## tarea2026055 ## Source details **Canonical URL:** [tarea2026055](https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026055.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2026/english/tarea2026055.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2026/english/tarea2026055.pdf.json) --- ### Preface — Project purpose, scope, and implementation - Purpose: Strengthen the Central Bank of Iraq’s (CBI) capacity for forecasting and policy analysis through development and customization of the Macroeconomics Foundations Tool (MFT), an Excel-based macroeconomic forecasting tool. - Scope: Address Iraq-specific challenges including dependence on the oil sector, customization of fiscal and monetary policy frameworks, and extension with short-term and nowcasting capabilities. - Implementation elements: - Close collaboration between CBI staff and ICD TA team to refine technical skills and establish structured methodologies for using the MFT. - Customization prioritized integration of an oil sector model and auxiliary models to leverage monthly and quarterly data via an interpolation technique combining higher-frequency data with annual values for forecast revisions. - Core team practiced a structured forecasting procedure: data collection, equation assessment, baseline forecast preparation, and result discussion. - Institutional acknowledgements: CBI appreciation for IMF (ICD) support on technical MFT details and METAC for TA support. - Intended use: MFT expected to enhance forecasting accuracy, allow exploration of alternative scenarios, and support policy decision-making at the CBI. ### Executive summary — chronology, capacity building, operationalization - Chronology: - Collaboration initiated in 2022 between the CBI and ICD TA team to develop an annual Excel-based MFT producing integrated multi-year macroeconomic forecasts. - Capacity-building and data work: - Intensive training on MFT features and complementary IMF online courses. - Core team gathered data required for customization and collaborated with TA to tailor the tool to Iraq’s economic features and CBI needs. - Customization priorities and methodological extensions: - Integration of an oil sector model and auxiliary models to incorporate monthly and quarterly data. - Implementation of an interpolation technique combining higher-frequency data with annual values for forecast revisions. - Operationalization and outputs: - Core team practiced MFT use and developed alternative scenarios to inform policy choices. - Recommendations for policy use: - Continue forecasting practice and present baseline and shock scenarios to CBI management. - Explore integration with existing CBI forecasting/policy systems. - Enhance cooperation with the ministry of finance for budgetary and medium-term financial data. ### Recommendations (as presented) - III.B Follow-up to work with the Central Statistics Organization (CSO) on retrieving the national accounts expenditure components in fixed prices — 2025 - IV Cooperate with the ministry of finance on getting the budget next and medium-term year plans for baseline development — current-2025 - IV Ensure projections prepared with MFT are placed into decision-making process — 2025 ### 1 Background — macro-fiscal context, vulnerabilities, and policy adjustments - Macro-fiscal context and vulnerabilities: - Post-October 2022: greater domestic stability; approval of first three-year budget and significant fiscal expansion beginning in 2023. - Non-oil sector recovered in 2023 after slowdown in 2022. - Economy remains vulnerable to oil price fluctuations; private sector constrained by state dominance, employment, corruption, bureaucracy, poor infrastructure, and limited credit access. - Short-term growth supported by fiscal expansion; medium-term risks of sovereign debt and external instability may rise without policy adjustments. - Fiscal position and recommended adjustments: - Public debt: "about 44 percent of GDP in 2023". - Recommended adjustments: reduce large public wage bill, increase non-oil revenue, improve public financial management, limit use of funds outside the budget, adhere to framework for government guarantees. - Monetary and financial sector constraints: - Fixed exchange rate (conventional peg) limits monetary policy maneuver. - Policy interest rate raised from "4 to 7.5 percent in June 2023"; pass-through hampered by excess liquidity, government deposits, and lack of market development. - Reserve requirement raised from "15 to 18 percent"; introduced a 14-day CBI bill facility. - Need to enhance fiscal-monetary coordination, manage surplus liquidity, improve monetary policy transmission, modernize financial sector, and restructure largest state-owned banks. ### 2 Initiation of the TA project — scoping, gaps, and training - Scoping and needs assessment: - CBI requested TA end of 2021; scoping mission in June 2022 with meetings including MoF, CSO, and MoO; questionnaire to assess