra Leone Low Income West Africa
45 Somalia Low Income East Africa
46 South Africa Upper Middle Income Southern Africa
47 South Sudan Low Income East Africa
48 Sudan Low Income East Africa
49 Tanzania Lower Middle Income East Africa
50 Togo Low Income West Africa
51 Tunisia Lower Middle Income North Africa
52 Uganda Low Income East Africa
53 Zambia Lower Middle Income Southern Africa
54 Zimbabwe Lower Middle Income Southern Africa

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111
 ANNEX IV:
TECHNICAL DESCRIPTION
OF A DYNAMIC
STOCHASTIC GENERAL
EQUILIBRIUM MODEL
(DSGE)

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112
Taking into consideration some of Africa’s stylized facts highlighted in Section 1, a prototype DSGE Model, de-
veloped by Peiris and Saxegaard (2007), comes near to capturing the dynamics of the African economy. DSGE
models are considered state-of-the-art in macroeconomic modelling because they are based on deep parame-
ters, which emerge from the micro-foundation of rational economic agents’ (consumers and firms) behavior. As
they are built in the context of rational expectation hypothesis, they are also believed to address what is called
the “Lucas Critique” directed at traditional large-scale Keynesian macroeconomic models that dominated macro
policy modelling before the emergence of DSGE models.

2.6.1. Household Behaviour

A typical household aims at maximising utility characterised by the following function:

Where represent consumption, labor supply, and real money balances. The inclusion of separable real
money balances reflects the dominance of cash transactions in Africa. This utility function can also be modified
to capture the fact that households consume agriculture and non-agriculture products, mineral and non-mineral
GDP, etc. Although substantial progress has been made in financial development, the cash economy remains re-
latively large, justifying the inclusion of real balances in the utility function. Here, pt is the consumer price index. b is
a measure of habit formation. The capital account is assumed closed, an assumption which reflects the presence
of capital controls in many African economies.

Households seek to maximise utility given by eqn.1 subject to some budget constrained which is characterised
as follows:

Where are profits from the banking system and non-tradable firms. Capital stock evolves accor-
ding to the following rule:

With being depreciation of capital, captures capital adjustments costs which is driven by the ratio of invest-
ment to capital as follows:

Where, are greater than or equal or equal to zero and u_t^1 is a shock to the depreciation process.

The consumer problem can thus be presented as follows:

Max:

Where and are Lagrangian multipliers. The first order conditions for consumption, labour, money and de-
posits are

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113
2.6.2. Production of Final Goods

The production of final goods Z is governed by the following constant elasticity of substitution function which ag-
gregates domestically produced as well as imported goods.

Profit maximisation entails the following demand functions for i=d,m

The cost minimising price index becomes

2.6.3. Intermediate good production

The production of intermediate goods is driven by learning by doing and credit constrains which are captured by
which are funded by borrowing from the banking system

Productivity is captured by and is affected by the small size of tradable sector and large size of government
spending in African economies and it follows the following autoregressive process

The function h(.) captures technology used by government to produce productivity enhancing public goods. The
firm’s problem is to minimise costs subject to satisfying market demand.

The first order conditions from eqn. 18 are:

We can postulate nominal marginal costs as the ratio of nominal wage to marginal product of labour as follows

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114
The key assumption is that each domestic firm is able to sell output on domestic and international market such
that for tractability demand for exports follows a similar function with domestic demand:

2.6.4. Price Setting by Intermediate Goods Producers

Intermediate goods producers are confronted with quadratic adjustment costs which can be presented as follows

The optimal price setting for non-tradables can be written as follows:

Eqn. 25 allows us to capture the fact that flexible prices are set as a markup over marginal costs. For simplicity,
law of one price is assumed to hold.

2.6.5. Financial Intermediation

The banking system converts peoples’ deposits into loans to intermediate goods producers and the public sec-
tor and reserves. The higher the deposits the lower the amount of money in circulation. See Agenor and Montiel
(2006)

Loans to intermediate goods firms earn an interest rate that represents a markup over the interest on deposits This
markup is a function g(.) of firm’s ratio of liabilities to their capital stock.

The banking system is also assumed to maintain reserves sufficient enough to cover statutory requirements as
follows:

2.6.6. Public sector dynamics

The Central Bank’s balance sheet is given as:

Where e is the nominal exchange rate, Z captures foreign exchange reserves and B are government securities.
One way to extend this equation is to assume that foreign reserves earn interest rates since most Central Banks
in Africa place their external reserves with fund managers. However, for simplicity, one would also assume zero
interest if the reserves position is quite low which is mostly the case in African countries.

A is aid and B are bonds issued to the financial sector which earn some interest, share u of government spending
is done on productivity investment as follows:

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115
The consolidated budget constraint is this give as follows:

Where is base money.

2.6.7. Fiscal monetary policy conduct

Fiscal policy rules can be given as follows

2.6.8. Foreign exchange intervention

The effect of shocks on international reserves and the monetary base depends on the actions of the Central Bank.
Foreign exchange interventions are thus governed by

Open market operations will have effect on exchange rate and monetary base with attendant implication on
macroeconomic performance. The monetary authorities are faced with an option of conducting operations on
temporary basis as follows.

captures the magnitude on operations effected to sterilise the impact of foreign exchange interventions on
monetary base. is the commitment to inflation target while captures authorities’ aversion to output de-
viation from potential and captures the fact that bond operations must be unwound at some point in time.

2.6.9. Market clearing

Ordinarily, under general equilibrium, supply must equal demand in both markets, intermediate as well as final
goods

Alternatively, this model can be closed using the following rule:

The model is driven by shocks to all stochastic equations. These shocks are assumed to follows AR(1) process
except for the shock to markup which is assumed to follow a white noise process.

2.6.10. Model estimation/simulation

The DSGE models are estimated using a complex algorithm in Matlab or Octave. They can be estimated using
DYNARE or IRIS using Bayesian or maximum likelihood methods. The Bayesian estimation would be preferred in
African context since the posterior incorporates judgement. Granted data and many other modelling challenges
in Africa, judgement should not be divorced during the estimation process. Octave and Dynare are free software.
The availability of these freely downloadable software is a significant contribution to DSGE modelling in many
African economies which are struggling with resources. Before simulation or estimation of the model can be
done, one needs to set priors for the parameters. While the DSGE models are flexible to accommodation several

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116
adjustments, their use particularly in African economies is not without controversy. Some of the contested issued
include the following:

i. The DSGE fails to fully model heterogeneity of economic agents, which is the basic feature of an African
economy that incorporates both formal and informal firms and households, corporate and unincorporated
firms/farms.

ii. The aggregation of the whole economy into a single sector, particularly when the underlying stress on the
economy is one of structural change, requiring the movement of resources from one sector to another (say
agriculture to manufacturing or low productivity sector to high productivity sector – i.e., structural transfor-
mation), when there are market imperfections (say in access to credit) impeding the reallocation.

iii. The other basic assumption of the standard open economy DSGE model is the assumption about the
access of economic agents to international financial markets (and credit) without any constraint. Empirical
evidenced suggest that African countries actually are credit constrained.

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117
 ANNEX V:
ALTERNATIVE
DYNAMIC STOCHASTIC
MACROECONOMETRIC
MODEL FOCUSED ON
AFRICA

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118
This Annex is an unrevised reproduction taken directly from Alemayehu Geda (2021a) “Tools for Short-run Macroeco-
nomic Management: A Macro Model for African Central Banks” that discusses an alternative to DSGE in Africa. This
model is estimated and run using Ethiopian data for illustrative purpose. That part is not presented here. The focus
here is on its general theoretical structure. The original source has all the references cited here as well as a critique of
standard DSGE model both in advanced and developing countries context, as a prelude to developing this model.

The Parsimonious Applied Dynamic Stochastic African Macro-econometric Model [PADS-AfriMod]

The parsimonious applied dynamic stochastic African macroeconometric model (PADS-AfriMod) is developed using
the five equations provided below. The model is developed by transforming the standard DSGE and AD-AS models.
The latter is an extension of the Modigliani’s and Hicks’s interpretation of ‘The General Theory’ using his IS-LM mo-
del (Keynes, 1936; Hicks, 1937; Modigliani, 1944; see Geda, 2020a for detail). Inspired by Mankiw (2014), I have
introduced the following innovations to make the standard AD-AS model dynamic and relevant for Africa: (i) first,
I will make each of the equations dynamic by introducing time to each of the variables, (ii) second, I will make the
aggregate demand and aggregate supply equations stochastic by introducing a random error (stochastic) term in
each of them, (iii) third, I will modify both the aggregate demand and aggregate supply equations so that they will
reflect the stylized facts in Africa, and finally (iv) I will introduce a policy rule or a policy function that could be (or are)
pursued by policy authorities in Africa. The latter is different from the typical policy rules used in DSGE models of the
rich countries. This policy rule will also replace the assumption of exogenous money supply that is generally used in a
typical DSGE, AD-AS as well as IS-LM models in favor of a post-Keynesian approach that theoretically argues about
the endogeneity of money supply (see Davidson, 1994; Alemayehu, 2020b for details).

Expectation formation in PADS-AfriMod is assumed to be adaptive given the limited availability of information both
for policy makers and agents in developing countries. The adoption of such expectation formation assumption
has also to do with the difficulty of employing the rational expectation hypothesis in most macro models. There
are several problems associated with the application of rational expectation hypothesis in modern DSGE models,
the details of which is documented, for instance, in Pesaran and Smith (2011) and Pesaran (1997). In addition to
these problems, empirical macroeconomic studies in Africa also show that even relatively sophisticated economic
agents in Africa rely more on adaptive rather than rational expectation (Geda and Weeks, 2018). Moreover, even if
we believe economic agents in Africa behave as hypothesized by the rational expectation hypothesis instead, as
noted by Pesaran and Smith (2011), inter-temporal optimisation calculations employed in DSGE models typically
require expectations far into the future and survey measures of distant expectations are rarely available. Therefore,
even with survey measures, one would need to model the expectations formation process to provide estimates of
these more distant expectations, which modern DSGE models failed to capture them correctly (see Pesaran and
Smith, 2011). Pesaran (1997) also argued earlier that as far as the modelling of the long-run is concerned, it is not
necessary to assume rational expectation to hold at all times.

Rather, long-run relations can be formulated in a theory consistent manner, within an intertemporal optimisation
framework for instance, without having to assume rational expectation holds in every period. Such long-run
relations will then simply be the steady-state solution of the economic model (see Pesaran, 1997 for detail). On
these theoretical grounds and the empirical reality in Africa, I have opted for adaptive expectation to hold which
is given by equation [3] and used in the Fisher equation given by equation [2] below. These innovations will offer
us a dynamic and stochastic macroeconomic/macroeconometric model relevant to Africa. This model is given by
equations [1] to [5].

9.3.1 The Model

The model begins with the aggregate demand equation which is given as,

Here, Yd stands for aggregate demand. ‘A’ stands for absorption which is a function of real interest rate (r), profit
rate (r) or expected future return and real income (Y). could also be availability of cash flows when self-finan-
cing/inside finance is important as in Kalecki. As part of absorption, government consumption (G) and investment
(Ig) expenditures and taxes (T) could be thought to be partly exogenous and captured in the constant term “a”
in equation [1a] and “b0” in equation [1b]. The latter is the estimable version of equation [1a]. They could also be
thought of partly as a function of Y (for taxes) and as a function of r, and Y (for Ig).

NX in equation [1a] refers to net exports (net exports and imports of goods and non-factor services) which are
set as a function of the real exchange rate (RER), real income (Y) and income of trading partners Y*TP. RER is in
turn defined as the product of nominal exchange rate (e) and the ratio of foreign (P*f) to domestic (P) prices. At the

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estimation stage, instead of using a single price index for foreign prices, it would be more informative to disaggre-
gate it into import and export unit prices. This is because a change in the two types of prices affects the domestic
economy differently (the net effect on domestic aggregate demand being dependent on which effect dominates).
Moreover, if export prices are used in equation [1a] or [1b], we can omit the income of trading partners from the
estimable equation. “Z” stands for other determinants of imports and exports, such as supply conditions and
autonomous imports, whose proxies will be the lagged level of imports and exports. The variable represents
an aggregate demand shock which is assumed to be a stochastic term. In logarithmic and reduced form, this can
be given by (in equilibrium we can collect all “Y” terms to the left-hand side of equation [1b], resulting in deflating
of all coefficients given in [1b] by the term (1-b2)),

The Fisher real interest rate and expected (E) inflation (ΔP), which is assumed to be formed based on adaptive
expectations, are given by equations 2 and 3, respectively,

The Fisher Equation [2]

Adaptive Expectation [3]

Equations [4a] and [4b] offer the African aggregate supply equation, which together with equation [4c] replaces the
Philips Curve equation of a typical AD-AS or DSGE model of rich countries.

Aggregate Supply [4a]

Where: Vt is the supply shock indicator; K capital stock, L labour and A an indicator of the total factor productivity
(TFP); is an elasticity of substitutions parameter for capital in the production function. The production function
is assumed to have a Cobb-Douglas form (its return to scale could be relaxed to be guided by data at estimation
stage).

Given the importance of food supply in determining inflation in many countries in the continent, this supply of out-
put (Ys) could be disaggregated into food and non-food sectors, if needed. The TFP in equation [4a] is further de-
fined as a function of weather condition, such as the average rainfall level (R) for countries dependent on rain-fed
agriculture (or its deviation from its long-period average, ). TFP is also set to depend on the availability of foreign
exchange (FX) which is a major constrain to production activity in the other sectors. The latter captures the de-
pendency of African growth on global primary commodity prices and inflow of capital (Alemayehu, 2019). The FX
variable could be measured by the negative of the balance of payment of a country (which in the African context is
the sum of private (remittance) and official (aid) transfers, debt-creating flows and FDI as well as a country’s export
price, PX). The variable “A” in equation [4a] will be, thus, substituted with these variables (i.e., with R or (R- ),
PX and FX). The remaining part of the “A”/TFP (the unexplained residual) is assumed to indicate technology or
efficiency (“a0”) as usual. In logarithmic and reduced form, equation [4a] could, thus, be given by equation [4b],

By putting [4b] in an aggregate supply equation similar to a typical augmented-Phillips curve, but allowing both
the aggregate demand and change in money supply or its deviation from its expectation (which is invariably poli-
cy-induced) to directly interact with aggregate supply (b1 could also be taken as capacity utilization rate, if supply
side problems are not major issues or output is constrained by imported intermediate inputs, say due to foreign
exchange problem, in the short-run, Ndulu, 1986; 1991; Alemayehu, 2002), the aggregate supply equation of the
model could be given by [4c],

Given the assumed adapted expectation framework, [4c] could also be given as,

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An alternative specification to the Cobb-Douglas based formulation in [4a] and [4b] is to start from a generalized
constant-elasticity of substitution (CES) production function, for which equation [4a] is a special case. The CES
function can then further be specified in a trans-log form which could be used to replace equations [4b] and its use
in equation [4d]. Such specification allows to capture important issues in Africa such as structural transformation
by letting the elasticity of substitution parameters to vary over time (I didn’t pursue that here4).

The policy rule equation is given by [5a], replacing the interest rate-based monetary policy rule of the typical DSGE
models of the rich counties.

Where: Y* is the targeted GDP level (or its growth) and Y is the actual or realized GDP level (or growth); P and P*
show the actual and targeted level of prices, CPI (which can also, alternatively, be given by π and π* that show
actual and targeted inflation rates); ΔRes stands for change in reserves given in the balance of payment that is
related to the net inflow of capital, which also affects the money supply through its effect on the monetary base.
stands for the change in money supply unrelated to either the stabilization policy related to P and Y or the
change in reserves.

Unlike the typical “monetary policy rule” in DSGE models, all the theta ( ) parameters in equation [5a] are expected
to be positive (the last one being so if monetary policy sterilization is not followed). This is because a higher than
target GDP level (or growth rate) could be realized in saving-constrain economies only through monetization of de-
ficit or external indebtedness, making y and R positive. This in turn leads to inflation in food-supply constrained
economies, making the relationship between price and money supply, and hence the value of π, positive. We
also note here a trade-off between the ambition to grow fast and inflation.

From estimation perspective, specifying equation [5a] using price and GDP levels, instead of their growth rate (in-
flation and GDP growth), is preferred because it simplifies the task of empirically capturing the long-run equilibrium
relationship as well as its short-term dynamics using a co-integration approach and an ECM model. Note also
that is a parameter which shows the growth rate of the money supply when both targets are realized and hence
the two terms in the brackets are reduced to zero (assuming away the impact of change in reserves on money
supply). Thus, in such a situation, shows the normal growth rate of the money supply which is usually proxied
by the growth rate of the real GDP (transaction demand).

