Two documents, one of gold and one of lead
Monday this week, marking the beginning of the second semester, the Ministry of Finance released its mid-year review of the Macro-economic Framework, the foundational structure upon which all other projections, either fiscal or economic, are based.
This document is a solid piece of work and it shows a certain finesse in the level of refinement that has now become a hallmark of the finance ministry. It reviews the assumptions and consequently the forecasts, that formed the structure of the macro economic framework that was drafted in September October last year, and upon which the Medium Term Expenditure Framework, and the actual budget for this fiscal year, are based.
From the outside, the scope of this work looks very similar to the annual preparations for the IMF Article IV consultations that usually take place in November.
The mid-year review is impressive, not only in its level of technical analysis, but also in the soundness of its underlying assumptions, and in the reliability of its forecasts.
Macro-economic forecasting is always a bit of a faith-based exercise. It draws the bigger picture, and it provides a certain view (and expectation) of the immediate as well as the medium-term future. As such, macro-economic models are notoriously unreliable and they are often undermined by the micro-economic side which simply follows existential realities, regardless of the macro-economic expectations of the policymakers. In a sense, a macro-economic model only assumes a value in hindsight after all the micro-economic elements, upon which it is based, have been gathered and incorporated into the refined or actual picture that gradually emerges as the real figures get built into the framework.
But macro-economic models are an absolute necessity for planning despite their tendency never to turn out exactly as anticipated. These models provide the bench mark against which actual performance must be measured and paced. A macro-economic framework, at the national level, fulfils much the same role as a budget in a large corporation, and very similar to the budget, they must be reviewed and updated.
I am not aware that the finance ministry published mid-year reviews in the past, at least not for public consumption as was the case this week. I am sure some sort of review must have been done in previous years, as it forms the basis to prepare for the Article IV consultations. But in a round about way, the mid-year review affirms first, the reliability of economic planning, and second, the institutional depth developed in those agencies charged with planning and executing our economic direction.
Perhaps most enlightening, are the many adjustments made to the forecasts drawn up late last year. In this sense the mid-year review is very clear and the reason for each and every adjustment is stated. I find this an indication of sound research, availability of reliable statistics, and a responsive finger on the pulse of the broader economy. It is also a very positive sign that the mid-year review explains its assumptions and methodology in broad terms, and that it casts its analytic eye much wider than just the immediate domestic horizon.
There are whole sections on the ministry’s take on international and regional conditions and developments and how these are anticipated to impact our domestic economy. Now, it is often a matter of opinion whether one agrees with their point of view or not, but it is encouraging to note that our economic planning does not take place in isolation. One aspect that impressed me throughout while working through the nitty gritty of the detail, is the considered and balanced way in which those elements over which we have zero control, are discussed and then incorporated to help form a comprehensive and cohesive view of where we as a country stand and how our local economy will be affected by these (ever changing) external elements.
I recommend that every person involved with serious analysis and projections, obtain a copy of the mid-year review from the finance ministry. It is an invaluable document.
As an aside, the ministry also released its quarterly economic overview. Although this document does not contain nearly the same amount of detail, it provides the outsider a type of background view against which the more detailed mid-year review was developed. The quarterly review does, however contain a detailed section on unemployment statistics, where the National Planning Commission, for the first time states in public, the gospel unemployment data, was all bogus. Don’t bother to get a copy of this document, unless you are a student of Statistics and you need a case study of how it must not be done.