skills, data frameworks, tools. - Core team drawn from CBI’s Statistics and Research department with varied backgrounds and limited exposure to structural/semi-structural forecasting. - Identified gaps and recommended approach: - Prior CBI forecasting used simple regressions, univariate autoregressive models for inflation, occasional VARs — insufficient for policy analysis. - Lack of national accounts data (expenditure components in fixed prices) and incomplete oil sector data identified as constraints. - ICD recommended implementing MFT as a simple, customizable framework to be developed in-house and expanded for the oil sector. - Training and collaboration: - Core team assigned IMF online courses: Financial Programming and Policies; Macroeconomic Diagnostics and Macroeconomic Management in Resource-rich Countries. - Action plan axes: (i) develop and operationalize Excel macro-projections tool with sectoral consistency; (ii) construct baseline projection focusing on detailed FX reserves analysis; (iii) analyze alternative macro policies and shocks. - Four daily training sessions in August 2022 covering FPP recap and MFT introduction. - MCD Iraq team supported richer representation of oil production/export and detailed fiscal decomposition. - CBI applied scenarios in MFT including oil shocks, exchange-rate shocks, and balance of payments deficits. ### 3 MFT features and customization — core design, institutional benefits, structure, and simulations - A. MFT core features and design: - Excel-based integrated macroeconomic framework generating multi-year macro forecasts using input assumptions, behavioral equations, and accounting identities. - Original template: six main sheets forecasting real, fiscal, external, and monetary sectors. - Key attributes: simplicity, flexibility, consistency, minimal data requirements, straightforward calibration, integrated cross-sector interlinkages, consistency checks, and financing considerations. - Solved iteratively using Excel’s goal seek to produce a consistent baseline scenario. - B. Institutional and operational benefits: - Facilitates coordination, collaboration, and policy dialogue across government macroeconomic policy bodies. - Outputs can be integrated into official decision-making processes and policy documents. - C. Basic MFT structure (interrelated sheets): - ‘Source Data’ and ‘Auto Data’: historical raw data and key projection assumptions. - ‘GDP & Prices’: expenditure and production approaches; potential output, output gap, disposable income, inflation, GDP deflator, interest rates, and exchange rates. - ‘Deficits & Financing’: nominal macro variables, savings-investment gaps, indicators such as international reserves in months of imports. - ‘Policies’: fiscal sector projections (revenue/expenditure), overall fiscal deficit and financing sources, public debt stocks, cyclical primary balance, monetary policy rule, exchange rate assumptions. - ‘SEI’ output: summarizes forecast results by sector and enables scenario comparison. - ‘Control panel’: dashboard and macros to create policy scenarios and model shocks. - D. Simulation capabilities: - Supports simulations changing underlying forecast assumptions; examples and full list continue beyond excerpt. ### MFT customization for the CBI — oil and monetary modules, calibration, short-term module - Oil sector integration: - Two options: top-down supply-driven approach and bottom-up demand-driven approach. - Supply-driven approach performed better for Iraq and was prioritized. - Oil module represents oil and natural gas sectors with production, exports, internal consumption, and prices; sums production to obtain real and nominal oil GDP indicator, assuming constant intermediate cost for hydrocarbon sector. - Links: detailed breakdown of state budget revenues links fiscal revenues directly to oil sector; higher oil exports and fiscal revenues affect government spending and investment, feeding into GDP and disposable income. - Monetary sector customization: - Government spending impacts on currency in circulation, narrow money, base money, and broad money modeled. - Foreign exchange reserve assets and their management incorporated. - Central bank survey incorporated into MFT's monetary sector. - Calibration strategy: - Combines partial econometric estimation with adjustments to align with recent periods and theoretical constraints; mirrors a Bayesian framework of priors and data. - Model properties analyzed via simulations and benchmarking against historical episodes. - Short-term forecasting module: - Adds monthly and quarterly data tools to update projections and enhance policy relevance. ### MFT core equations (model structure) — selected equations preserved verbatim - Real sector identities and behavioral equations: - GDP identity (nominal expenditure components): GDP_t = C_t + G_t + I^P_t + I^G_t + X_t − M_t [M0] - Private consumption growth: ∆C_t = γ_c ∆C_{t−1} + a_c ∆Y^d_t + ε^c_t [M1] - Private investment growth: ∆I_t = γ_I (∆Y_t − ∆Y_{t−1}) + a_I ∆Y^*_t + β_I ∆r_t + ε^I_t [M2] - Export growth: ∆X_t = w_oil ∆X^{oil}_t + (1−w_oil)(a_x ∆Y^f_t + β_x ∆z_t) + ε^X_t [M3] - Import growth: ∆M_t = a_M ∆Y_t + β_M ∆z_t + ε^M_t [M4] - Oil export growth: ∆X^{oil}_t = a_{Xoil} ∆Y^f + β_{Xoil} ( (X^{oil} − X^{oil,*}) / X^{oil,*} ) + ε^x_t [M5] - Domestic oil use change: ∆O_t = a_o ∆Y_t [M6] - Output gap via Hodrick-Prescott filter: Ŷ_t = 100∙(Y_t / Y^*_t − 1) [M7] - Prices: - CPI inflation: π_t = γ_p π_{t−1} + (1−γ_p − a_p) π̄_t + a_p Ŷ_t + β_p (∆s_t + π^*_t) + ε^π_t [M8] - Fiscal sector: - Budget revenue items (R_{i,t}), except oil: R_{i,t} = ε_i Y_t [M9] - Oil revenue: R^{oil}_t = ε^{oil} Y^{oil}_t [M9.1] - Budget expenditures (E_{i,t}) as ratio to GDP: E_{i,t} = ε_i Y_t [M10]; remainder exogenous. - External sector and BoP: - Other financial account items: FA_{i,t} = ε_i Y_t [M11] - Monetary policy and sector: - Peg exchange rate regime: s_t = s_{t−1} + ε^s_t [M12] - Identities: - (S^P_t − I^P_t) + (S^G_t − I^G_t) = CAB_t [M13] - ΔFXRES_t = CA_t + FA_t [M14] ### Connecting high- and low-frequency data — interpolation technique and revision rule - Rationale: Annual-only operation requires higher-frequency tools to update projections within a year. - Data sources: CSO, CBI, MoF and MoO produce monthly and quarterly datasets (e.g., quarterly GDP by sector, quarterly oil production). - Forecast revision (interpolation technique): - Without quarterly data, assume quarterly growth equals annual rate: ∆y_{t=1:4}^4 = ∆y_t. - When first quarter value ∆y_{t=1/4,P} is published, update annual forecast as: ∆y_t = 1/4 ∆y_{t=1/4,P} + 3/4 ∆y_{t=1:4}. - Similar technique applies to inflation and other indicators; monthly data can be aggregated to produce quarterly projections. ### Policy analysis and typical scenarios modeled - Core team forecast procedure: - Collect and validate data; check equation performance and modify parameters; prepare baseline assumptions; run Excel iterative calculation and check consistency; prepare forecast presentation and alternative scenarios. - Frequent scenario: oil price shock - Assumption: oil prices decline by 20 percent in the first projection year and then stabilize at that level for the following two years. - Documented impacts: - Reduces value of oil exports and substantially negative impact on balance of payments, shrinking current account surplus and leading to decline in foreign exchange reserves. - Substantial widening of the fiscal deficit and rise in public debt since oil revenues account for most revenues. - Lowers inflation and depresses real GDP growth via lower net exports and lower private consumption due to reduced disposable income. - Figures described (series span 2022–2026): Export oil prices, USD; Real GDP growth, percent; Inflation, percent; Current account balance, percent of GDP; Fiscal balance, percent of GDP (+ is surplus); FX reserves, bil. USD. ### TA challenges, risks, and operationalization priorities - A. Data: - Data limitations impair MFT effectiveness; lack of reliable, regular, and complete source data for GDP by expenditure (including fixed prices). - Recommendation: authorities and CSO should continue working with METAC to improve national accounts and produce GDP by expenditure in fixed prices. - B. Logistics: - In-person missions more effective; due to Iraq’s HRL status, Fund staff could not visit CBI in Iraq; from second mission TA missions organized in-person off-site in Jordan. - Funding constraints limited CBI team size for in-person missions to up to four people; METAC financed travel and accommodation to increase team size up to six people. - C. Team turnover: - July 2023: near-complete turnover of CBI core team temporarily impacted TA action plan — December 2023 mission focused on MFT overview and baseline scenario instead of alternative scenarios. - New core team progressed sufficiently to prepare alternative scenarios at next mission and produced a forecast report including financial, monetary, and real sector variables. - ICD addressing personnel risks by encouraging use of MFT User Manual and adding oil sector customization guidance. - D. Operationalization of the MFT (institutionalization actions): - Maintain forecasting practices and deliver baseline and shock scenario presentations to CBI management. - Investigate integration methods between MFT and existing forecasting/policy analysis systems at CBI. - Engage with Ministry of Finance to secure upcoming budget and medium-term financial plans for realistic baseline forecasts. ### Annex I — selected action plan timeline (selected entries) - Pre-Scoping Meeting: Dec 20, 2021 - Scoping Mission: Jun 3 -10, 2022 - Mission preparation: April – July 2022 - Virtual TA mission: Aug 29 – Sep 2, 2022 - In-person TA mission (organized in Jordan): Nov 27 – Dec 1, 2022 - TA mission April 2023 - TA mission December 2023 - TA mission June 2024 - Final TA mission (virtual): April, 2024 ### ANNEX II — Results framework (selected outcomes, ratings, and milestones) - Objective (MFP): Stronger analytical skills and better macroeconomic forecasting and policy analysis feeds into policymaking. - Outcome: Authorities have a baseline understanding of capabilities and opportunities for improvement. - Annual Assessment Rating: 4 Fully Achieved - Outcome Rating Date: 6/27/2024 - Diagnostic/scoping produced baseline: Baseline Value: none; Target Value: yes; Current Assessment Value: yes as of 6/27/2024 - Objective (MFR): Develop capacity in macroeconomic forecasting and policy analysis to support policy decision making and communications. - Outcome: Improved analytical skills and better macroeconomic forecasting and policy analysis capacity. - Annual Assessment Rating: 3 Largely Achieved - Outcome Rating Date: 6/27/2024 - Indicators and assessments: - Relevant staff demonstrates capability to independently operate the MPT and auxiliary models: - Baseline Value: MPT is not operated by staff - Target Value: MPT is completed by staff, supported by TA, and staff demonstrates absorption of knowledge - Current Assessment Value: Approximately 75% of the desired outcome has been realized as of 6/27/2024 - Relevant staff have built required skills for forecasting and policy analysis (survey-based): - Baseline Value: Staff doesn’t have experience with model-based forecasting - Target Value: Staff has complete understanding and uses model to prepare policy recommendations - Current Assessment Value: Around 50% of the outcome was achieved as of 6/27/2024 - Milestones (selected): - Staff understands model theory and interprets behavior: - Target Completion Date: 1/31/2023 - Milestone Actual Completion Date: 11/24/2023 - Milestone Rating: 4 Fully Achieved as of 6/26/2024 - CBI staff prepares pre-production customized MFT including oil sector: - Target Completion Date: 12/29/2023 - Milestone Actual Completion Date: 11/24/2023 - Milestone Rating: 4 Fully Achieved as of 6/26/2024 - CBI staff develops production version of MFT and applies it for baseline forecast development: - Target Completion Date: 3/15/2024 - Milestone Actual Completion Date: 6/14/2024 - Milestone Rating: 4 Fully Achieved as of 6/26/2024 - CBI staff operates MFT to produce regular baseline forecasts and scenarios for FX reserves and uses it in CBI policy-making: - Target Completion Date: 12/31/2024 - Milestone Rating: 2 Partially Achieved as of 6/26/2024 - CBI staff produces regular macroeconomic forecast report based on MFT: - Target Completion Date: 3/31/2025 - Milestone Rating: 1 Not Achieved as of 6/26/2024 *IMF Technical Assistance Report | tarea2026055 — Preface, Executive Summary, Recommendations, Background, Initiation, MFT features and customization (sections A–C), MFT equations, data linkage, scenarios, challenges, Annex I action plan, and ANNEX II results framework as provided in the source content.* ### Preface ................................................................................................................ ### Preface ### Project purpose and scope - Strengthen the Central Bank of Iraq’s (CBI) capacity for forecasting and policy analysis through development and customization of the Macroeconomics Foundations Tool (MFT), an Excel-based macroeconomic forecasting tool. - Address Iraq-specific challenges: dependence on the oil sector, customization of fiscal and monetary policy frameworks, and extending frameworks with short-term and nowcasting capabilities. - TA adhered to established ICD practices and included scoping missions, intensive training sessions, continuous collaboration, and in-house capacity building. ### Key implementation elements - Close collaboration between CBI staff and ICD TA team to refine technical skills and establish structured methodologies for using the MFT. - Customization prioritized integration of an oil sector model and auxiliary models to leverage monthly and quarterly data via an interpolation technique combining higher-frequency data with annual values for forecast revisions. - Core team practiced a structured forecasting procedure: data collection, equation assessment, baseline forecast preparation, and result discussion. - The project culminates in a final report documenting development and implementation, technical/professional growth of the CBI team, and achieved outputs. ### Institutional acknowledgements - CBI appreciation expressed for IMF (ICD) support on technical MFT details and METAC for TA support. ### Intended use and expectations - MFT expected to enhance forecasting accuracy, allow exploration of alternative scenarios, and support policy decision-making at the CBI to navigate Iraq’s economic challenges. --- ### Executive Summary ### Project chronology and organization - Collaboration initiated in 2022 between the CBI and ICD TA team to develop an annual Excel-based MFT producing integrated multi-year macroeconomic