The formulation given by equation [5a] shows the reality of fiscal dominance in Africa and the accommodating role,
and hence endogeneity, of money supply in such economies. This issue could be directly addressed from policy
perspective by specifying equation [5a] as equation [5b] below (an alternative monetary policy rule for relatively
sophisticated African economies could be specified as equation [6] which is given below).

Where: Rev and Rev* stand for actual and targeted government revenue (excluding both private and official trans-
fers/grants), and Exp and Exp* and Cr and Cr* stand for actual and targeted government expenditure and credit
by commercial banks, respectively. F and F* stand for an actual and targeted level of foreign capital inflow which is
the sum of long- and short-term capital inflows (debt-creating flows), FDI, as well as private and official transfers.
In the balance of payment, this could be summarized on a net basis by a change in reserves ( ∆Res).

Equation [5b] shows that in the majority of the African economies such as Ethiopia, fiscal dominance is the main
reason for the monetization of a deficit. When monetary policy accommodates such deficit, it is generally found
to be the source of inflation in many African counties. This is because these countries suffer from a lagging food
supply sector (see Alemayehu and Kibrom, 2020 for review). Thus, in such a policy environment, the money sup-
ply is usually an accommodating variable for the expansionary fiscal policy pursued by governments as well as
through expansion of credit by commercial banks in the private sector - leading to the endogeneity of the money
supply increase. This is also in line with the argument of post-Keynesian economists who believe in the endoge-

-------------------------------
1
Given the dynamic nature of growth and structural change in developing countries and the flexibility of a translog specification of production function
which accommodates issues of change in the substitution parameter over time, the Cobb-Douglas production function in [5a] for two variables (capital
(K) and labour (L)), could be re-specified, in logarithms, as a translog production function given by:

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121
nous nature of the money supply process (see Davidson, 1994; Palley, 1996; Lavoie, 2009). Besides, if part of
this deficit is financed by external borrowing, the change in net foreign assets position of the country (∆Res) will
affect the money supply by raising the monetary base. From this perspective, equations [5a] could alternatively
be replaced by a “fiscal and accommodative monetary policy rule” given by equation [5b]. This allows to squarely
focus on fiscal policy, instead

In equation [5b] the term (F-F*) could be replaced by the net change in foreign assets (i.e., change in reserves,
∆Res), which affects the monetary base and hence the money supply. However, I have used the variable “F” here
as it helps to further identify the sources of potential macroeconomic instability. Thus, to offer policymakers deeper
insight, “F” could be further disaggregated into actual and target levels of “debt-creating flows, KI”, “foreign direct
investment, FDI” and “Official and Private Transferer, TrOff &Trpr”, net of the balance of payment deficit (ie., F=KI+F-
DI+TrOff +Trpr; and ∆Res=F-BoP balance).

To operationalize equation [5b], depending on the timely availability of information and data about ExP, Rev, Cr
as well as “F” in equation [6] to policymakers, the target variables that are marked with “*” as well as P* and Y* in
equation [5a] could be replaced with their one-period lagged values. This is tantamount to replacing these targe-
ted variables in equation [5b] with their expected value at a time “t”, the assumed expectation formation being an
adaptive one.

An Alternative Monetary Policy Rule

In relatively advanced African countries where the interest rate is functional as a policy instrument, the change in
money supply equation given by [5a] could be replaced by real interest ([i-π], where “i“ and “π” stand for nominal
interest rate and inflation, respectively). The change in reserves should also be left out in this latter formulation. This
will give us the typical monetary policy rule used in DSGE models, which is given by equation [6].

To finalize, we note from the set of equations specified above that the PADS-AfriMod is similar in its form to the
modern New Keynesian DSGE models. However, there is a major and fundamental difference between the two.
This major difference lines in the fact that the aggregate relationships specified in DSGE models, which are simi-
lar to our set of equations above, are arrived at by a simple aggregation of results generated by representative
micro-level economic agents. These representative economic agents (consumer and producers) are assumed to
carry out their optimization task in an inter-temporal optimization framework that is based on a rational expec-
tation hypothesis. This assumption is crucial as it is presumed to offer deep parameters (parameters of agents’
behaviour and technological relation) which are central, among other things, in addressing what is called the “Lu-
cas Critics” to the use of large-scale Keynesian macroeconometric models that were common in the 1960s and
1970s. Thus, the DSGE models are praised for building macroeconomic models based on such micro foundation
and rational expectation that offered the so called “deep” parameters.

Notwithstanding this, such micro foundation-based aggregation from a representative agent-based micro level
activity to arrive at the macro variables (and a macro model) is a serious deviation from the original Kaleckian and
Keynes’ formulation of how the macro economy works. Following the classical tradition such as those of Ricardo
and Marx, Keynes and Kalecki were concerned at the aggregate relationship among macro variables as such
(Keynes, 1936; Kalecki, 1965; 1971). In line with this classical tradition, our model above claims neither such
micro foundation nor a representative agent-based modelling and aggregation to arrive at macro-outcomes. This
doesn’t mean that followers of the Kaleckian and Keynes’ approaches care less about the micro reality in their
macro models. They do care; but use them rather creatively from the function or real (not idolized) economy (see
for instance Kalecki’ mark-up pricing approach in Kalecki, 1965; Shaikh, 2016) to inform their macro models. In a
more general approach, the latter macroeconomists take the macroeconomic-outcomes as outcomes that result
from an emergent property of agents’ interaction at micro, sectoral and similar such levels (see; Shaikh, 2016). For
followers of these later economists, economic agents could have different behaviour in different settings too (such
as in rich or poor countries) depending on many factors that include the historical and institutional context in which
they function (see Shaikh, 2016; Kalecki, 1971; Keynes, 1936; Taylor, 1983; FitzGerald, 1993; Alemayehu, 2018).

Estimation Approach and an Illustrative Macro Model

What makes PADS-AfriMod interesting as an applied macro model for African Central Banks is its simplicity for
application. This is because we have to estimate only the aggregate demand and supply equations in a more
elaborated manner. For the other two equations of the model, we can either use parameters that can be obtained

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122
from previous studies or use the OLS technique to generate them. Let us call this empirical procedure the ‘prefer-
red econometric/estimation approach”, outlined in more detail next.

The Preferred Econometrics/Estimation Approach

a) Estimating the Aggregate Demand and Aggregate Supply Equations

The estimation approach I am proposing, and used here as an illustration, is estimating an Auto-Regressive
Distributive Lag (ARDL) based error correction model (ECM) of equations [1b] and [4b] above. This approach is
chosen for the following reasons: first (i), it is a very simple and straight forward approach that can easily be imple-
mented by technocrats in Central Banks of Africa as it can handle both I(0) and I(1) variables in a single equation
framework. Second (ii), since it is formulated in a dynamic ECM form, it handles both short term dynamics as well
as long-term equilibrium relationships suggested by the theory and specified in the above five-equations based
theoretical model (Pesaran and Shin, 1999; Pesaran et al, 2001; Pesaran, 1997). In line with this, the following two
ARDL-based estimable ECM equations are derived from the theoretical model:

All variables in the estimable versions of the models above (E1 &E2] are given in levels. This is because when these
variables are set in levels, the ECM approach allows both forms of a variable (changes and levels) to be incorporated
in one equation. This, in turn, has the advantage of capturing the long-run theoretical relationship as specified above
as well its dynamics. (To illustrate how to build and use this macro model, these two ECM equations are estimated
for Ethiopia using over 70 quarterly observations (2000/01-20018/19) for each equation and works very well).

The augmented Phillips curve type aggregate supply equation, which is also the closure equation of the model and
given by equations [4c & 4d], as well as the policy rule equation that is given by equation [5a] are estimated using
OLS as they are specified in their first difference form, and hence, are stationary series. This is elaborated next.

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b) Estimating the Parameters of the Model Closure and Policy Rule Equations

Once the two ECM-based equations are estimated, the parameters needed in the aggregate price equations
as given in equation [4c and 4d] and the policy rule equation given by equation [5a] could either be calibrated
based on previous studies or could be derived using a simple OLS estimation approach on the first difference
of all variables. In our illustrative Ethiopian version of the PADS-AfriMod, the parameters needed for equation
[4c] are generated by regressing the change in price level on change in money supply and change in GDP. The
latter is taken as a proxy for the gap between aggregate demand and supply, which is reasonable as supply
usually lags a bit to demand in adaptive expectation set-up. Once the parameters b1 and b2 are estimated
using equation [4c] in this way, the aggregate supply and aggregate demand variables in equation [4c] will be
replaced by their estimated ECM versions when we embark on the construction of the empirical macro model
in our preferred software platform – I have used EViews for this.

Similarly, the parameters needed for the policy rule equation [Eqn 5a] could be obtained by regressing the
change in money supply on change in price levels, change in real GDP and change in reserves. This effectively
replaces the deviation of the price and GDP levels from their target in equation [5a] by the deviation of the cur-
rent values of these variables from their lagged values. This later formulation could also be taken as being in line
with the empirical counterpart of the adaptive expectation formulation of the target variables that is assumed
to hold theoretically in the model.

I have pursued this procedure of deriving the parameters of the model for the Ethiopian version of the PADS-
Afri- Mod which is constructed for the illustrative purpose in this study. One of the practical reasons for this is
that the empirical model built while implementing this idea has 16 variables. This is extremely large number of
variables for handling in econometrically neat approaches such as the SCVAR approach and system-based
estimation suggested next. In fact, studies about this issue show that the use of such large number of variables
(usually above 8 variables) in carrying out system-based estimation of the co-integrating vectors aggravates the
possibility of getting a wrong co-integration rank (Ho and Sørensen, 1996). Moreover, as noted by Assenma-
cher-Wesche and Pesaran (2008) it is often “difficult to identify the cointegrating space of a high-dimensional
system by choosing restrictions that are economically meaningful and not rejected by the data”.

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An Alternative Econometric Approach for Estimation

As future research direction, alternative approaches to generating parameters of the model can be explored. The
simplest of this is just to calibrate the model using actual data as is normally done in deriving parameters for DSGE
models. This is simple but represents an oracular empirical approach that has its limitations. This is because it
extremely limits the role of data and proper econometric approach in the model formulation. A relatively better va-
riety of this oracular approach of generating parameters of the model is to use a priori information in the Bayesian
econometric technique that is based on such a priori information.

The second alternative and empirically neat estimation procedure (notwithstanding the limitations noted above)
that I would suggest future researchers to focus on is to use the “Structural Co-integration Vector Auto-Regres-
sive” (SCVAR) system-based estimation approach suggested by Garratt et al. (1998) and Pesaran (1997). This
has partly informed our preferred ARDL-based ECM approach suggested above. One possible weakness of this
ARDL approach that I have suggested above (and used for building the Ethiopian version of PADS-AfriMod in this
study) is its imposition of a strong a priori theoretical structure on the econometric model and pursuing the esti-
mation using a single-equation based estimation approach. Thus, it is estimated without strictly paying homage to
the simultaneity of the model equations and the related issue of model identification – i.e., neglecting the issue of
recovering the structural coefficients from the reduced form estimated model (see Johnston and DiNarod (1997),
for instance, for technical discussion about such weaknesses). This possible weakness could be addressed by
employing the SCVAR approach and setting all endogenous variables of the model in a theoretically informed VAR
framework. This approach begins by defining the long-run structure of the macro economy from a theoretical
perspective as we did in section two above. This will be followed by embedding this in unrestricted VAR model
of the macro economy. Then, the key endogenous variables are estimated simultaneously, taking all feedbacks
between the variables into account through their short-run dynamics as suggested by the long-run economic
relationships (see Garratt et al., 1998; Pesaran, 1997) .

Garratt et al. (1998) employed this SCVAR approach to build a quarterly macro model for the UK economy and
found excellent result. They also found this model to have a strong potential for use in policy and external shock
analysis. After comparing their SCVAR approach with several approaches to macro modelling and estimation,
they concluded that this approach “has the attractive features that the estimated long-run relationships embodied
in the model are theory consistent and have clear economic interpretation, and yet the short-run dynamics are
flexibly estimated within a VAR framework”. The authors also noted that the transparency of the approach both
from the theoretical and empirical perspective is also found to be a key factor to have an excellent impulse res-
ponse analysis and forecasting capability. Earlier, Gali (1992) has also applied a similar VAR approach to estimate
the traditional IS-LM-Phillips equation model for the US economy. He documented the excellent performance of
his model in tracing the evolution of the US economy at the time that competes well with any well-structured mo-
dels that includes DSGE models. The dynamic properties of the estimated model (as well as the impulse-response
analysis he carried using the model) are also shown to match most of the stylized predictions of the theoretical
model and the evolution of the US economy. Thus, exploring the application of this econometric approach to the
model developed described above is an exciting topic for future research.

Source: Alemayehu Geda (2020), Towards a Parsimonious Applied Dynamic Stochastic Macro-econometric Mo-
del for Forecasting and Policy Analysis in African Central Banks’ (Unpublished, Department of Economics, Addis
Ababa University and also at www.reseachgate.net/profile/Alemayehu_Geda )

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 ANNEX VI:
TRAINING MODULES
AND MASTERS AND
PHD PROGRAM ON
MODELLING

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A. Short-term On-job Training (for 2.6 Structuralist Macroeconomics: The Kaleckian
wing of the Post-Keynesian Macroeconomics
Category A)
3. Macroeconomic Schools of Thought and
Objective the Macro Policy Discourse in African
(SAP, PRSP.)
The main goal of the short-term courses is to build the
capacity of various level officials at the Ministries of
4. The 2008/09 Financial and Economic Crisis
Finance/Planning and Central Banks through on-job
and the Future of Macroeconomics
training. The short courses are to be delivered in a
time frame of 4-5 weeks in a manner that should not
2. A Review of the IS-LM and Aggregate
disrupt an otherwise normal flow of the job activities.
Detailed outlines of the short courses are provided Demand and Aggregate Supply (AD-
below. AS) Analysis and their Dynamics

1. Advanced Short-run Macroeconomics 2.1.1 Keynes and the Classics: IS-LM and AD- AS
Models
for Africa
2.1.2 The IS-LM Model: The Goods and Money
1. Introduction
Markets
2 Schools of Thought in Macroeconomics
2.1.2 The Aggregate Demand and Aggregate Sup-
ply (AD-AS) Model and Policy Analysis
2.1. The Keynesian Revolution over the Neoclassi-
cals: The Birth of Modern Macroeconomics
A. Short-term Policy Analysis using the AD-AS Model
2.2. The Neoclassical Synthesis Keynesians [NCSK]:-
B. Convergence and Stability Analysis
Keynes and the Classics
2.2.1 Towards Dynamic AD-AS and Dynamic Sto-
2.3 The New Classical Macroeconomics [NCM]
chastic General Equilibrium (DSGE) Models
2.4 The New Keynesian Macroeconomics [NKM]
2.3 Towards Dynamic AD-AS and Dynamic Stochastic
General Equilibrium (DSGE) Models
2.5 The Post-Keynesian Macroeconomics [PKM]
2.4 Applied Dynamic AD-AS Macro-econometric
Models in Africa

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3. Rational Expectation in 4.6.1 The World Bank-IMF [Bank-Fund] Growth
Macroeconomics and Adjustment Macro Framework for Po-
licy use in Africa
3.1 The Concept of Rational Expectation in Macroe-
conomics 4.6.2 The Kaleckian/Structuralists Alternative Mo-
del of Growth and Financing Development in
The Basics of Adaptive and Rational Expec- LDCs
tation, Bounded Rationality
4.6.3 An African Application of Open-Economy
3.2 A Dynamic Aggregate Demand (AD) and Aggre- Macroeconomics: The African Global Model
gate Supply (AS) Model with Rational Expectation
5. Consumption and Saving Theories
3.2.3 Adaptive Expectation Version of the Model
and its Solution 5.1 The Keynesian Consumption Function and
Background to the Evolution of Other Consump-
3.3 Rational Expectation Version of the Model and tion Theories
The Policy Ineffectiveness Proposition (PIP)
5.2 The Fisher Intertemporal Utility Optimization
3.3.1 Rational Expectation and the Policy Ineffec- Framework as Micro Foundation
tiveness Propositions (PIP)
5.3 The Life-Cycle Hypothesis: The Anod-Modigliani
3.4 The Lucas Critique Approach

