Supporting Nepal’s macroeconomic forecasting to strengthen policy actions

While it is impossible to predict the future, economic forecasting helps policymakers anticipate future economic conditions.  Answering questions such as how much the economy may grow in the next year, what impact international price changes may have on the economy, and the likely trajectory of public debt are essential components of good fiscal planning. 

At the same time, fiscal planning, forecasting, budgeting, risk management, and reporting are becoming increasingly complex tasks.  Each fiscal year, around the end of May, the federal government of Nepal presents its budget to the legislature for the next fiscal year along with a rolling three-year medium term expenditure framework. Underlying these planning and budget documents is macroeconomic and fiscal forecasting, which is an essential element for developing a sustainable fiscal strategy and ensuring greater predictability of budget allocations. 

To support the government’s forecasting and budgeting efforts, the World Bank in collaboration with the Ministry of Finance provided technical assistance for the development and use of a Nepal Standalone Macro-Fiscal Model.

To support the government’s forecasting and budgeting efforts, the World Bank in collaboration with the Ministry of Finance provided technical assistance for the development and use of a Nepal Standalone Macro-Fiscal Model. Assistance began in January 2021 and included the development of a model designed specifically for the Nepali economy. This was complemented by three separate training events for government officials to enable their independent use of the model.

Made for Nepal

One of the primary functions of World Bank economic teams in countries around the world is the periodic forecasting of major macroeconomic variables and simulating the impact of a wide range of policy changes and shocks to the economy on a country-by-country basis. This is done using the World Bank’s core Macroeconomic and Fiscal Model (MFMod), which consists of individual country models for 181 countries. The Nepal Standalone Macro-Fiscal Model created for the government is an extended version of the MFMod.  

Macroeconomic models, including the Nepal Standalone Macro-Fiscal Model, provide an evidence-based approximation of what might happen under normal circumstances based on historical linkages across sectors of the economy. The world has been anything but normal over the past few years as multiple simultaneous crises including the pandemic and the war in Ukraine are making forecasting much more difficult. While the model cannot predict a pandemic, it does provide policy makers with a tool to help predict how the economy will respond once one hits , and how different policies can smooth the recovery.

Macroeconomic models, including the Nepal Standalone Macro-Fiscal Model, provide an evidence-based approximation of what might happen under normal circumstances based on historical linkages across sectors of the economy.

As an important milestone, an electronic version of the model was delivered by the World Bank to the government of Nepal for its use in October 2022 . The Nepal Standalone Macro-Fiscal Model covers the fiscal accounts of the three tiers of government, the national income accounts, the balance of payments, and the Central Bank’s balance sheet to better reflect the Nepali economy. The model has an easy-to-use front end in Microsoft Excel, with model estimations executed in an EViews backend (EViews is a proprietary econometric software).

The model can be used to create a baseline forecast of all standard macro variables including gross domestic product, consumption, investment, exports, and imports.  The baseline forecast is the most likely outcome based on the continuity of existing policies. The model can be also used to forecast macroeconomic variables under alternative scenarios based on varying sets of assumptions. The highly customised nature of the model can also provide insights for “what if” questions such as the impact of changes in global commodity prices on the Nepali economy. These types of simulations help policymakers design new policies and adjust existing policies as the economy evolves. 

Next Steps

The World Bank’s technical assistance for macroeconomic forecasting is supported by the Nepal Public Financial Management Multi-Donor Trust Fund. As part of the World Bank’s ongoing engagement, future support is envisioned to further strengthen the technical capacity of government officials running the model. Over the next two fiscal years, the Bank will focus on incorporating a climate module in the Nepal Standalone Macro-Fiscal Model.

As part of the World Bank’s ongoing engagement, future support is envisioned to further strengthen the technical capacity of government officials running the model. 

With this module, the government will be able to estimate the macroeconomic and fiscal impacts of climate change and perform simulations to inform strategies to manage the risks associated with climate change. The Bank hopes that this support will help advance Nepal’s transformative shift to a Green, Resilient, and Inclusive Development (GRID) pathway.