forecasts. - Action plan summarized in Annex I. ### Capacity-building and data work - Intensive training on MFT features and complementary self-education using IMF online courses. - Core team gathered data required for customization and collaborated with TA to tailor the tool to Iraq’s economic features and CBI needs. ### Customization priorities and methodological extensions - Integration of an oil sector model due to oil’s significance for Iraq’s economy. - Expansion with auxiliary models to incorporate monthly and quarterly data to improve forecast accuracy and to capture recent developments. - Implementation of an interpolation technique combining higher-frequency data with annual values for forecast revisions. ### Operationalization and outputs - Core team practiced MFT use and developed alternative scenarios to enhance forecasting capability and inform policy choices. - Team mastered documenting and presenting forecasts. - For policy use, recommendations include continuing forecasting practice, presenting baseline and shock scenarios to CBI management, exploring integration with existing CBI forecasting/policy systems, and enhancing cooperation with the ministry of finance for budgetary and medium-term financial data. - Progress and results presented in Annex II. --- ### Recommendations (as presented) - III.B Follow-up to work with the Central Statistics Organization (CSO) on retrieving the national accounts expenditure components in fixed prices — 2025 - IV Cooperate with the ministry of finance on getting the budget next and medium-term year plans for baseline development — current-2025 - IV Ensure projections prepared with MFT are placed into decision-making process — 2025 --- ### 1 Background ### Macro-fiscal context and vulnerabilities - Post-October 2022: greater domestic stability; approval of first three-year budget and significant fiscal expansion beginning in 2023. - Non-oil sector recovered in 2023 after slowdown in 2022; resilience noted despite regional conflicts. - Economy remains vulnerable to oil price fluctuations; private sector constrained by state dominance, employment, corruption, bureaucracy, poor infrastructure, and limited credit access. - Short-term growth supported by fiscal expansion; without policy adjustments, medium-term risks of sovereign debt and external instability may rise due to oil price volatility or intensified regional conflicts. ### Fiscal position and recommended adjustments - Public debt: "about 44 percent of GDP in 2023" and projected to rise steeply absent fiscal adjustment. - Recommendations: reduce large public wage bill, increase non-oil revenue, improve public financial management, limit use of funds outside the budget, adhere to framework for government guarantees. ### Monetary and financial sector constraints - Fixed exchange rate (conventional peg) limits monetary policy maneuver. - Policy interest rate raised from "4 to 7.5 percent in June 2023"; pass-through hampered by excess liquidity, government deposits, and lack of market development. - Reserve requirement raised from "15 to 18 percent"; introduced a 14-day CBI bill facility. - Need to enhance fiscal-monetary coordination, manage surplus liquidity, improve monetary policy transmission, modernize financial sector to support correspondent banking relationships, and restructure largest state-owned banks. --- ### 2 Initiation of the technical assistance project ### Scoping and needs assessment - CBI requested TA end of 2021 to build macroeconomic forecasting capacity. - Scoping mission in June 2022 assessed needs and capacities via meetings with CBI, Ministry of Finance (MoF), Central Statistics Organization (CSO), and Ministry of Oil (MoO); a questionnaire was prepared to assess skills, data frameworks, and tools. - Core team primarily from CBI’s Statistics and Research department; varied educational and experience backgrounds with limited exposure to structural or semi-structural system-of-equations forecasting. ### Identified gaps and recommended approach - Existing CBI forecasting relied mostly on simple regressions and univariate autoregressive models for inflation; occasional VARs used to assess shocks—approaches insufficient for policy analysis due to limited accounting for interrelations among macro variables. - Lack of national accounts data, particularly expenditure components in fixed prices, and incomplete oil sector data were identified as constraints. - ICD recommended implementing MFT to provide a simple, customizable framework that can be gradually developed in-house, expanded to include the oil sector, and help develop analytical capacity. ### Training and collaboration - Core team assigned IMF online courses: Financial Programming and Policies; Macroeconomic Diagnostics and Macroeconomic Management in Resource-rich Countries. - Action plan axes: (i) develop and operationalize Excel macro-projections tool with sectoral consistency; (ii) construct baseline