3.5 Policy Effectiveness with Rational Expectation: A 5.4 The Permanent Income Hypothesis: The Fried-
New Keynesian Perspective man Approach

3.4 Application of Expectation in African Context
4. Open-Economy Macroeconomics: The
Mundell-Fleming and Exchange Rate
Models
4.1 The Accounting Framework for Open Economy
Macroeconomics (OEM)
The Implications for Macro Modelling and the
Two and Three Gap Models
5.5 The Relative Income Hypothesis: The Duesen-
berry Approach
5.6 Shaik’s Critique of Deriving Aggregate Consump-
tion Function from the Representative Agent
Model
5.7 Saving and Consumption Theories in the African
Context
5.7.1 Saving and Consumption Smoothing in De-
veloping Countries

Gap Models in the African Context 5.7.2 Saving and the External Sector (saving, Aid,
and Terms of Trade)
4.2 The Mead-Mundell-Fleming Model (MMF/MF)
5.7.3 Saving, Growth, and Macroeconomic
4.3 Weeks’ Critique of the MF Model Policies

4.4 The Aggregate Supply Side of OEM with Arming- 5.7.4 Saving and Demographic and Institutional
ton Formulation Issues

4.5 A Brief Look at Exchange Rate Models and The 6. Investment and Investment Theories
Dornbusch Over-Shooting Model
6.1 The Neoclassical Theory of Investment: The
A. The Flexible Monetary Approach (FMA) User-Cost Model
B. The Portfolio Balance Approach (PBA) i) The Rental Price of Capital: The Rental and Pro-
ducer Firms
C. The Dornbusch Over-Shooting Model
ii) The Cost and Benefit of Capital: From the Rental
D The Overshooting Model and the Dutch Disease Firm to Producer Firm
4.6 Application: Open Economy Macroeconomics 6.2 The Tobin-q Theory of Investment
and the Macro Policy Framework in Africa

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6.3 The Accelerator Theory of Investment A. The Harris-Todaro Model

6.3.1 The Naïve Accelerator Model B. The Lewis Dual Economy Model

6.3.2 The Flexible Accelerator Model 7.5.2 The Informal Labour Market in Africa

6.4 The Kaleckian Investment Theory: A Heterodox 7.5.3 The Rural Labour Market in Africa
Approach
8. Macroeconomic Policies and the
6.5 Investment Theories and Developing Countries: African Context
The Crowding-in/out Hypothesis
8.1 Technical Aspects of Short-run Macroeconomic
6.5.1 The Crowding-in Crowding-out Hypothesis Policy

6.5.2 Empirical Studies of Determinants of Private 8.1.1 Fiscal Policy, Financing Development and
Investment in Africa Government Debt

6.5.3 Foreign Direct Investment (FDI) and its De- A. Public/Government Revenue
terminants in Africa
B. Public/Government Expenditure
7. The Labor Market & Labor Market
Theories C. External Debt and Financing Development

7.1 The Aggregate Demand and Supply of Labor 8.1.2 Monetary Policy, Financing Development
and the Labor Market and Inflation

7.2 The Expectation Augmented Philips Curve: The i) The Demand for and Supply of Money
Aggregate Supply Curve and Labor Supply
A. The Demand for Money
7.3 Real and Nominal Wage Rigidities and Related
Theories B. The Supply of Money

7.3.1 Implicit Contracts ii) Financing Development: Monetization of Deficit,

Domestic Debt and Inflation
7.3.2 Efficiency Wage: A Simple Model
8.2 Political Aspect of Macroeconomic Policy Ma-
i) A Simple Model of Efficiency Wages king in Africa

ii) Summers’ (1988) Reservation Wage 8.2.1 The Washington Consensus and the Struc-
turalist Critique of Macro-Policy in Africa
7.4 Other Theories of the Labor Market for Further-
Readings: Union and Search Models 8.2.2 History, Politics and Institutions in Policy
Making: Why Nations Fail?
7.5 Labour Market in Developing Countries with a
Focus on Africa 8.2.3 Macro-Policy as Part of Industrialization
Policy: The East Asian Success Story
7.5.1 The Theory

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Reading List
Agénor, P-R. (2004). The Economic of Adjustment
and Growth, 2nd edition. Cambridge: Harvard Univer-
sity Press.
Agénor, P-R. and P. Montiel. (2008). Development
Macroeconomics. New York: Palgrave Macmillan.
Geda, Alemayehu. (2021a). “Advanced Macroecono-
mics for Africa I: Short-run Macroeconomics.” Unpu-
blished, Department of Economics, Addis Ababa Uni-
versity.
Heijdra, Ben J. and Frederick van der Ploeg. (2002).
Foundation of Modern Macroeconomics. Oxford:
Oxford University Press.
Romer, David. (2019). Advanced Macroeconomics,
5th edition. London: McGraw Hill.
Scarth, William M. (1988). Macroeconomics: An In-
troduction to Advance Methods. Toronto: Harcourt
Brace.
Shaikh, Anwar. (2016). Capitalism: Competition,
Conflict and Crisis. Oxford: Oxford University Press.
Recommended Reading
Davidson, P. (1994). Post Keynesian Macroeconomics
Theory: A Foundation for Successful Economic Policies
for the Twenty-first Century. Aldershot: Edward Elgar.
Rogoff. (1996). Foundations of International Macroe-
conomics. Cambridge: MIT Press.
Ndulu, B. J., S.A. O’Connell, R.H. Bates, P. Collier, and
C.C. Soludo. (2007). The Political Economy of Econo-
mic Growth in Africa, 1960—2000. Vol. 1. Cambridge:
Cambridge University Press.
Snowdon, B. and H.R. Vane. (2005). Modern Macroe-
conomics: Its Origins, Development and Current
State. London: Edward Elgar.
Taylor, L. (2004). Reconstructing Macroeconomics:
structuralist Proposals and Critiques of the Mains-
tream. Cambridge: Harvard University Press.
Taylor, L. (1983). Structuralist Macroeconomics. New
York: Basic Books.
Weeks, J. (2012). The Irreconcilable Inconsistencies
of Neoclassical Macroeconomics: A False Paradigm.
New York: Routledge.
Weeks, J. (1991). Critique of Neoclassical Macroeco-
nomics. London: Palgrave Macmillan.
9. Applied Macroeconomic Modelling
and Forecasting for Africa
1. Data for Macroeconomic Modelling
• System of National Accounts as a
Database

Geda, A. (2002). Finance and Trade in Africa: Macroe- • Importance of Consistent National
conomic Response in the World Economy Context. Accounts Data for Modelling
Basingstoke/New York: Palgrave-Macmillan.
• Managing Missing Data and the Informal
Murshed, S.M. (1977). Macroeconomics for the Open Sector in Macro Models
Economy. London: Dryden Press. Obstfeld, M., and K.

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II. Time Series-based Forecasting Model
• Graphic Forecasting
o Modelling Cycles, Modelling Trends and
Deterministic Shifts
• The Box-Jenkins Approach to Forecasting
o AR, MA, ARIMA.
• Forecasting with Regression
o VAR, SVAR, Impulse Response
• Dynamic Factor Modelling
• Leading Indicators based Forecasting
III. Economy Wide Macroeconomic Models
• Macro-econometric Models (Dynamic Ag-
gregate Supply and Demand Models)
• Input-Output Models and Multiplier Analysis
• Social Accounting, Matrix-based Eco-
nomy-wide models (SAM multiplier Analysis)
• Computable General Equilibrium Models
o Neoclassical CGE Models
o Structuralist CGE Models
• New Keynesian Dynamic Stochastic Gene-
ral Equilibrium Models (DSGE)
• Global Macroeconomic Models
o African and Global Macroeconomic Models
o Threshold 21 Modelling and SDGs
IV. Applied Macro Models and Framework in Use
in Africa
• Increasing Organizational Resilience (ICOR)
and Investment and Growth Forecasting
• The Gap Model: Two Gaps and Three Gap
Models
• MTEF (Medium-term Expenditure
Frameworks)
• Financial Programming Model of IMF/ The
Pollak Model
• REMSIMX (Revised Minimum Standard Mo-
del) of World Bank
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
• QFM (Quantitative Forecasting Models)
• Inflation Modelling
Reading List
Agénor, P-R. (2004). The Economic of Adjustment
and Growth, 2nd ed. Cambridge: Harvard University
Press.
Agénor, P-R. and P. Montiel (2008). Development
Macroeconomics. New York: Palgrave Macmillan.
Preston, A.J. and A.R Pagan (1982). The Theory of
Economic Policy: Statics and Dynamics. Cambridge:
Cambridge University Press.
Recommended Reading
Adam, C., E. Buffie, S. O’Connell, and C. Pattillo.
(2008). “Monetary Policy Rules for Managing Aid
Surges in Africa.” UN WIDER Research Paper No.
2008/77, Helsinki.
Agénor, P-R, C. J. McDermott, and E.S Prasad.
(2000). “Macroeconomic Fluctuations in Developing
Countries: Some Stylized Facts.” The World Bank
Economic Review, Vol. 14(2): 251-85.
Barhoumi, K., O. Darné, and L. Ferrara. (2017). “Dy-
namic Factor Models: A Review of the Literature”, in
Handbook on Rapid Estimates, edited by G. L. Maz-
zi, 287-320. European Union and the United Nations
Statistics Division.
Berg, A., P. Karam, and D. Laxton. (2006a). “A Prac-
tical Model-Based Approach to Monetary Policy:
Overview.” IMF Working Paper No. 06/80
Berg, A., P. Karam, and D. Laxton. (2006b). “Practi-
cal Model-Based Monetary Policy Analysis: A How-
to Guide.” IMF Working Paper No. 06/81.
FitzGerald, E.V.K. (1993). The Macroeconomics of
Semi-Industrialized Economies: A Kaleckian Ap-
proach. London: Palgrave-McMillan.
Geda, A. (2002). Finance and Trade in Africa: Macroe-
conomic Response in the World Economy Context.
Basingstoke/New York: Palgrave-Macmillan.
Geda, A. and K. Tafere. (2020). “The Challenge of
Inflation and Financing Development in Ethiopia: A
Kaleckian Approach with Empirical Results.” (De-
partment of Economics, AAU, Unpublished at www.
researchgate.net/profile/Alemayehu_Geda
Geda, A. and A. Yimer (2016). “An Applied Macro-Eco-
nometric Model for Supply Constrained African Eco-
131
nomy: A Rwandan Macro Model.” Tanzanian Economic
Review, Vol. 4, Nos. 1 & 2, 2014: 24–55.
Khan, M. S. and M. Knight (1981). “Stabilization Pro-
grams in Developing Countries: A formal framework.”
IMF Staff Papers, Vol. 28, No. 1
Khan, M. S. and Montiel P. (1989). “Growth Oriented
Adjustment Programs: A Conceptual Framework.”
IMF Staff Papers Vol. 36, p. 279.
Kydland, F.C. and E.C. Prescott. (1994). “Business Cy-
cles: Real Facts and a Monetary Myth.” In The Rational
Expectations Revolution: Readings from the Front Line,
edited by Preston J. Miller), Cambridge: MIT Press.
de Melo, J. and Robinson, S. (1982). General Equi-
librium Models for Development Policy. Cambridge:
Cambridge University Press.
Millenium Institute. (undated). “T21 Integrated Develop-
ment Model.” https://globalclimateactionpartnership.
org/app/uploads/2015/10/T21Overview1.pdf
Obstfeld, M. (2002). “Inflation Targeting, Ex-
change-Rate Pass-Through, and Volatility.” The
American Economic Review. Vol. 92(2):102-107.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
132
Stiglitz, J. (2017). “Where Modern Macroeconomics
Went Wrong.” Oxford Review of Economic Policy, Vo-
lume 34, Issue 1-2, Spring-Summer 2018, 70–106.
Stock, J.H. and M.W. Watson. (2016). «Dynamic
Factor Models, Factor-Augmented Vector Autore-
gressions, and Structural Vector Autoregressions in
Macroeconomics» In Handbook of Macroeconomics,
Vol.2a, edited by J. B. Taylor and H. Uhlig, 415-525,
Amsterdam: Elsevier.
Taylor, L., ed. (1990). Socially Relevant Policy Ana-
lysis: Structuralist Computable General Equilibrium
Models for the Developing World, Cambridge, MA:
MIT Press
Taylor, L. (1979). Macro Models for Developing Coun-
tries. New York: McGraw Hill
Tinbergen, J. (1952). On the Theory of Economic Policy.
Amsterdam: Elsevier Holland. (see especially Ch 17).
Vlcek, J., M. P. Pranovich, P. Hitayezu, B. Mwenese,
and C. Nyalihama. (2020). “Quarterly Projections Mo-
del for the National Bank of Rwanda,” IMF Working
Paper WP/20/95, Washington, D.C., IMF Institute for
Capacity Development.
10. Development Planning and 1.2.6. Physical planning vs. financial planning
Techniques: Course Syllabus
1.2.7. Perspective planning and annual planning
Course Name: Development Planning and Its
Techniques 1.3. Methodology and Stages of Planning
Course Type: Short Course
Course Duration: 4-5 weeks 1.3.1 Basic data in planning

Course Description 1.3.2. Determination of growth rates and plan

targets

The subject matter of development planning and its 1.3.3. Stages of economic planning
techniques aims at introducing the basic concepts
and tools of development planning, which includes 1.3.4. The process of plan formulation and adop-
types of planning, methodology, and stages of plan- tion
ning; quantitative development planning techniques,
and reviews of some practical planning experiences 1.3.5. Planning from above vs. planning from be-
from other developing countries. low

Course Objective 1.3.6. Implementing the plan

1.3.7. Evaluating the plan

Planning is seen as an essential ingredient for rapid
development in developing countries. It is an integral Part II:
part of economic systems. Despite its worldwide po-
pularity, it is a much debated, hotly discussed, and 1. Quantitative Development Planning Techniques
controversial subject. The purpose of this course is to
create an understanding of the concept of planning 1.1. An overview of the characteristics of develop-
and the tools that are used in practice. The substance ment planning models
of planning would be taken up in different modules
focusing on principles, techniques, and practice. 1.2. Growth models and Long-term/Perspective
Plans
Course Content
1.3. Input-output analysis and its application
Part I:
1.4. Mathematical programming and its application
1.1 Introduction to Development Planning,
1.5. Social accounting matrices (SAM) and an Intro-
duction to CGE Models
i. Historical background of economic planning
ii. Projection, planning, and forecasting
1.6. An Introduction in the use of Macroeconometric
iii. The meaning of economic planning
Model for short term planning
iv. The need for economic planning
v. Requisites for successful planning
Part III:
vi. The pros and cons of planning
vii. Shortcomings of planning
2. Planning in Practice: Experiences form other
Developing countries
1.2 Types of Planning
This part requires the participants to prepare a term
1.2.1. Planning by direction and planning by
paper of planning experience from their and other
inducement
countries. Students will work in groups to write term
papers; possible topics include:
1.2.2. Short term, medium term, and long-term
planning
Economic Planning Experience in Country A (the
country in question)
1.2.3. Fixed and rolling planning
Planning experiences of other countries (e.g.,
1.2.4. Regional, national, and international planning
Botswana, India, Soviet Union, China, France)
1.2.5. Sectoral and area planning.