projection focusing on detailed FX reserves analysis; (iii) analyze alternative macro policies and shocks. - Four daily training sessions conducted in August 2022 covering Financial Programming and Policies recap and MFT introduction (spreadsheets, notations, data inputs, accounting identities, behavioral equations, control panel, estimation/calibration, model construction, and forecasting approaches). - CBI presented impacts of balance of payments on monetary policy, currency selling window operations, currency demand types (cash vs. import), and implications for exchange rate and inflation. ### Inputs from MCD and scenario analysis - MCD Iraq team supported richer representation of oil production and export and detailed fiscal decomposition; emphasized tool’s usefulness in IMF-policy discussions. - CBI applied scenarios in MFT including oil shocks, exchange-rate shocks, and balance of payments deficits to assess impacts. --- ### 3 MFT features and customization ### A. MFT core features and design - MFT is an Excel-based integrated macroeconomic framework generating multi-year macro forecasts using input assumptions, core behavioral equations, and economic identities to ensure consistency. - Original MFT template consists of six main sheets forecasting real, fiscal, external, and monetary sectors. - Key attributes: simplicity, flexibility, consistency, minimal data requirements, straightforward calibration, expert judgment allowance, integrated cross-sector interlinkages, consistency checks, and financing considerations. - System of equations includes behavioral equations, simple ratios, and identities; solved iteratively using Excel’s goal seek to produce a consistent baseline scenario. ### B. Institutional and operational benefits - Facilitates coordination, collaboration, and policy dialogue across government macroeconomic policy bodies. - Outputs can be integrated into official decision-making processes and policy documents. ### C. Basic MFT structure (interrelated sheets) - ‘Source Data’ and ‘Auto Data’: input historical raw data and key projection assumptions. - ‘GDP & Prices’: projects real GDP via expenditure approach (behavioral equations for real private consumption and investment, real exports and imports, plus real public consumption and investment) and production approach (real output by sector); projects potential output, output gap, disposable income, and key price variables including inflation, GDP deflator and subcomponents (export/import deflators), interest rates, and exchange rates. - ‘Deficits & Financing’: projects nominal macro variables of GDP, balance of payments, disposable income, monetary survey; computes savings-investment gaps (public and private) and indicators such as international reserves in months of imports. - ‘Policies’: projects fiscal sector nominally (revenue and expenditure items), overall fiscal deficit and financing sources (below the line), public debt stocks and debt service, analytical indicators (e.g., cyclical primary balance); projects monetary policy rule (e.g., policy rate, Taylor rule) and exchange rate assumptions. - ‘SEI’ output sheet: summarizes forecast results by sector and enables scenario comparison. - ‘Control panel’ sheet: dashboard and macros to create policy scenarios and model shocks. ### D. Simulation capabilities - Once baseline is complete, MFT supports simulations including changes in underlying forecast assumptions (full list of simulation types continues beyond provided excerpt). --- *IMF Technical Assistance Report | Preface, Executive Summary, Recommendations, Background, Initiation, MFT features and customization (sections A–C) as provided in the source content.* ### introduction of specific shocks to the forecast; and (iii) other policy measure changes, ### tarea2026055 - introduction of specific shocks to the forecast; and (iii) other policy measure changes, ### MFT customization for the CBI - Oil sector added to the Macroeconomic Foundations Tool (MFT) with two options: - Top-down supply-driven approach: builds sectoral forecast using government plans for oil production and projections for global oil prices that match best with Iraq’s historical average oil price; allows adjusting production in line with OPEC decisions. - Bottom-up demand-driven approach: uses exogenous projections for external demand and domestic consumption to generate aggregate demand for oil and gas products. - Supply-driven approach performed better given Iraq’s strategy to increase oil production steadily and explore alternative markets. - Oil sector module features: - Represents oil and natural gas sectors with data on production (supply), exports, and internal consumption (demand), plus oil and gas prices. - Sums production to obtain a real and nominal oil GDP indicator (including natural gas), assuming constant intermediate cost for hydrocarbon sector. - Linkages introduced between the oil sector and real, external, and fiscal sectors: - Detailed breakdown of state budget revenues provides direct link of fiscal revenues to the oil sector. - Higher oil exports and fiscal revenues affect current government spending (including transfers) and investment, which feed into GDP and disposable income. - CBI team emphasized the importance of oil prices for government revenues and the role of oil production determined by OPEC on financial and monetary policies. - Monetary sector customization: - Introduced discussion of government spending impacts on currency in circulation, narrow money, base money, and broad money. - Foreign exchange reserve assets and their management incorporated to reflect currency value preservation and inflation stabilization. - Central bank survey incorporated into MFT's monetary sector. - Calibration strategy due to short time series and structural transformations: - Strategy partially incorporates econometric estimation results while adjusting them to align with recent periods and theoretical constraints. - Approach mirrors Bayesian framework where prior beliefs and empirical data converge. - Model properties analyzed via simulations and benchmarking against historical episodes (example: demand-driven oil shock with simultaneous declines in oil prices and production). - Short-term forecasting module added: - Complements annual macro projections with monthly and quarterly data tools for updating projections. - Enhances forecast value for policymakers and helps understand recent economic developments and shocks. ### MFT core equations (model structure) - Real sector: - GDP identity (nominal expenditure components): GDP_t = C_t + G_t + I^P_t + I^G_t + X_t − M_t [M0] - Private consumption growth: ∆C_t = γ_c ∆C_{t−1} + a_c ∆Y^d_t + ε^c_t [M1] - Private investment growth: ∆I_t = γ_I (∆Y_t − ∆Y_{t−1}) + a_I ∆Y^*_t + β_I ∆r_t + ε^I_t [M2] - Export growth: ∆X_t = w_oil ∆X^{oil}_t + (1−w_oil)(a_x ∆Y^f_t + β_x ∆z_t) + ε^X_t [M3] - Import growth: ∆M_t = a_M ∆Y_t + β_M ∆z_t + ε^M_t [M4] - Oil export growth: ∆X^{oil}_t = a_{Xoil} ∆Y^f + β_{Xoil} ( (X^{oil} − X^{oil,*}) / X^{oil,*} ) + ε^x_t [M5] - Domestic oil use change: ∆O_t = a_o ∆Y_t [M6] - Output gap via Hodrick-Prescott filter: Ŷ_t = 100∙(Y_t / Y^*_t − 1) [M7] - Prices: - CPI inflation: π_t = γ_p π_{t−1} + (1−γ_p − a_p) π̄_t + a_p Ŷ_t + β_p (∆s_t + π^*_t) + ε^π_t [M8] - Deflators built using CPI inflation, imported inflation and oil prices with proper weights. - Fiscal sector: - Budget revenue items (R_{i,t}), except oil, modelled as ratio to GDP: R_{i,t} = ε_i Y_t [M9] - Oil revenue linked to nominal oil output: R^{oil}_t = ε^{oil} Y^{oil}_t [M9.1] - Budget expenditures (E_{i,t}) modelled as ratio to GDP: E_{i,t} = ε_i Y_t [M10]; remainder of expenditures exogenous. - External sector and Balance of Payments: - Current account derived from exports and imports; other items by assumptions (judgments). - Government borrowing linked to fiscal sector and shown in financial account (FA). - Other financial account items modeled as random walk or assumptions: FA_{i,t} = ε_i Y_t [M11] - External demand indicators (GDP, inflation, oil prices, interest and exchange rates) are considered exogenous and drawn from external sources (e.g., IMF WEO). - Monetary policy and monetary sector: - Peg exchange rate regime: s_t = s_{t−1} + ε^s_t [M12] - Money supply equals money demand; money demand determined by net foreign assets (NFA) and net domestic assets (NDA). - Claims on government linked to fiscal sector; claims on private sector depend on lag and GDP growth. - Identities: - National account identity reiterated. - Current account balance expressed via public and government savings and investments: (S^P_t − I^P_t) + (S^G_t − I^G_t) = CAB_t [M13] - Change in foreign exchange reserves from BoP identity: ΔFXRES_t = CA_t + FA_t [M14] ### Connecting high- and low-frequency data - Rationale: - Annual-only operation requires complementing with higher-frequency tools to update projections within a year and increase forecast confidence. - Data sources: - CSO, CBI, MoF and MoO produce monthly and quarterly datasets (e.g., quarterly GDP by sector, quarterly oil production) to inform annual forecasts for total GDP and exports. - Forecast revision (interpolation technique): - Without quarterly data, assume quarterly growth equals annual rate: ∆y_{t=1:4}^4 = ∆y_t. - When first quarter value ∆y_{t=1/4,P} is published, update annual forecast as: ∆y_t = 1/4 ∆y_{t=1/4,P} + 3/4 ∆y_{t=1:4}. - Similar technique applies to inflation and other indicators; monthly data can be aggregated to produce quarterly projections. ### Policy analysis and forecasting with MFT - Typical core team procedure: - Collect and validate data. - Check equation performance, modify equations and parameters as needed. - Prepare and discuss baseline forecast assumptions (use hard values for exogenous variables). - Run forecast calculation via designated Excel iterative procedure and check consistency. - Prepare