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133
Reading List
Textbooks
Agrawal, A.N. and K. Lal. (1981). Economic Planning:
Principles, Techniques and Practice. New Delhi: Vikas.
Cave, M. and P. Hare. (1981). Alternative Approaches
to Economic Planning. London: Macmillan.
Dale, R. (2004). Development Planning: Concepts and
Tools for Planners, Managers and Facilitators. London:
Zed Books
Geda, A., N,. Nduung’u, and D. Zerfu. (2012). Ap-
plied Time Series Econometrics: A Practical Guide for
Macroeconomic Researchers with a Focus on Africa.
Kenya: University of Nairobi Press
Recommended Reading
Anyanwu, J.C. Oyefusi, H. Oaikherian, and F.A Dimowo.
(1997). The Structure of the Nigerian Economy: 1960–
1997. Onitsha: Joancee A Educational Publishers.
Griffin, K. and J.L. Enos. (1970). Planning Develop-
ment. London: Addison Wesley.
Jhingan, M.L. (1990). The Economics of Development
and Planning. New Delhi: Vikas
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
134
11. Project Analysis and Management
Course Syllabus
Course Name: Project Analysis and
Management
Course Type: Short Course
Course Duration: 4-6 weeks
Course Description
The subject matter of project analysis aims at asses-
sing the benefits and the costs of undertaking a pro-
ject and leads to the selection of the most promising
project. It aims at the optimum allocation of scarce
resources so that the benefits to the economy and the
society are maximized. The purpose of the course is
to outline and present the general framework and the
basic methodology for project planning and analysis
across different sectors. The basic theoretical tools of
project analysis will be discussed, and include expla-
nations on how to apply quantitative analysis of costs
and benefits to evaluate these projects from different
perspectives (i.e., from the point of view of the private
sector, the public sector, and the country, as a whole).
The course is organized into four major sections or
parts. The first part is devoted to the discussion of the
fundamentals of project planning and analysis, while
the second part deals with the elements of financial
analysis. The third part builds on the financial analysis
and takes the analysis to an economic one.
Course Objectives:
By the end of the course, participants should be able
to apply, with a reasonable level of confidence, the fol-
lowing tools and techniques of effective project ma-
nagement:
• objective setting and project design,
• planning, scheduling, and budgeting,
• progress control and monitoring,
• risk assessment and management, and
• making technical financial and economic
analysis of projects
Course Content
PART I: BASIC CONCEPTS
Unit 1: Introduction to project planning
• The project concepts
• Development planning and project planning
• Aspects of project analysis
Unit 2: The project cycle
• Identification
• Preparation and analysis
• Appraisal
• Design
• Implementation
• Evaluation
PART II: Managerial Aspects of Project Analysis
• Understanding Project Management
• Being an Effective Project Manager
• Organization Strategy and Project Selection
• Organization Structure and Culture in
International Projects
• Managing Project Teams
TECHNICAL ASPECT OF PROJECT
ANALYSIS
PART III: FINCANCIAL ANALYSIS OF PROJECTS
Unit 3: The valuation of financial costs and
benefits
• When to undertake financial analysis
• Identification and quantification of costs
and benefits
• Tangible and intangible costs and benefits
of a project
• The treatment of transfer payments in fi-
nancial analysis
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Unit 4: The cash flow in financial analysis
• Basic principles for measuring project cash
flows
• Components of the cash flow stream
• Biases in cash flow estimation
Unit 5: Time preference, discounting and
financial discount rate
• Pareto optimality and the Hicks-Kaldor
compensation criteria
• Time preference and the marginal rate of
time preference
• Non-discounted measures of project worth
Unit 6: Discounting Future Income Flows in
Project Analysis
• The discounting processes
• Discounted project assessment criteria
o Net present value (NPV)
o The internal rate of return (IRR)
o The net benefit investment ratio
o The domestic resource cost ratio (DRC)
o The benefit cost ratio
PART IV: ECONOMIC ANALYSIS OF PROJECTS
Unit 7: An Overview of Economic Analysis
• The rational for public sector involvement
• Questions that economic analysis should
answer
• The essential elements of economic
analysis
Unit 8: Determining economic values
• Adjustment for transfer payments
• Economic or shadow pricing
• Traded and non-traded commodities
• Valuation of non-traded commodities
• Measurement of the economic value of tra-
dable (Valuation of Tradable)
• Border parity pricing
• Potentially traded commodities
• National parameters and standard conver-
sion factor
Unit 9: The economic valuation of foreign
exchange
• The premium on foreign exchange
• The shadow exchange rate
• Foreign exchange premium and valuation
of traded goods
• Comparing the UNIDO and LM approaches
135
Unit 10: The valuation of land, labour and natural
resources
• Elements of the shadow wage rate
• The valuation of unskilled labor
• Land and natural resources
Unit 11: The social discount rate
• Function of the social discount rate
• Determination of the social discount rate
Unit 12: Social cost benefit analysis
• The purpose of social cost benefit analysis
• Significance of social cost benefit analysis
• Difference between commercial calcula-
tions and social cost benefits analysis
Unit 13: Handling of risk and uncertainty in
project analysis
• Sources of uncertainty
• Probability distributions and their use in
project analysis
• Treatment of risk in project analysis
• Sensitivity analysis
PART V: PROJECT MONITORING AND
EVALUATION
Unit: 14: Basic issues in project monitoring and
evaluation
• The rationale for monitoring and evaluation
• Elements to be monitored and evaluated
• Major steps in monitoring and evaluation
activities
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
136
o Formulating objectives and goals
o Developing indicators
o Defining and setting targets and base-
line values for indicators
o Developing data gathering and analysis
method
• Establishing monitoring and evaluation
system
• Implementation issues
• Reporting monitoring and evaluation results
Reading List
Textbooks
Boardman, A.E., D.H. Greenberg, A.R. Vining, and
D.L. Weimer. (1996). Cost Benefit Analysis: Concepts
and Practice. Cambridge: Cambridge University
Press.
Curry, S. and J. Weiss. (1993). Project Analysis in De-
veloping Countries. London: Palgrave McMillan.
Gray, C.F. and E.W. Larson. (2011). Project Manage-
ment: The Managerial Process, 5th edition. New York:
McGraw-Hill Irwin.
Recommended Reading
Gittenger, J.P. (1982). Economic Analysis of Agricul-
tural Projects. Baltimore: Johns Hopkins University
Press.
Irvin, G. (1978). Modern cost befit methods: An Intro-
duction to Financial, Economic, and Social Appraisal
of Development Projects. London: Macmillan,.
Little, I.M.D. and J.A. Mirrlees. (1974). Project Appraisal
and Planning for Developing Countries. London: Heine-
mann Educational Books.
Mishan, E.J. (1972). Cost Benefit Analysis: An Informal
Introduction, London: G. Allen and Unwin.
Perkins, F. (1994). Practical Cost Benefit Analysis: Ba-
sic Concepts and Applications. Melbourne: Macmillan
Education Australia.
Squire, L. and H.G. van der Tak. (1975). Economic
Analysis of Projects. Baltimore: Johns Hopkins Univer-
sity Press.
Sugden, R. and A. Williams. (1978). The Principles of
Practical Cost Benefit Analysis. Oxford: Oxford Univer-
sity Press.
Sen, A., P. Dasgupta, and S.A. Margling. (1972). Guide-
lines for Project Evaluation. New York: UNIDO.
Tan, Jee-Peng; J.R. Anderson, P. Belli, H. Barnum, and
J.A. Dixon. (2002). Economic Analysis of Investment
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Operations Analytical Tools and Practical Applications.
WBI Development Studies, Washington, D.C.: World
Bank Group
12. Tax and Tax Policy Analysis: Course
Syllabus
Course Name: Tax and Tax Policy Analysis
Course Type: Short Course
Course Duration: 4-5 weeks
Course description
This course examines the role of the public sector
in the economy of a country, with emphasis on the
design and implementation of taxation and fiscal po-
licies. The course focuses on the development of the
principles and applied techniques for identifying and
evaluating the impacts of alternative tax policies on
the economy’s resource allocation, income distribu-
tion, capital formation, budgetary requirements, and
inflation. This course covers alternative systems for di-
rect and indirect taxes, including taxes on international
trade.
137
Course Objectives
The objective of this course is for participants to ob-
tain the necessary theoretical and empirical tools to
be able to have professional careers in the field of
applied public finance. On successful completion of
this course, participants will have developed greater
understanding and skills.
• All participants will have developed
knowledge and understanding of applied
public finance, particularly in the econo-
mics of tax policies with respect to direct
taxes, indirect taxes, and the taxation of in-
ternational trade.
• All participants will have developed their
skills in applied microeconomic analysis,
and applied welfare economics focused
on the analysis of a diverse set of public
finance and taxation issues. Emphasis will
be placed on policy design in countries that
are open to international trade. All partici-
pants will have developed their apprecia-
tion of and respect for values and attitudes
regarding the issues of tax and policy for-
mulation. They will also appreciate the im-
portance of using a general equilibrium ap-
proach to the analysis of public policies.
Course Content
Unit 1: Introduction
• Definition of tax
• Functions of taxes
• Typology of taxes
• Taxation principles.
• Tax theories
o classical economy,
o neoclassicism,
o Keynesian tax theory,
o neoconservatives, and
o contemporary tax theory
Unit 2: Overview and Principles of Tax Reforms
Unit 3: Mobilization of Fiscal Resources for
Development, GDP Based Forecasting
Unit 4: Tax Revenue, Excess Burden, Tax
Incidence
Unit 5: Externalities and Public Goods
Unit 6: Indirect Taxes
Unit 7: Value Added Tax
Unit 8: Taxes on International Trade: Import
Tariffs and Export Duties
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
138
Unit 9: Taxation of Income: Personal Income
Unit 10: Taxation of Income: Corporate Income
and Tax Integration
Unit 11: Incidence of the Corporation Income
Tax, Inflation and Taxation
Unit 12: Tax Incentives
Unit 13: Tax Policy in Developing Countries: A
Case Study of the Country in Question (will be
included in this unit)
• Tax revenues and their structures.
• Recent tax reforms.
• Factors of tax structures and tax develop-
ment.
• Tax competition, coordination and harmo-
nization.
• Tax policy in Country X
Reading List
Textbooks
Kaplow, L. (2008). The Theory of Taxation and Public
Economics. Princeton: Princeton University Press
Lewis, S.R. (1984). Taxation for Development: Prin-
ciples and Applications. New York: Oxford University
Press.
Musgrave, R.A. and P.B. Musgrave (1989). Public Fi-
nance in Theory and Practice, 5th edition. New York:
McGraw Hill, 1989.
Shome, P. ed. (1995). The Tax Policy Handbook. Was-
hington D.C.: Fiscal Affairs Department, International
Monetary Fund.
Recommended Reading
S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote,
M. Gammie, P. Johnson, G. Myles, and J. Poterba,
editors. (2010). Dimensions of Tax Design: The Mirr-
lees Review Institute for Fiscal Studies. Oxford: Oxford
University Press.
S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote,
M. Gammie, P. Johnson, J. Mirlees, G. Myles, and J.
Poterba, editors. (2011). Tax by Design: The Mirrlees
Review Institute for Fiscal Studies. Oxford: Oxford Uni-
versity Press.
Adam, S., J. Browne, and C. Heady. (2010). “Taxation
in the UK”. In Dimensions Of Tax Design, The Mirrlees
Review, edited by S. Adam, T. Besley, R. Blundell, S.
Bond, R. Chote, M. Gammie, P. Johnson, G. Myles,
and J. Poterba. Institute for Fiscal Studies. Oxford:
Oxford University Press
Atkinson, A. and J. Stiglitz. (1980). Public Economics.
New York: McGraw-Hill.
Gruber, J. (2019). Public Finance and Public Policy,
7th edition. New York: Worth Publishers.
Jenkins, G., C-Y. Kuo, and G.P. Shukla. (2000). “Tax
Analysis and Revenue Forecasting.” Harvard Institute
for International Development. Cambridge: Harvard
University.
Kay, J. and M. King. (1990). The British Tax System,
5th edition. Oxford: Oxford University Press.
Messere, K., F.de Kam, and C. Heady. (2003). Tax Po-
licy: Theory and Practice in OECD Countries. Oxford:
Oxford University Press.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Mirrlees et al. (2010), Dimensions of Tax Design: The
Mirrlees Review, Oxford University Press.
Mirrlees et al. (2011), Tax by Design: The Mirrlees Re-
view, Oxford University Press,
Myles, G. (1995). Public Economics. Cambridge:
Cambridge University Press.
Salanié, B. (2003). The Economics of Taxation. Cam-
bridge: MIT Press.
Stiglitz, J. (1999). Economics of the Public Sector, 3rd
edition. New York: W.W. Norton & Company.
Tanzi, V. (1991). Public Finance in Developing Coun-
tries. Brookfield: Edward Elgar Publishing.
139
Research Methods for Economists Course
Syllabus
Course Name: Research Methods for Economists
Course Type: Short Course
Course Duration: 4-5 weeks
Course Description
This course covers the basics of research methods
for economists, with emphasis on the design and
implementation of taxation and fiscal policies. The
course focuses on the development of the prin-
ciples and applied techniques for a successful un-
dertaking of an applied research endeavor. This
course covers a wide range of issues on the sub-
ject matter covering the foundations of economic
research, research process and design, elements of
sampling, data collection techniques, data proces-
sing, hypothesis testing and analysis, and writing
the final research report.
Course Objective
The objective of this course is to introduce the basic
principles and approaches to economic research. The
basic steps in economic research methodology will be
highlighted and discussed. The course is expected to
help participants to find, and use effectively, the me-
thods most appropriate to carrying out research on a
topic that interests them. More specifically, the course
has two major objectives: (i) to enable students to
develop the most appropriate methodology for their
research studies; and (ii) to make them familiar with
the art of using different research methods and tech-
niques in economic research.
Course Content
Unit 1: Foundations of Economic Research
• The scientific method and social research
• The conceptual definition of research
• The methods of social science research
• The purpose and types of research
• Research methods and research
methodology
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
140
• Time dimensions in research
• Criteria of a good research
• Theory, facts, and methods
Unit 2: The Research Process and Design
• Identifying a research topic
• Defining the research problem
• Literature survey
• Formulating the research hypothesis
• Preparing the research plan
• Collecting, analyzing, and interpreting the
information
• Preparing the research report
• The research design
• The research proposal
• The research methodology
Unit 3: Elements of Sampling
• Sampling concepts and terminology
• The reasons for sampling
• Steps in sampling design
• Characteristics of a good sample design
• Probability and non-probability sampling
• Types of probability sampling techniques
• Problems in sampling
Unit 3: Data collection Techniques
• Secondary and primary sources of data
• Methods of data collection
• Survey instrument design and implementa-
tion
• The nature of measurements
Unit 4: Data Processing, Hypothesis Testing and
Analysis
• Coding, entering, and cleaning the data
• Data analysis
• Stating and testing the hypothesis
Unit 5: Writing the Research Report
• The writing process
• Research report formats
Reading List
Textbooks
Korthari, C.K. (1985). Research Methodology: Me-
thods and Techniques. New Delhi: Wiley Eastern Li-
mited.
Mikkelsen, B. (2005). Methods for Development Work
and Research: A Guide for Practitioners, 2nd edition.
New Delhi. SAGE Publications
Neuman. W.L. (1997). Social Science Research Me-
thods: Qualitative and Quantitative Approaches, 3rd
edition. Boston: Ally and Bacon.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Recommended Reading
Brewer, J. and A. Hunter. (1989). Multi-method Re-
search: A Synthesis of Styles. London: SAGE Publi-
cations
Cooper, H.M. 1989. Integrating Research: A Guide for
Literature Reviews. London: SAGE Publications
Griffiths, D., W. D. Stirling, and K. L. Weldon. (1998).
Understanding Data: Principles and Practices of Sta-
tistics. New York. John Wiley
and Sons.
Sapsford, R. and V. Jupp. eds. (1996). Data Collection
and Analysis. London. SAGE Publications
Weisberg, H.F., J.A. Krosnick, and B.D. Bowen.
(1996). An Introduction to Survey Research, Polling
and Data Analysis. London: SAGE Publications
141
13. Applied Time Series Econometrics 2.3.2 Coping with model specifications
with a Focus on Africa
2.4 From Model Specification to Estimation
Course Name: Applied Time Series Eco-
nometrics with a Focus on Africa Unit 3: Time Series Properties of Macro Variables:
Testing for Unit Roots
Course Type: Short Course 3.1 Introduction

Credit Hour: 4-5 weeks 3.2 Theoretical Time Series Issues

Course Description 3.2.1 Covariance and difference stationarity

This short-term course in applied time series eco- 3.2.2 Hands on Eviews: exposition of some time
nometrics covers the basic procedures of applied series characteristics using montecarlo si-
macro-econometrics, which include concepts on how mulation
to motivate the theoretical model, time series proper-
ties of macro variables, concepts and issues in cointe- 3.3 Unit Root Tests
gration analysis, an introduction to panel unit roots and
cointegration, and an introduction to the economics of 3.3.1 The Dickey Fuller test
forecasting.
3.3.2 Hands on EViews: Unit Root Test
Course Objective
3.3.3 Problems with Unit Root Testing
This course in applied time series econometrics is
designed to cover the basic procedures of applied 3.3.4 Unit roots and structural breaks
macro-econometrics. The approach of the course
is to introduce econometric methods and discuss Unit 4: Cointegration Analysis
estimation procedures. The course also prepares
participants to undertake applied research using a 4.1 Introduction to Cointegration (CI) and Error Cor-
particular econometric package, such as EVIEWS. rection Models (ECM)
The first part of the course covers the statistical un-
derpinnings of econometrics; it is more theoretically 4.2 The Engel-Granger (EG) Two-Step Approach
oriented. The second part is devoted to practical ap-
plications of the topics covered in part one. 4.2.1 Hands on EViews: The Engle-Granger (EG)
Two-Step Approach
Course Content
4.3 Some Relevant Mathematical Concepts:
Unit 1: Introduction Matrices and Eigen Values

Unit 2: Model Specification 4.3.1 Points on Matrix Algebra for Cointegration

Analysis
2.1 The Theoretical Model
4.4 Johansen’s Multivariate Approach: Identification
2.1.1 Motivating Your Model of the beta-coefficient &Restriction Tests
2.1.2 Locating Your Study in the Literature
and Formulating Testable 4.4. 1 An Introduction to VAR
Empirical Questions
4.4.2 VAR, CI and ECM
2.2 Hands on EViews: Data Exploration with
EViews-A Brief View 4.4.3 A numerical illustration of the VAR and ECM
model formulation
2.2.1 Graphical inspection and transformation
2.2.2 Diagnostic analysis 4.5 Hands on EViews: Application of the Johansen
Approach Using Ethiopian Consumption Data
2.3 Narrowing down the Research Question and Co-
ping with Model Specification 4.5.1 Estimation of Reduced-form VAR and Test
for Cointegration
2.3.1 Narrowing down the research question
4.5.2 Identification of Coefficients

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142
4.5.3 Testing for Weak Exogeneity 5.3.3 Estimation and Inferences in panel cointe-
gration models
4.6 Hands on EViews: The Nice Case of One Cointe-
gration Vector 5.4 Hands on EViews:

4.7 Hands on EViews: Handling Two Cointegrating 5.4.1 Panel cointegration tests
Vectors
Unit 6: Introduction to the Economics of
4.7.1 Estimating the VAR Forecasting

4.7.2 Testing for Cointegration 6.1 Introduction

4.7.3 Modelling the Short Run Dynamics: The 6.2 Graphics for Forecasting
Vector Error Correction Model
6.3. Modelling Trends, Deterministic Shifts, Seasona-
Unit 5: An Introduction to Panel Unit Roots and lity and Cycles
Cointegration
6.3.1 Modelling trends and deterministic shifts
5.1 Introduction
6.3.2 Modelling cycles
5.2 Panel Unit Root Tests
6.3.3 Moving Average (MA) and Autoregressive
5.2.1 Tests with common unit root process (AR) modelling

5.2.2 Tests with individual unit root process 6.4 The Box-Jenkins Approach to Forecasting

5.2.3 Hands on EViews: panel unit root test 6.5 Forecasting with Regression

5.3 Testing for Cointegration in Panel Data

6.5.1 Single equation forecasting models
5.3.1 Single equation based tests
6.5.2 Multiple equation forecasting models
5.3.2 Multiple equation (multivariate) based tests
6.6 Impulse Response Analysis

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143
Reading
Textbooks
Canova, F. (2005). Methods for Applied Macroecono-
mic Research. Princeton: Princeton University Press.
[Selected chapters]
Enders, W. (2003). Applied Econometric Time Series.
New York: Wiley and Sons.
Geda, A., N. Nduung’u and D.l Zerfu.
(2012). Applied Time Series Econometrics: A Practical
Guide for Macroeconomic Researchers with a Focus
on Africa Nairobi :University of Nairobi Press.
Goldberger, A. (1991). A Course in Econometrics.
Cambridge: Harvard University Press.
Hamilton, J. (1994). Time Series Analysis. Princeton:
Princeton University Press. [Recommended reading]
Harvey, Andrew C. (1993). Time Series Models, 2nd
edition. Cambridge: MIT Press.
Kennedy, P. (2008). A Guide to Econometrics, 6th edi-
tion. Oxford: Wiley-Blackwell
[econometric packages: E-views and STAT]
Lutkepohl, H. and Kratzig, M. (2004). Applied Time
Series Econometrics. Cambridge: Cambridge Univer-
sity Press [Selected chapters]
Stock, J.H. and M.W. Watson. (2010). Introduction to
Econometrics, 3rd edition. New York: Pearson.
Wooldridge, J. (2009). Introductory Econometrics: A
Modern Approach, 4th edition. Boston: South-Wes-
tern College Publishing.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
144
8. Climate Change, Green Economic
Strategy and Economic Policy
Course Name: Climate Change, Green
Economic Strategy and Economic Policy
Course Type: Short Course
Duration 4-5 weeks
Course Description
Climate change can be viewed as a fundamentally
economic problem: Emissions of greenhouse gases
have no economic value, so they are freely overpro-
duced, to the entire planet’s detriment. However, cli-
mate change has a unique set of attributes that make
standard economic analysis very difficult to apply. It is
a global problem requiring unprecedented international
cooperation. It is pervaded by uncertainty in every step
of the process of translating global emissions into local
damages. The costs and benefits of its mitigation are
highly mismatched geographically as well as temporal-
ly. And its damages are largely irreversible.
Course Objectives
This course is about breaking down the many challen-
ges of climate change and examining the ways eco-
nomics research addressed them. Participants will
learn what is known (and what is not known) about the
economic damages of climate change; they will also
study theoretical models that clarify the policy pro-
blem; and will examine existing and potential climate
policies and their relative strengths and weaknesses.
In the process, students will practice developing and
conducting empirical economics research, as well as
writing and presenting it.
Course Content
Unit 1: Introduction:
• The Nature of the Climate Problem
Reading List:
Stavins, R.N. (2011). “The Problem of the Com-
mons: Still Unsettled after 100 Years.” American
Economic Review 101(1):81-108.
Unit 2: Defining Concepts I
• Externalities and Public Goods
Reading List:
Coase, R.H. (1960). “The Problem of Social
Cost.” Journal of Law & Economics 3:1-19 [Sec-
tions I-VI].
Committee on Health, Environmental, and Other
External Costs and Benefits of Energy Produc-
tion and Consumption, National Research Coun-
cil. (2010). “Hidden Costs of Energy: Unpriced
Consequences of Energy Production and Use.”,
Washington, D.C.: National Academies Press.
[Pp. 29-57]
• Defining Concepts II: Discounting
Reading List:
Nordhaus, W.D. (2007). “A Review of the Stern
Review on the Economics of Climate Change.”
Journal of Economic Literature 45:686-702.
Stern, N. (2008). “The Economics of Climate
Change.” Richard T. Ely Lecture, American Eco-
nomic Review: Papers & Proceedings 98(2):1-37.
• Defining Concepts III: Uncertainty
Reading List:
Newell, R.G. and W.A. Pizer. (2003). “Discoun-
ting the Distant Future: How Much Do Uncertain
Rates Increase Valuations?” Journal of Environ-
mental Economics and Management 46:52-71.
Wagner, G. and M.L. Weitzman. (2013). “Inconve-
nient Uncertainties.” The New York Times, Octo-
ber 10th.
• Defining Concepts IV: Distribution of
Damages
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
Reading List:
Becker, G.S., K.M. Murphy, and R.H. Topel.
(2010). “On the Economics of Climate Policy.”
B.E. Journal of Economic & Policy Analysis 10(2):
Article 19.
Schelling, T. (1997). “The Cost of Combating
Global Warming: Facing the Trade-offs.” Foreign
Affairs 76:8-14.
• Defining Concepts V:
Reading List
Arrow, K.J. and A.C. Fisher. (1974). “Environ-
mental Preservation, Uncertainty, and Irreversibi-
lity.” Quarterly Journal of Economics 88(2): 312-
319.
Mann, C. C. (2013). “What if We Never Run Out
of Oil? ” The Atlantic Monthly, April 24th.
Unit 3. Climate Damages
• Climate Damages I: Catastrophic Damage
Reading List:
Angrist, J.D. and A.B. Krueger. (1991). “Does
Compulsory School Attendance Affect Schoo-
ling and Earnings?” Quarterly Journal of Econo-
mics 106(4): 979-1014
Anttila-Hughes, J.K. and S.M. Hsiang. (2013).
“Destruction, Disinvestment, and Death: Econo-
mic and Human Losses Following Environmental
Disaster.” Mimeo.
Harlan C. (2013). “In the Philippines, Natural Di-
sasters Are Common; Ways to Reduce Their Im-
pact Aren’t.” The Washington Post, November
16th.
• Climate Damages II: Non-Catastrophic
Damage
Reading List:
Burgess, R., O. Deschenes, D. Donaldson, and
M. Greenstone. (2011). “Weather and Death in
India Mechanisms and Implications for Climate
Change.” Cambridge, Mass.: MIT.
Guiteras, R. (2009). “The Impact of Climate
Change on Indian Agriculture.” Research Trends
in Agriculture Sciences, 16:41-55.
145
 Sethi, N. (2013). “India Scores a Win in Warsaw
on Emission Cuts Affecting Farmers.” The Hindu,
November 14th.
Unit 4. Mitigation Costs
• Mitigation Costs I: Competitiveness
Reading List:
Jaffe, A.B., S.R. Peterson, P.R. Portney, and
R.N. Stavins. (1995). “Environmental Regulation
and the Competitiveness of U.S. Manufacturing:
What Does the Evidence Tell Us?” Journal of
Economic Literature 33(1):132-163.
Porter E. (2013). “Rethinking How to Split the
Costs of Carbon Emissions.”. The New York
Times, December 24th.
• Mitigation Costs II: Trade and the
Environment
Reading List:
Shapiro, J. (2016). “Trade, CO2, and the Envi-
ronment.” American Economic Journal: Econo-
mic Policy, Vol. 8, No. 4:220-54.
Szabo M. (2013). “Trade War ‘Unavoidable’ if
EU Airline Emissions Plan Blocked: Lawmaker.”
Reuters, November 20th, 2013.
Unit 5: Cost-Benefit Analysis
• Cost-Benefit Analysis I: Integrated
Assessment Models I
Reading List:
McKibben W. (2012). “Global Warming’s Ter-
rifying New Math.”, Rolling Stone, July 19th,
2012.
Nordhaus, W.D. (2007). A Question of Balance:
Weighing the Options on Global Warming Poli-
cies. New Haven: Yale University Press.
[Pp. 30-115].
• Cost-Benefit Analysis II: Social Cost of
Carbon
Reading List:
Greenstone, M., E. Kopits, and A. Wolverton,
(2011). “Estimating the Social Cost of Carbon
for Use in Federal U.S. Rulemakings: A Sum-
mary and Interpretation.” NBER Working Paper
16913.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
146
Volcovici, V. (2013). “Major Companies Plan for
U.S. Carbon Emissions Fee, Report Says.”, Reu-
ters, December 5th.
• Cost-Benefit Analysis III: Credibility of CBA
Reading List:
Millner, A. (2013). “On Welfare Frameworks and
Catastrophic Risk.” Journal of Environmental
Economics and Management 65:310-325.
• Cost-Benefit Analysis IV: Alternatives to CBA
Reading List:
Heinzerling, L. and F. Ackerman. (2007). “Law
and Economics for a Warming World.” Harvard
Law & Policy Review 1(2):331- 362.
• Cost-Benefit Analysis V: Seminar on Current
Issues
Reading List:
Pindyck, R.S. (2013). “Climate Change Policy:
What Do the Models Tell Us?” Journal of Econo-
mic Literature 51(3): 860-872.
Stern, N. (2013). “The Structure of Economic
Modeling of the Potential Impacts of Climate
Change: Grafting Gross Underestimation of Risk
onto Already Narrow Science Models.” Journal
of Economic Literature 51(3): 838-859.
Weitzman, M.L. (2013). “Tail-Hedge Discounting
and the Social Cost of Carbon.” Journal of Eco-
nomic Literature 51(3): 873-882.
Unit 6 . Policy Instruments:
Policy Instruments I: Market-Based Policies
Reading List:
Friedman, T. L. (2013). “The Market and Mother Na-
ture.” The New York Times. January 8th.
Weitzman, M.L. (1974). “Prices vs. Quantities.” Re-
view of Economic Studies 41(4):477-491.
Policy Instruments II: Command-and-Control
Policies
Reading List:
Helfand, G.E. (1992). “Standards versus Standards:
The Effects of Different Pollution Restrictions.” Ameri-
can Economic Review 81(2):622-634.
Shear, M. D. (2013). “Administration to Press Ahead with
Carbon Limits.” The New York Times, September 20th.
Policy Instruments III: European Union – Emis-
sions Trading Scheme
Reading List:
Ellerman, A.D., F.J. Convery, and C. de Perthuis. (2010).
Pricing Carbon: The European Union Emissions Tra-
ding Scheme. Cambridge: Cambridge University Press,
Chapter 6: 158-191.
Reed, S. (2013) “European Lawmakers Support Carbon
Trading System.” The New York Times, December 10th.
Policy Instruments IV: U.S. Cap-and-Trade
Reading List:
Ellerman, A.D. and J.-P. Montero. (1998). “The Decli-
ning Trend. In Sulfur Dioxide Emissions: Implications
for Allowance Prices.” Journal of Environmental Eco-
nomics and Management 36:26-45.
Silverman, G. B. (2013). “RGGI States Urge EPA to Let
Success of Regional Plan Guide Power Plant Rules.”,
Bloomberg BNA, December 3rd.
Policy Instruments V: Standards, Subsidies, and
Tariffs
Reading List:
Porter, E. (2012). “Taxes Show One Way to Save Fuel.”
The New York Times, September 11th.
Schmalensee, R. (2012). “Evaluating Policies to In-
crease Electricity Generation from Renewable Ener-
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
gy.” Review of Environmental Economics and Policy
6(1):45-64.
Policy Instruments VI: International Policy
Design
Reading List:
Aldy, J.E., S. Barrett, and R.N. Stavins. (2003).
“Thirteen Plus One: A Comparison of Global Climate
Policy Architectures.” Climate Policy 3: 373-397.
Vidal, J., A. Stratton, and S. Goldenberg (2009).
“Low Targets, Goals Dropped: Copenhagen Ends in
Failure.”, The Guardian, December 18th.
Policy Instruments VII: Energy
Reading List:
Allcott, H. and M. Greenstone (2011). “Is There an
Energy-Efficiency Gap?” Journal of Economic Pers-
pectives 26(1):3-28.
Cavanagh, R. (2013) “How We Learned Not to
Guzzle.” The New York Times, September 12th.
Policy Instruments VIII: Policy Debate
No Reading – the course will initiate a one-on-one
debate over energy policy and discuss its relevance
to the African country in question.
Another interesting alternative is to discuss the
Millennium Institute’s Threshold 21 model which at-
tempts to link climate with social and economic is-
sues by anchoring them through the SDGs.
147
11. Economic Analysis of the Extractive • Property rights and land tenure arrangements af-
Sector & Natural Resource fecting natural resource management.
Management
• Policy tools used by government to correct mar-
Course Title: Economic Analysis of the ket failures in natural resource management.
Extractive Sector and Natural Resources
• The time value of money and its influence on na-
Management tural resource management decisions.

Course Type: Short Course Course Content

Course duration: 3 to 5 weeks Unit 1: Introduction: Natural Resources and

Society
Course Description
• resource sustainability: a unifying framework
This course is designed to give trainees a better un-
derstanding of and appreciation for the role economics • role of natural systems
plays in the management, use, and protection of natural
resources. Its focus is to develop the participants’ ca- • types and classification
pacity to understand and apply economic decision-ma-
king criteria in the management of natural resources. o natural resources
The course emphasizes the practical application of
economic principles and concepts to natural resource o natural resource values
management problems. The course begins by develo-
ping students’ understanding of basic microeconomic Unit 2: Principles of Demand and Supply in Na-
concepts then exposes them to tools and techniques tural Resource
for valuing natural resources and evaluating alternative
uses of natural resources using economic and finan- • principles of demand
cial criteria. The last part of the course applies these
economic concepts, tools, and techniques to a variety o consumption and utility
of natural resource management problems. Since a si-
gnificant number of African countries are dependent on o consumer decision criteria
natural resources, (especially for exports) this is a rele-
vant course for most member countries. o use in deriving a demand curve

Course Objectives c change in Q-D vs. change in demand (fac-

tors)
Specific learning objectives of the course are to deve-
lop an understanding of: • examples and applications

• The fundamental interdependency of humans • principles of supply

and natural resources.
o change in Q-S vs. change in supply (factors)
• The role of natural systems in the production and
consumption of market- and amenity-based na- o production functions
tural resources goods and services.
o types of costs
• The role and importance of natural resources in
society, and the role of economics in the mana- o criteria for determining efficient output level
gement of natural resources.
o examples and applications
• How producers determine an economically-effi-
cient level of production. o price elasticity

• Why markets fail and market failures commonly • definition

associated with natural resources.
• derivations

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148
• Applications and examples in a natural resource • nominal versus real rates
context
• discounting and compounding formulas
Unit 3: Supply - Demand Interaction in Natural
Resource • applications and example problems

• market equilibrium Unit 5: Analysis Tools, Investment Rules, Capital

Budgeting
o consumer and produce surplus
• criteria for measuring project efficiency
o surpluses, shortages
• tools for measuring project efficiency
• market failures in natural resource management
• capital budgeting rules
o causes and types of market failures
• Examples and applications to natural resource
o public goods problems

o externalities Unit 6: Project Analysis Design for Natural

Resources
• policy tools to address market failures
• use of project analysis in natural resources
o range of policy tools used
• project analysis model framework
o criteria for judging policy tool choice
• financial versus economic analysis
o Policy Tool Examples
• important considerations/potential pitfalls
Unit 4: Inflation and the Time Value of Money
• data analysis and examples
• definitions and measures of inflation
• applications to natural resource problems
• discount rate components

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149
Unit 7: Non-Market Valuation Techniques of • valuation methods
Natural Resource Management
• impacts of financing on land values
• contingent valuation
• policy tool impacts
• hedonic price model
Unit 10: Payments for Environmental Services
• travel cost method
• ecosystem functions and values
Unit 8: Economics of Natural Resource
Management • value versus pricing issues

• ecological principles and characteristics • types of payment mechanisms

• management/protection/sustainability issues • qualities of effective payment mechanisms

• application of economic principles and tools • examples

• examples Unit 11: The Macroeconomics of Natural Re-

source Revenue Management
• economics of forest management
• Dutch disease
• economics of fisheries and wildlife management
• the fiscal response to external finance from natu-
Unit 9: Land Economics ral resource sector

• legal/institutional setting • governance (political economy of resource use)

• real property rights • managing public expenditure and public revenue

from natural resource sectors

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150
Reading List
Textbooks
Klemperer, W.D. (2010). Economics and Natural
Resource Management, University of Minnesota.
McGraw-Hill.
Recommended Reading
Bockstael, N.E., A.M. Freeman, R.J. Kopp. P. R. Port-
ney, and V.K Smith. (2000). “On Measuring the Eco-
nomic Values for Nature.” Environmental Science and
Technology 34(8): 1384-1389.
National Research Council. (2004). “Valuing Ecosys-
tem Services: Toward Better Environmental Decision
Making”. Report in Brief. November 2004, 4 p.
Gammon, D., J.M. Platania, S. Manring and D. Muñoz.
(2011). “Economics: the Overlooked Discipline in Ear-
th Stewardship.” Frontiers in Ecology and the Environ-
ment, 9(1):535.
Helbling, T. (2010). “What are Externalities?” Finance
and Development, December 2010: 48-49.
Asian Development Bank. (19972017). “Guidelines
for the Economic Analysis of Projects.” (Revised 1997
version).
Carson, R.T. (2000). “Contingent valuation: a user’s
guide.” Environmental Science and Technology 34(8)
1413-1418.
Lassner, J.A. (1998). “Valuing agricultural conservation
easements.” The Appraisal Journal 66(2):145-150.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
12. Inter-Governmental Fiscal Relations
and Local Financial Management
Course Title: Intergovernmental Fiscal
Relations and Local Financial
Management
Course Type: Short Course
Duration: 3-5 weeks
Course Description
The course is designed for practitioners, researchers/
Academics, and trainers in the area of public finance re-
lated to local government issues and intergovernmen-
tal fiscal relations. It covers topics of fiscal decentrali-
zation, the assignment of expenditure responsibilities,
the tax assignment problem, the intergovernmental
systems and grant structure, own source revenues,
local government budgets, and issues of sectoral ap-
proach to intergovernmental fiscal relations and local
financial management
Course Objectives
The objectives of the course are to (i) provide parti-
cipants with the analytical framework for understan-
ding intergovernmental fiscal economics and various
modules of the central-sub national (e.g., local) rela-
tionship; (ii) enhance participants’ capacity for suc-
cessful implementation of public sector resource ma-
nagement reform by analyzing mechanisms for the
transfer of resources among governments and iden-
tifying ways to address the issue of regional disparities
and local resource mobilization; (iii) increase partici-
pants` understanding in the issues of fast restructu-
151
ring public economy in countries of transition and (iv)
enhance participants’ capacity to understand and use
the practical simulation methods on public finance is-
sues (transfers, local taxes).
Course Content
Chapter 1: Fiscal decentralization
• The purpose of this introduction is two-fold: to
provide a course overview and to lay out some
key questions to be examined in subsequent pre-
sentations and discussions. The module begins
with a discussion of the concept (e.g., distingui-
shing fiscal from other forms of decentralization
and pointing out the variants fiscal may take),
and then proceeds to ask several critical ques-
tions: Why/why not decentralize? What are the
benefits and risks? How does one measure and
monitor? And what are the basic approaches
and instruments of fiscal decentralization and
local financial management policy?
Chapter 2: The assignment of expenditure
responsibilities
• Discussions proceed from the overview of decen-
tralization practice to the “practice” of sorting out
fiscal roles and responsibilities and the operations
of a multi-tier government. To stress the axiom that
finance follows function, the first topic is that of
assignment of expenditures: the theory and prac-
tice of the dividing line between private and public
sector activities, principles to guide expenditure as-
signment, and the problems that may result from
failure of clarity and stability in the assignment pro-
cess. Then, specific policy choices are discussed:
operating vs. capital spending, (and borrowing)
responsibilities, need for an appropriate regulatory
framework, and the role of privatization of public
services.
Chapter 3: The tax assignment problem: concep-
tual and administrative considerations in achieving
sub-national fiscal autonomy
• Narrowing the scope of inquiry: Musgrave’s
three-function framework; realizing the political
benefits of tax assignment; constraints on tax
assignment; conceptual arguments; alternative
methods of revenue assignment; administrative
considerations; vertical imbalance and horizontal
disparities; concluding remarks: tax competition
revisited.
Chapter 4: The intergovernmental systems and
grant structure
• Recognizing that a multiplicity of governments and
government functions raises questions regarding
macroeconomic control by a central government,
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
152
the module begins by drawing on the discussion
of previous modules as a way of introducing the
conventional scope of inquiry (macro, redistribu-
tion, allocation) and its limitations as it may apply to
different systems. It proceeds to examine intergo-
vernmental theory and practice. The module also
discusses the objectives of an intergovernmental
grant system: correcting or adjusting for vertical
imbalance, horizontal imbalance and externalities,
coordinating central and sub national spending;
and providing incentives for certain forms of local
behavior (tax effort, intergovernmental coopera-
tion, structure of government).
Chapter 5 Framework for enhancing local go-
vernment creditworthiness, municipal credit
markets
• Framework for international local creditwor-
thiness; general features and issues underlying
the development of municipal credit markets;
analytical parameters of fixed-income securities;
“structured” financing in municipal credit markets;
legal and regulatory framework; local government
institutional capacity; infrastructure financing and
access to private capital markets; market-based
financial intermediaries for local investments; links
to capital market development issues; credit ra-
tings; municipal bond markets and the experience
of the United States; municipal bond markets and
prospects for developing countries.
Chapter 5: Own source revenues: Property tax,
user charges
• Increased importance of the property tax in the
OECD countries; advantages of a property tax; the
property tax as a local tax; basing the property tax
on market values; taxing both land and buildings
or taxing land alone; administration of the property
tax; exercise: designing property tax (simulation);
concept of user fee finance; design options for
user charges; implementation including metering,
collection, enforcement, and billing; case study.
Chapter 6: Local government budgets
• Budget purpose; types of budgets; budgeting
and accounting; stages of the budget process;
capital budgeting; evaluation of performance.
Chapter 7: Sector approach: housing
• Role of the state in housing in the pre-transi-
tion and post-transition; different privatization
strategies; alternative service delivery (municipal,
non-profit, and private); central and local hou-
sing programs; structure of grants and subsidies
(e.g., housing allowances, vouchers, construc-
tion subsidies), combining central and local pro-
grams; private and public partnership in housing
 development at local level; local housing funds:
revenues and expenditures, operational issues;
issues of regulation: rent control (central and
local solution), building regulations, land deve-
lopment, arrears; issues of externalities: grant
“leakage”; local housing indicators; Exercise: de-
signing a housing program grant (simulation).
Chapter 8: Sector approach: social policy
• Basic issue of social policy in transition; problem
of the ”agency“ or ”choice” model; interaction
between the sectors: health care, housing, public
services and social; financing institutions and be-
nefit programs; local social policy and central pro-
grams; financing institutions providing social care;
grant structure: role of matching grants in social
services, Exercise: designing local social program
Reading List
Textbooks
Ogbuishi, A. F. (2007). “Fundamentals of Inter-go-
vernmental Relations.” Enugu: Academic Publishing
Company.
Shah A. (2004). “Fiscal Decentralization in Developing
and Transition Economies: Progress, Problems, and
the Promise.” World Bank Policy Research Working
Paper 3282.
Recommended Reading
Aronson, J.R. and E. Schwartz. (2004). Management
Policies in Local Government Finance, 5th edition.
Washington, D.C.: International City Management As-
sociation.
Bird, R. M. and R. Bahl. (2008). “Sub-national Taxes
in Developing Countries: The Way Forward”. IIB Wor-
king Paper No. 16 (Toronto: Institute for International
Business, Rotman School of Management, University
of Toronto, August.
Fisher, R. C. (2006). State and Local Public Finance,
3rd edition. Mason: South-Western.
Fjeldstad, O-H. (2001) “Intergovernmental Fiscal Re-
lations in Developing Countries: A Review of Issues.”
In Intergovernmental Relations in South Africa: The
Challenges of Co-operative Government, edited by N.
Levy and C. Tapscott, 55-93. Capetown: IDASA and
School of Government, University of the Western Cape.
Friedrich, C. (1963). Federalism: National and Interna-
tional. New York: Oxford University Press.
Oates, W. E. (1972). Fiscal Federalism. New York:
Harcourt, Brace, Jovanovich.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
World Bank. (2007). “Fiscal Decentralization and Re-
gional Inequality,” In Spending for Development: Ma-
king the Most of Indonesia’s New Opportunities, 111-
134. Washington, D.C.: World Bank.
The Economics of Financial Markets
Course Title: Economics of Financial
Markets
Course Type: Short Course
Course Duration: 3 to 5 weeks
Course Description
The aim of the course is to provide greater understan-
ding of the role and interaction of economic factors with
the financial sector. The course explores the structure
and growth of the economy, the determination of inte-
rest rates, exchange rates and equity prices, the role of
finance, the changing importance of banks, institutional
investors and security markets, and the economics of
regulation with focus on the Global Financial Crisis. The
course also touches on topical issues in economics
and financial markets, for example the implications of
the surge in government debt and ICT and financial
sector development.
Course Objective
The learning outcomes of this course are to be able to:
Understand economic and financial concepts
and theories.
Explain current and prospective economic and
financial market developments, with reference to
economic and financial concepts, theories, evi-
dence, and practice.
Understand the objectives and structure of
an economy and its financial system, why this
BENCHMARK MACROECONOMIC MODELS
FOR EFFECTIVE POLICY MANAGEMENT IN
AFRICA structure has economic and financial
impacts and how its components can be used
to achieve desired outcomes.
• Explain the role and interaction of economic fac-
tors (including instruments of economic policy
and financial regulation) with the financial sector
(including financial market prices and the beha-
vior of the financial system).
• Apply economic and financial concepts and
theory, plus an understanding of current issues,
to critically evaluate major economic and finan-
cial challenges and their implications for financial
markets and institutions.
153
Course Content
Chapter 1: INTRODUCTION AND OVERVIEW OF
THE ECONOMY
• The objective of this chapter is to introduce eco-
nomic concepts important to the understanding
of developments in financial markets and more
broadly the financial system. The focus is on cur-
rent relevance and the ability to analyze current
economic and financial market issues.
Outline
• Why does economics and finance matter?
• Measuring economic and financial systems.
• Potential and actual growth of the economy.
• Consumer and asset inflation/deflation.
• Balance of payments and the international
economy.
• Business cycles – ups and downs in economic
activity.
• Gauging and forecasting the economy.
• Assessment of foreign assets and foreign
liabilities and sustainability.
• Wealth, debt, and income effects.
• Promotion of inflation targeting and demotion of
the balance of payments.
• Understanding key drivers of economic activity
and its financial linkages.
• Digitalization and finance: Fintech, emergency of
digital payment systems.
Reading List
Andersen, C. (2011). “Rethinking Economics in a
Changed World” remarks from J. Stiglitz, M. Spence
and R. Solow from IMF Finance and Development.
Spaventa, L., “Economists & Economics”, What Does
the Crisis Tell Us?” (2009). CEPR Policy Insight, No.38.
Chapter 2: Macroeconomic and Financial
Policies
• The objective of this chapter is to examine the
use of some of the instruments of economic
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
154
policy and how they affect closely related financial
market prices and more generally, the stability of
the financial system.
• The goals of economic policy
• Interest rates.
• Exchange rates.
• Fiscal policy effectiveness and sustainability?
• Monetary policy: monetary policy decisions:
what next?
• Macro prudential policy.
• International economic policy and monetary
system.
• The role of policy makers in macroeconomic and
financial stabilization.
• Inflation targeting: goods and services prices
only or asset prices too?
• Currency unions and exchange rate regimes -
fixed, floating, or common?
• A Country’s exchange rate condition:
deprecation, appreciation, or stability?
• The reserve currency debate and rebalancing
global growth.
Reading List
Brash, D. T..(Governor, Reserve Bank of New Zealand)
(2000). “The Pros and Cons of Currency Union: A Re-
serve Bank Perspective.” Address to the Auckland
Rotary Club, 22 May, 2000.
Dudley, W. C., President and Chief Executive Officer of
the Federal Reserve Bank of New York. (2010). “Asset
Bubbles and the Implications for Central Bank Policy”.
Address to the Economic Club of New York, New York
City, 7 April, 2010.
Gruen D. (2011). “Lessons About Fiscal Policy from
the 2000s.” Address to the Reserve Bank of Australia
Conference, 14 December, 2011.
Jácome, L. and E. Nier. (2012). “Macroprudential Po-
licy: Protecting the Whole.” Finance & Development,
Vol. 49, No.
Jaumotte F. (2011). “Fixing the Flaws in the EMU.” Fi-
nance & Development, Vol. 48:4.
Mateos y Lago, I., R. Duttagupta, and R. Goyal.
(2009). “The Debate on the International Monetary
System”, IMF Staff Position Note, November.
Stevens G., (Governor of the RBA). (2008). “Monetary
Policy and Inflation: How Does it Work?” Remarks to
the Australian Treasury Seminar Series Canberra - 11
March, 2008.
Chapter 3: FINANCE IN THE ECONOMY
• The objective of this chapter is to examine
the role of finance in the economy, why
countries differ in the financial structure that
has developed and why this structure has an
economic impact.
• Role of finance in the economy: asymmetric
information and the costs of information and
transactions as drivers of financial development.
• Savings and investment – further insights in
economic and financial activity.
• Intermediation and disintermediation.
• Financial Accounts – an accounting framework
for the financial system.
• Financial sector structure and economic
development.
• Are financial intermediaries and capital markets
alternatives or complementary? Good or bad?
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
• What companies are likely to use intermediated
bank finance rather than disintermediated financial
instruments in capital markets? And why?
• What are the major influences on financial
structure?
• What causes procyclicality and instability in
banking and financial system?
• What financial system could have lessened
disruption caused by subprime crisis?
Reading List
Bank of Japan, Research and Statistics Department
(2012). Flow of Funds (1st Quarter 2012) – Japan,
US and Euro area Overview” .
Haldane A. G. (Executive Director, Financial Stability,
Bank of England). (2012). “A Leaf Being Turned.”
Address to Occupy Economics, “Socially Useful
Banking”, London, 29 October, 2012.
IMF. (various years) Latest Global Financial Stability Re-
port, (Released April and October), “Chapter 1, Global
Financial Stability Report - Executive Summary”.
Mohanty M. S. and P. Turner. (2010). “Banks and
Financial Intermediation in Emerging Asia: Reforms
and New Risks.” BIS Working Papers No 313, June.
Trichet, J-C. (2010). President of the European Cen-
tral Bank, What role for finance? at the Universidade
Nova de Lisboa, Lisbon, 6 May.
155
Chapter 4: ECONOMICS OF SECURITIES
MARKETS
• The objective of this chapter is to build some of
the drivers of primary and secondary markets for
securities and their derivatives, including explo-
ring some valuation issues from an economics
perspective.
• Effective demand and supply
• Supply-side and demand-side factors for
securities
• Judging effectiveness – Efficiency and inefficien-
cy in the foreign exchange, bond, and equity
markets
• Alternative valuation approaches and their uses
o What are the signs investors and rating
agencies use to judge the limit of govern-
ment borrowing?
o Do shortages in the supply of equities and
government debt constrain economic de-
velopment?
o The calculation and relevance of Tobin’s q
and Shiller’s p/e ratios.
o How will the increasing reliance on private
provision of retirement incomes affect the
demand for and supply of securities?
o Are bubbles inevitable and impossible to
deflate without a crisis?
Reading List
Poghosyan, T. (2012) “Long Run and Short-Run De-
terminants of Sovereign Bond Yields in Advanced
Economies”. IMF Working Paper WP/12/271.
Shiller, R. J. (2005). Irrational Exuberance, 2nd edition.
Princeton: Princeton University Press.
[The whole book, but especially Chapter 10, pages
177-194 – “Efficient Markets, Random Walks, and
Bubbles”]
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
156
Chapter 5: ECONOMICS OF FINANCIAL REGU-
LATION
• The objective of this chapter is to explore the
rationale for regulation of the financial sector—
notably both markets and financial service pro-
viders—and how regulatory power can be best
used to achieve desired outcomes.
Outline
• Economic rationale for regulation
• Cost of regulation
• Regulation and financial innovation
• Lessons from the US sub-prime mortgage
market
• Lessons from the Asian crisis
• What regulatory factors helped or fueled the
Global Financial Crisis?
• What regulatory factors helped or fueled the
Asian Crisis?
• What are recent examples of conflicts of interest
and moral hazard?
Reading List
Carstens A. (2013). “The Quest for Successful Policy
Responses to Sovereign Crises.” Address by Agustín
Carstens, Governor of the Bank of Mexico, at the Mo-
netary Authority of Singapore Lecture 2013, Singa-
pore, 5 February.
Claessens, S. and M. A. Kose. (2013). “Financial
Crises: Explanations, Types, and Implications”, IMF
Working Paper WP/13/28, January.
Constâncio, V. (2013). “The Global Financial Crisis – 5
years on.” Speech by the Vice-President of the Euro-
pean Central Bank, at the China-Europe Economists
Symposium, Beijing, 12 January.
Financial Stability Board. (2011). “Overview of Pro-
gress of the G20 Recommendations for Strengthe-
ning Financial Stability- Report by the FSB to G20
Leaders”. 4 November.
B. MA/MSc in Macro Modelling
for Policy Analysis (for
Category C)
A2.1 MA/MSc in Macroeconomic Model-
ling and Forecasting
INTRODUCTION: This program is developed in anti-
cipation and partly in response to an expressed need
for graduate-level training in applied macro modelling
and forecasting. The program helps to build long-term
capacity for planning, budgeting and macro policy,
and impact analysis. Graduate students who consi-
der their professional careers in government and the
business sector are also expected to apply for this
course. The program being proposed in this docu-
ment is a Master’s of Arts Degree in Applied Macro
Modelling and Forecasting that runs over one year,
two semesters, to be offered without thesis as a re-
quirement. If it runs for four semesters (two years) and
writing a thesis on modelling issues as a requirement
is considered, it will be termed as Master of Science
Degree in Applied Macro Modelling and Forecasting.
TITLE OF THE PROGRAM: The title of the program
is ”MA in Applied Macro Modelling and Forecasting”.
(This would be “Master of Science” instead if two
years’ duration is adopted)
RATIONALE: Africa needs high-level professionals
in public policy to effectively carry out policy analysis.
Thus, provision of training and education in applied
macro modelling and forecasting will strengthen the
current human resource capacity of the government
agencies in each country.
OBJECTIVES: The objectives of this program are to
create applied macro modelers and forecasters ca-
pable of handling issues in policy analysis, planning,
and forecasting. It also aims at strengthening the ca-
pacity of ministries and the private sector.
ADMISSION REQUIREMENTS
Successful completion of BA/BSc in Economics and
related degree and a pass mark on entrance exam to
be administered by preferred partner universities.
1. The applicant must have:
a) a Bachelor’s degree majoring in economics, or
b) a Bachelor’s degree with a minor in economics
including Microeconomics, Macroeconomics,
Calculus, Statistics, and Econometrics, or
c) a Bachelor’s degree with the equivalent of a mi-
nor in economics, though not formally taking
economics as a minor including such basic
courses as Microeconomics, Macroeconomics,
Calculus, Statistics, and Econometrics;
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
d) A Bachelor’s degree in related fields that includes
basic economics courses (Microeconomics,
Macroeconomics, and Quantitative methods). If
the candidate audited such courses in undergra-
duate level, he/she could be considered for ad-
mission; and
2. The applicant must satisfactorily pass an en-
trance examination to be administered by pre-
ferred partner universities. Applicants must also
meet other requirements as appropriately may
be laid down.
COURSE SCHEDULE
Duration Two Semester (One Year) and MSc
Four Semester (Two Year)
Semester I
Econ 601: Advanced Microeconomics I (3)
Econ 603: Advanced Macroeconomics I (3)
Econ 605: Mathematics for Economists (3)
Econ 607: Econometrics I (3)
Semester II
Econ 634 Advanced Macro Economics II and Macro
Policy (3)
Econ 682: Advanced Microeconomics II and Micro
Policy (3)
Econ 654: Research Methods and Applied
Econometrics (4
Econ 777: Financial Econometrics and Forecasting (3)
Econ 888 Applied African Macro Modelling and
Forecasting (3)
Econ 999 Project and Policy Impact Analysis (3)
(With a Project on the Country’s/African Macro/Micro
Policy Issues)
COURSE DESCRIPTION
Semester I
Econ 601: Advanced Microeconomics I (3)
Theory of consumer behavior; theory of producer be-
havior; theory of market structure; principles of welfare
economics, and social choice; general equilibrium;
choice under uncertainty, inter-temporal choice.
Econ 603: Advanced Macroeconomics I (3) Aggre-
gate supply and demand; expectation, aggregate
consumption and savings; investment, money de-
mand and supply; credit and banking, deficits, and
inflation; fixed-price models, heterodox macro models
and African Economies, payment and exchange rates
and open economy macroeconomics.
Econ 605: Mathematics for Economists (3)
Matrix algebra; calculus; constrained optimization;
157
non-linear programming; dynamics; game theory;
dynamic programming.
Econ 607: Econometrics I (3) Simple regression mo-
del; general linear regression model; violation of basic
assumptions; specification errors; topics in time-se-
ries analysis; limited dependent variable models; si-
multaneous equations.
Econ 888 Applied African Macro Modelling and Fore-
casting (3): Applied macro modelling in Africa, macro
model-based forecasting, policy analysis using simu-
lation, using expert opinion in policy analysis and fore-
casting, evaluation of forecasting and policy analysis,
the institutional framework for policy analysis and fore-
casting; case studies of applied African applied macro
models.

Semester II Econ 999 Project Analysis & Policy Impact Analy-

Econ 634 Advanced Macro Economics II and Macro
Policy (3): Open economy macroeconomics; ex-
change rate markets; structural adjustment; controls
and rent seeking behavior; trade stocks; applied mo-
dels of the macro economy. Structural adjustment and
stabilization issues; trade policies; monetary and fiscal
policies; credit policy; agricultural policies; exchange
rate policies.
Econ 682: Advanced Microeconomics II and Micro
Policy (3): Public goods; externalities; transaction costs;
recent advances in the economics of information, game
theory, and in the economics of industry. Poverty, vulne-
rability; the peasant household decision model; econo-
mics of health and nutrition; labor markets; migration;
agricultural market analysis; pricing; credit markets,
informal sector; industrial policies; public economics
issues, property rights, public goods provision.
Econ 654: Research Methods and Applied Econo-
metrics (3): Scientific methods in economic research;
Applied time-series econometrics and forecasting and
micro-data (cross section) econometrics using PCs
(with STATA, EVIEWS, PC-GIVE, LIMDEP), data ex-
ploration as a continuation of Econometrics I (Econ
507) (including research project).
Econ 777: Financial Econometrics and Forecasting
(3) Time series econometrics modelling, cycles and
trends; the asset pricing model, GARCH model
sis (3): Principle of project analysis, social cost be-
fit analysis, private cost benefit analysis, incidence
analysis using micro data., Budgeting process and
expenditure tracking, analysis of proposed executed
polices.
GRADUATION REQUIREMENT: The candidate for
the MA in Applied Macro Modelling and Forecasting
is required to take 24 credit hours during the course
of the program and write at least two term papers.
The minimum cumulative grade point required to ob-
tain this MA degree is a cumulative Grade Point Ave-
rage (GPA) of 3.00 in a four-point grading system.
Quality assurance system: Evaluation of student
performance: all taught courses will have final exa-
mination, but other additional methods of evaluation
differ across courses depending on the nature of the
courses and practical conditions such as the number
of students and teaching load. Quality is a function
of the inputs that are made available which implies
that attempts have to be made continuously by pre-
ferred partner universities to improve the quantity and
quality of the inputs in the process. For this particular
program the preferred partner universities could work
with highly qualified Applied Macro Modelling &Fore-
casting institution and internationally acclaimed pro-
fessors/economists.
List of elective courses that may be available for the
M.Sc. program include.

Econ 701: Economics of Development (3) Econ 711: Public Finance (3)
Econ 731: Monetary Economics (3) Econ 733: International Economics (3)
Econ 735: Industrial Economics (3) Econ 737: Agricultural Economics (3)
Econ 739: Policy Analysis and Economic Management (3) Econ 745: Economics of Human Resources (3)
Econ 751: Economics of Natural Resources and the Environment (3) Econ 753: Population Economics (3)
Econ 759: Econometrics (3)
Econ 755: Health Economics (3) Econ 765: Operations Research (3)
Econ 767: Corporate Finance and Investment (3) Econ 768: Managerial Economics (3)

The second year of enrolment is devoted to a thesis project. A candidate registered for a thesis project is
required to submit a dissertation with 10,000-20,000 words for examination by a panel of internal and external
examiners.

Econ 771/72 Graduate Seminar in Economic Policy Analysis -- with a focus on a country’s macro modelling
issues

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

158
C. Ph.D./Advanced level Applied o Monotonicity
o Convexity and Concavity
Macro Modelling Study for
Category C Experts • The Existence of a Utility Function that Repre-
sents a Preference Ordering
Bridging Courses for PhD
• Indifference Curves and the Marginal Rate of
Objectives Substitution

The remedial/bridging courses are designed to help o Three general properties

participants refresh their knowledge of core courses
to be taken at an advanced PhD level. The core o Hypothesis of diminishing MRS
courses to be covered here in the bridging courses
are advanced econometrics, advanced mathematical • Utility Functions
economics, advanced macroeconomics, advanced
microeconomics, and statistical methods for econo- o Monotonic Invariance of Utility Functions
metrics. The courses are to be given in an intensive
form that may take up to three months. o Properties of Utility Functions

1. Advanced Microeconomics I & II o Important Examples: L i n e a r,

Course Syllabus Leontief, Cobb-Douglas

Course Name: Advanced B) Utility Maximization and Comparative

Statics
Microeconomics I & II
• Graphical Illustration
Course Type: Core Bridging Course
• First Order Conditions
Course Duration: 2 to 3 months
• Algebraic Examples
Course Description:
• Corner Solutions
This is a bridging course in advanced microecono-
mics. Topics to be covered in this course include • Marshallian Demand Functions
basic concepts and issues in microeconomics, inclu-
ding, the theories of consumer and producer behavior, o Properties: Walras Law, homogeneous of
partial and general equilibrium analysis, choice under degree zero
uncertainty and game theory.
o Examples and derivation techniques
Course Objective:
• Indirect Utility Functions
To introduce the fundamental concepts of microeco-
nomic models of the firm, consumers, and decision • Properties
making under uncertainty. Also, introduce the basic
models of price theory in partial equilibrium, and gene- • Envelope Theorem
ral equilibrium framework. Furthermore, an introduc-
tion to game theory will also be offered. o Roy’s Identity

Course Content C) The Dual Problem: Minimizing expenditure

with a utility constraint
I: Consumer Theory
• First Order Conditions and Graphical Interpretation
A) Consumer Preferences and Utility
Representation • Hicksian or Compensated Demand Functions

• Commodity Space • Expenditure Function

• Preference Orderings Axioms • Shepard’s Lemma

o Completeness, reflexiveness, transitivity
o Continuity • Identities Linking the Expenditure and Indirect
UtiLity Functions

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

159
D) Comparative Statics of Consumer Behavior
E) Short Run Cost Functions
• Changes in Income
F) Duality between Cost and Production
• Changes in Prices
G) Long run profit maximization and Supply
• Compensated Price Changes
H) Short run profit maximization and Supply
• The Slutsky Equation and Decomposition
I) Factor Demand Functions
E) Elasticities
III. Partial Competitive Equilibrium
F) Revealed Preference Theory
A) Market Demand
• SARP, WARP, GARP
B) Short Run Supply
• Afriat’s Theorem
C) Equilibrium and Comparative Statics
II: Producer Theory
D) Long Run Competitive Equilibrium
A) Production Sets and Functions
E) Ricardian Rents
B) Isoquants and the Marginal Rate of Techno-
logical Substitution F) Welfare Analysis

C) The Nature of Cost G) Applications

D) Long Run Cost Minimization and Long Run o Taxation

Cost Functions o International Trade

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

160
IV. General Equilibrium o Evidence on probabilistic sophistication
and the stability of preferences
A) Exchange
o Ellsberg paradox and ambiguity aversion

o Edgeworth box representation VI: Game Theory

o Pareto optimality A) Cooperative Game Theory

o Competitive equilibrium B) Non-cooperative Game Theory

o First and second welfare theorems o Static games of complete information

o The core o Dynamic games of complete information

B) Production o Bargaining

o Robinson Crusoe economy o Wars of attrition

o Production feasible sets and production o Static games of incomplete information

possibility frontier
o Dynamic games of incomplete information
o Pareto optimality and competitive equili-
brium revisited Reading List

V: Choice Under Uncertainty Textbooks:

A) Objective Uncertainty
o Objects of choice and preference functionals
o Axiomatic characterization of expected utility
o Arrow-Pratt characterization of comparative
risk aversion
o Rothschild-Stiglitz characterization of com-
parative risk aversion
o Demand for -iInsurance
B) Subjective Uncertainty
o States, events, outcomes, and acts
o Probabilistic sophistication
o Expected utility preferences over subject
acts
o State dependent utility
C) Evidence and Alternative Models
o Evidence on the independence axiom (Al-
lais paradox)
o Non-expected utility functionals
Mas-Collel, A., D.Winston, and J.R.Green. (1995). Mi-
croeconomic Theory. Oxford: Oxford University Press.
Nicholson, W. and C. Snyder, Microeconomic Theory:
Basic Principles and Extensions, 10th edition. Mason:
South-Western.
Varian, H. (1992). Microeconomic Analysis, 3rd edi-
tion. New York: W.W. Norton.
Recommended Reading:
Debreu, G. (1959). A Theory of Value. New Haven:
Yale University Press.
Fudenberg, D. and J. Tirole (1992). Game Theory.
Cambridge Mass: MITPress.
Jehle, G. and P. Reny. (2011). Advanced Microecono-
mic Theory, 3rd edition. Toronto: Prentice Hall.
Kreps, D. (1990). A Course in Microeconomic Theory.
Princeton: Princeton University Press.
Rubinstein, A. (2006). Lecture Notes in Microecono-
mic Theory: The Economic Agent. Princeton: Prince-
ton University Press.
Stokey, N. and R. Lucas, Jr. (1989). Recursive Me-
thods in Economic Dynamics. Cambridge: Harvard
University Press.

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

161
1. Advanced Macroeconomics I &
II Course Outline
Course Name: Advanced
Macroeconomics I &II
Course Type: Core Bridging Course
Course Duration: 2-3 month
Course Description:
This is a bridging course in advanced macroeco-
nomics. Topics to be covered in this course include
basic concepts and issues in macroeconomics, ag-
gregate demand–aggregate supply analysis in closed
economy, open economy macroeconomics, behavio-
ral microeconomic foundations of macroeconomics,
economic growth, recent macro policy debates, and
issues of relevant macroeconomic theories for African
economies.
Course Objective:
The objective of this course is to serve as a bridging
course for a more advanced macroeconomics. To that
end, this course aims at introducing the fundamental
concepts and tools of macroeconomics in the areas of
aggregate demand–aggregate supply analysis, open
economy macroeconomics, economic growth, micro
foundations of macroeconomics, among others.
Course Content:
Unit 1: Introduction
• The State of Macroeconomics: Evolution and
Recent Developments
• Basic Concepts and Methods of Macroecono-
mic Analysis
Unit 2: Aggregate Demand and supply Analysis
• Introduction: The Income-Expenditure Approach
• Aggregate Demand Analysis
• Aggregate Supply
• Monetary and Fiscal Policy Analysis
Unit 3: Open Economy Macroeconomics
• Extensions of the Basic Model
• Macroeconomic Policy in an Open Economy
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
162
Unit 4: Macroeconomic Theory and African Eco-
nomies:
• The Applicability of ‘Conventional’ Theories to
African Economics.
• Current Macroeconomic Policy Issues in Africa
Unit 5: Behavioural Foundations
• Consumption and Saving
• Investment Supply and Money Demand
• Money Supply and Money Demand
• Government Debt
• The Labor Market
Unit 6 Macroeconomic Dynamics
• Economic Growth and Technical Progress
o Basic Solow Model
o Augmented Solow Model
o New Growth Theories
Unit 7 Recent Issues in Macroeconomic Policy
Debate:
• Rational Expectations, Micro foundations. Time
inconsistency and the Lucas Critique
• Real Business Cycles
• Inflation and Expectations
Reading List
Textbooks
Heijdra B.J. (2002). Foundations of Modern Macroe-
conomics. Oxford: Oxford University Press.
Romer, D. Advanced Macroeconomics, 4th edition.
London: McGraw-Hill.
Taylor, L. (1981). “IS/LM in the tropics: Diagrammatic
of the New Structuralist Macro Critique.” In Econo-
mic Stabilization in Developing Countries, edited by
W.R Cline. and S. Weintraub. Washington D.C.: The
Brookings Institute.
Taylor, L. (1983). Structuralist Macroeconomics: Ap-
plicable Models for the Third World. New York: Basic
Books.
Recommended Reading
Acemoglu, D. (2009). Introduction to Modern Econo-
mic Growth. Princeton: Princeton University Press.
Bagliano, C. and G. Bertola. (2004). Models for Dy-
namic Macroeconomics. Oxford: Oxford University
Press.
Blanchard, O.J. and S. Fischer. (1989). Lectures on
Macroeconomics. Cambridge: MIT Press.
Branson, W. (1989). Macroeconomic Theory and
Practice, 3rd edition. New York: Harper & Row.
Carlin, W. and D. Soskice. (2006). Macroeconomics:
Imperfections, Institutions and Policies. Oxford:
Oxford University Press, 2006.
Dornbusch, R. and S. Fischer. (1994). Macroecono-
mics, 2nd edition. New York: McGraw-Hill Internatio-
nal Edition.
Jones, C. (2002). Introduction to Economic Growth,
2nd edition, New York and London: W.W. Norton &
Co.
Ljungqvist, L. and T. D. Sargent. Recursive Macroe-
conomic Theory, 3rd edition. Cambridge: MIT Press.
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
McCandless, G. (2008). The ABCs of RBCs: An
Introduction to Dynamic Macroeconomic Models.
Cambridge: Harvard University Press.
Pentecost, E. J. (2000). Macroeconomics: An Open
Economy Approach, Macmillan Press Ltd.
Pilbeam, K. (1990). International Finance, 2nd edi-
tion. London: Macmillan.
Porter, R. and S. Ranney. (1982). “An Eclectic Mo-
del of Recent LDC Macroeconomic Policy Analysis”.
World Development, 10:9, 751-765.
Scarth, W.M. (2007). Macroeconomics: An Intro-
duction to Advanced Methods, 3rd edition. London:
Thomson Publishing.
Trap, F. (1993). Stabilization and Structural Adjust-
ment: Macroeconomic Frameworks for analyzing the
crisis in Sub-Saharan Africa. London: Routledge.
Whitta-Jacobsen, H.J. and P.B.Sorensen (2005). In-
troducing Advanced Macroeconomics: Growth and
Business Cycles. New York: McGraw-Hill.
Wickens, M., (2008). Macroeconomic Theory: A
Dynamic General Equilibrium Approach. Princeton:
Princeton University Press.
163
1. Statistical Methods for • Poisson
Econometrics Course Outline • Gamma
Course Name: Statistical Methods for • Gaussian
Econometrics
Course Type: Core Bridging Course • student-t
Course Duration: 1-2 months
• F
Course Description
• Normal
This is an intensive statistics review class for doctoral
students in economics and business. The primary goal Unit 5: Moment generating functions and
of the class is to provide students with the knowledge characteristic functions
and skills necessary to successfully complete the first
year of econometrics. This course is a bridging statis- Unit 6: The Concept of Convergence in
tics review class. It is designed to introduce students probability,
to topics in statistics and econometrics— for exa-
mple, linear algebra, probability theory, properties of • Convergence in probability
maximum likelihood estimators—that they are unlikely
to have studied in undergraduate or Master’s level sta- • Convergence in distribution
tistics courses.
Unit 7: Estimation and estimators
Course Objective
Unit 8: The Law of Large Numbers

This is a bridging course in advanced statistical me- • Weak law of large numbers
thods for econometrics. The course aims to equip
students with the basic procedures of statistical me- • Strong law of large numbers
thods for econometrics, including an introduction to
the theory of probability, distributions, and density • Central Limit Theorem (CLT)
functions. The course also aims to enhance students
knowledge on topics of moment generating functions, Unit 9: Maximum likelihood estimation
the concept of convergence, various estimation tech-
niques and their properties, and that of central limit. • Properties of the maximum likelihood estimator

Course Content Unit 10: (Time permitting) Other concepts and

definitions traditionally taught in the first year of
Unit 1 Basic probability theory study, including a brief overview of topics such
as white noise, stationary, and heteroscedasti-
• definitions and concepts city

Unit 2 Conditional probability Reading List

• Bayes’ Theorem Textbooks

• Marginal probabilities Chiang, A. (1992). Elements of Dynamic Optimization.

Unit 3 Distributions
• cumulative distributions and densities
• multivariate densities and distributions
Unit 4 Useful densities and probability functions:
• Binomial
New York: McGraw-Hill.
de la Fuente, A. (2000). Mathematical Methods and
Models for Economists. New York: Cambridge Univer-
sity Press.
Hogg, V. R., J.W. McKean and A.T. Craig. (1994). In-
troduction to Mathematical Statistics. London: Pren-
tice Hall.

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164
Recommended Reading
Casella G. and R.L. Berger. (2001). Statistical Infe-
rence. London: Duxbury Press.
Greene, W.H. (1999). Econometric Analysis. London:
Prentice Hall.
Hayashi, F. (2000). Econometrics. Princeton: Prince-
ton University Press.
Kolmogorov, A.N., and S.V. Fomin. (1970). Introducto-
ry Real Analysis. New York: Dover.
Rodin, W. Principles of Mathematical Analysis. New
York: McGraw-Hill.
Simon, C.P and L. Blume. (1994). Mathematics for
Economists. New York: W.W. Norton and Co.

BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA

165
2. Advanced Econometrics I & II • Sources of endogeneity:
Course Outline o omitted variables,
Course Name: Advanced Econometrics I o simultaneity,
& II
Course Type: Core Bridging Course o measurement error.
Credit Hour: 2-3 months
• The linear IV estimator and its statistical properties
Course Description
• Weak instruments and invalid exclusion
restrictions
This course is an advanced course in econometrics
that is intended to provide a preview of the techni- • Properties and diagnostic tests with constant
cal rigors involved in graduate studies. As such, this effects
course will expose the participants to the use of ap-
plied econometrics in solving economic problems. • Essential heterogeneity
The course will explore advanced techniques used
to study both micro-econometric and macro- econo- • Notions of average causal effects
metric problems, whilst consolidating the theoretical
techniques needed for graduate work. • Specification tests for IV models

Course Objective Unit 3 Nonlinear models for limited dependent

variables
This is a bridging course in advanced econometrics.
The course is designed to cover the basic proce- • Binary regression:
dures of econometrics, including an introduction to
advanced time series analysis. This material will be o linear probability,
extensively covered in the following courses of the
econometric sequence. The approach of the course o probity,
is to introduce econometric methods and discuss es-
timation procedures. The course also prepares stu- o Logit.
dents for the two follow-up courses Macro-econome-
tric and Time Series Econometrics. The first part of • Marginal effects.
the course deals with the statistical underpinnings of
econometrics; it is more theoretically oriented. The se- • Multiple Response Models
cond part is devoted to issues of micro-econometrics.
The final part provides an introduction to Time Series o Multinomial logit
models and procedures and that of macro level panel
data models. o Multinomial probit

Course Content • Ordered response model

Part I: o O-Probit

Unit 1: Introduction o O-Logit

• Linear regression: method of moments and small • Computational issues and ML estimation.
sample properties
• Censored regression and regression with selec-
• Linear regression: inference ted samples.

• Asymptotic theory • Hands on practical exercise Using STATA/

EVIEWS
• Maximum likelihood estimation
Unit 4: Micro Panel Data Models
Part II:
• Random Effect and Fixed Effect Models
Unit 2: Instrumental variables.
• Hands on practical exercise Using STATA/
EVIEWS

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Part III:
Unit 5: Time Series Properties of Macro
Variables: Testing for Unit Roots
• Introduction
• Theoretical time series issues
o Hands on EViews: The Engle-Granger (EG)
two-step approach
• Some relevant mathematical concepts: matrices
and eigen values
o Points on matrix algebra for cointegration
analysis

o Covariance and difference stationarity • Johansen’s multivariate approach: identification

of the beta-coefficient
o Hands on Eviews: exposition of some time
series characteristics • Restriction tests

• Using Monte Carlo simulation o An introduction to VAR

• Unit root tests o VAR, CI, and ECM

o The Dickey Fuller Test o A numerical illustration of the VAR and

ECM model formulation
• Problems with unit root testing
• Hands on EViews: Application of the Johansen
o Unit roots and structural breaks Cointegration

Unit 6: Cointegration Analysis o Estimation of reduced-form VAR and test

for cointegration
• Introduction to Cointegration (CI) and Error Cor-
rection Models (ECM) o Identification of coefficients

• The Engel-Granger (EG) two-step approach o Testing for weak exogeneity

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• Hands on EViews: the nice case of one cointe-
gration vector
• Hands on EViews: handling two co-integrating
vectors
o Estimating the VAR
o Testing for cointegration
o Modelling the short run dynamics: The
Vector Error Correction model
Unit 7: An Introduction to Macro Panel Unit Roots
and Cointegration
• Introduction
• Panel Unit Root Tests
o Tests with common unit root process
o Tests with individual unit root process
o Hands on EViews: panel unit root tests
o Testing for cointegration in panel data
o Single equation-based tests
o Multiple Equation (Multivariate) Based Tests
o Estimation and inferences in panel cointe-
gration models
• Hands on EViews:
o Panel Cointegration Tests
Reading List
Textbooks
Cameron, A.C. and P.K. Trivedi. (2005). Macroecono-
metrics: Methods and Applications. New York: Cam-
bridge University Press
BENCHMARK MACROECONOMIC MODELS FOR EFFECTIVE POLICY MANAGEMENT IN AFRICA
168
Geda, A., N. Nduung’u, and D. Zerfu. (2012). Ap-
plied Time Series Econometrics: A Practical Guide for
Macroeconomic Researchers with a Focus on Africa,
Nairobi: University of Nairobi Press.
Hamilton, J. (1994). Time Series Analysis. Princeton:
Princeton University Press.
Enders, W. (2003). Applied Econometric Time Series.
New York: Wiley.
Wooldridge, J M. (2002). Econometric Analysis of
Cross Section and Panel Data. Cambridge: MIT Press.
Recommended Reading
Angrist, J. and J. S. Pischke. (2009). Mostly Harmless
Econometrics: An Empiricist’s Companion. Princeton:
Princeton University Press.
Canova, F. (2005). Methods for Applied Macroecono-
mic Research. Princeton: Princeton University Press
(selected chapters).
Goldberger, A. S. (1991). A Course in Econometrics.
Cambridge: Harvard University Press.
Harvey, Andrew C. (1993). Time Series Models, 2nd
edition. Cambridge, Mass.: MIT Press.
Kennedy, P. (2008). A Guide to Econometrics, 6th edi-
tion. New York: Wiley.
Lutkepohl, H. and M. Kratzig. (2004). Applied Time
Series Econometrics. Cambridge: Cambridge
University Press.
Stock, J. H. and M. W. Watson (2010). Introduction to
Econometrics, 3rd edition. Boston: Addison Wesley.
Wooldridge, J. (2009). Introductory Econometrics: A
Modern Approach, 4th edition. Boston: South-Wes-
tern College Publishing .
3. Advanced Mathematical • Distance between vectors
Economics Course Outline • Vector spaces (Euclidean Spaces)
and subspaces
Course Name: Advanced Mathematical
Economics • Hyperplanes
Course Type: Bridging Course
Course Duration: 2-3 months • Budget sets and simplexes

Course Description • Linear combinations and spanning sets

This course is an advanced course in mathematical • Linearly independent sets

economics that is intended to provide a preview of the
technical rigors involved in graduate studies. As such, • Basis and dimension
this course will expose the participants to the use of
applied mathematics in solving economic problems. • Eigenvalues and Eigenvectors
The course will explore advanced techniques used to
study both microeconomic and macroeconomic pro- Unit 4 Multivariate Calculus
blems, whilst securing the mathematical techniques
needed for graduate work. Topics include:

Course Objective • Differentiation at a point

This course aims at using mathematics extensively. In • Partial differentiation

particular, participants should be able to algebraically
manipulate and solve equations. If participants have • Gradients and directional derivatives
not taken prior courses in calculus, they will find it
beneficial to review calculus concepts such as partial • Derivative matrix (Jacobean)
and total derivatives.
• Differentiation and continuity
Course Outline
• Chain rule
Unit 1: Introduction
• Higher order derivatives
• Introduction: Notation and basic set theory;
functions. • Young’s theorem.

Unit 2: Linear Algebra • Hessian matrix

Topics include: • Implicit differentiation

• Systems of equations and matrices; Gauss-Jor- • The implicit function theorem

dan Elimination; matrix algebra; formal definition
of a matrix. Unit 5 Optimization

• Symmetric Matrices. Row space, column space Topics include:

and null space; rank and nullity; fundamen-
tal theorem of linear algebra; determinants; • Quadratic forms; definiteness of quadratic forms
Cramer’s Rule.
• Local vs. absolute maximum
• Definiteness of a matrix
• Unconstrained maximum
Unit 3 Euclidean Spaces
• Constrained local maximum
Topics include:
• Kuhn-Tucker optimization
• Vectors
• Convexity and concavity
• Inner product
• Concavity and optimization

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169
• Quasi-concavity and quasiconvexity • Boundary conditions

• The Envelope Theorem • Transversality condition

• The Envelope Theorem with constrained optimi- • Phase diagrams

zation
• Introduction to optimal control theory
Unit 6 Difference and Differential Equations
• Maximum principle
Topics include:
• State variables, controls, and laws of motion
• Introduction to differential equations and boun-
dary value problems • Hamiltonian functions

• Higher order differential equations Unit 8: Real Analysis (Time Permitting)

• Lag and difference operators Topics in Real Analysis include:

• Linear first-order difference equations • Ordered sets

• Boundary conditions • Upper and lower bounds

• ARMA representations • Supremum and infimum

Unit 7 Dynamic Optimization • Metrics and distance functions

Topics include: • Neighborhoods, interior, and limit points

• Calculus of variations • Open and closed sets

• Euler equations • Bounded sets

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170
• Interior and closure of a set Recommended Reading

• Compact and connected sets Anton, H., C. Rorres, and A. Kaul. (2019). Elementary
Linear Algebra, New York: Wiley.
• Sequences, subsequences
Klein, M. (2001). Mathematical Methods for Econo-
• Cauchy sequences mics, 2nd edition. London: Pearson.

• Series, geometric series Rudin, W. (1976). Principles of Mathematical Analysis.

Reading List
Chiang, A. and K. Wainwright. (2005). Fundamental
Methods of Mathematical Economics, 4th edition.
New York: McGraw Hill.
New York: McGraw Hill.
Simon, C.P and L. Blume. (1994). Mathematics for
Economists. New York: W.W. Norton and Co.
Sundaram R.K. (1996). A First Course in Optimization
Theory. New York: Cambridge University Press.

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171