draft forecast presentation after finalizing forecast. - Prepare alternative scenarios focusing on oil price trajectories, fiscal adjustments, or other major macro shocks. - Frequent scenario modeled: - Oil price shock assumed: oil prices decline by 20 percent in the first projection year and then stabilize at that level for the following two years. - Impacts documented: - Reduces value of oil exports and significantly negative impact on balance of payments, shrinking current account surplus and leading to decline in foreign exchange reserves. - Substantial widening of the fiscal deficit and rise in public debt since oil revenues account for most revenues. - Lowers inflation and depresses real GDP growth via lower net exports and lower private consumption due to reduced disposable income. - Figures described (baseline vs scenario) include series for: - Export oil prices, USD (2022–2026) - Real GDP growth, percent (2022–2026) - Inflation, percent (2022–2026) - Current account balance, percent of GDP (2022–2026) - Fiscal balance, percent of GDP (+ is surplus) (2022–2026) - FX reserves, bil. USD (2022–2026) ### TA challenges and risks - A. Data - Data limitations impair MFT effectiveness; lack of reliable, regular, and complete source data for GDP by expenditure (including fixed prices) weakens national accounts quality. - Recommendation: authorities and CSO should continue working with METAC to improve national accounts and produce GDP by expenditure in fixed prices. - B. Logistics - In-person missions more effective than virtual due to low participant engagement and weak internet connectivity in Iraq. - Due to Iraq’s HRL status, Fund staff could not visit CBI in Iraq; from second mission TA missions organized in-person off-site in Jordan. - Funding constraints limited CBI team size for in-person missions to up to four people; METAC financed additional travel and accommodation to increase team size up to six people. - C. Team turnover - July 2023: near-complete turnover of CBI core team temporarily impacted TA action plan — December 2023 mission focused on MFT overview and baseline scenario instead of alternative scenarios. - By mission end, new core team progressed sufficiently to prepare alternative scenarios at next mission and produced a forecast report including financial, monetary, and real sector variables. - ICD team addressing personnel risks by encouraging use of MFT User Manual and adding a section on customization of MFT to the oil sector in Iraq. - D. Operationalization of the MFT - Institutionalization requires continued use and cooperation with CBI: - Maintain forecasting practices, deliver baseline and shock scenario presentations to CBI management. - Investigate integration methods between MFT and existing forecasting/policy analysis systems at CBI. - Engage with Ministry of Finance to secure upcoming budget and medium-term financial plans for developing realistic baseline forecasts that reflect current data and expectations. ### Annex I — Action plan (selected timeline and objectives) - Pre-Scoping Meeting: Dec 20, 2021 - Consideration of CBI request to provide TA for forecasting FX reserves; brainstorming with Research and Investment Departments, MCD-Iraq team, and Res Rep office. - Scoping Mission: Jun 3 -10, 2022 - Assess current forecasting tools, meet CBI, MoF, MoO, CSO, agree on core group and forward-looking action plan. - Mission preparation: April – July 2022 - Core Group to take the FPP.1X course online and prepare first generic MFT version; ensure input data availability and scenarios function. - Virtual TA mission: Aug 29 – Sep 2, 2022 - Present customized training (1-hour lectures; 2-hour implementation sessions); link data sheets to sources; brainstorm oil sector integration and forex reserves forecasting. - In-person TA mission (organized in Jordan): Nov 27 – Dec 1, 2022 - Introduce oil sector and link to fiscal/BoP; assess model properties for oil price changes; review datasets. - TA mission April 2023 - Prepare baseline forecast: current stance assessment, assumptions, baseline forecast, presentation, and MFT usability assessment. - TA mission December 2023 - Review MFT properties; update data and economic developments analysis; prepare baseline assumptions and simulate scenario; prepare forecast presentation. - TA mission June 2024 - Update baseline; develop alternative scenarios and shocks; incorporate additional monetary data; discuss enhancing tool with monthly/quarterly data. - Final TA mission (virtual): April, 2024 - Take stock of TA milestones and outcomes; develop recommendations for further capacity building; finalize final TA/project report. *IMF Technical Assistance Report | tarea2026055 - introduction of specific shocks to the forecast; and (iii) other policy measure changes,* ### ANNEX II: RESULTS FRAMEWORK ### ANNEX II: RESULTS FRAMEWORK ### Objective: Stronger analytical skills and better macroeconomic forecasting and policy analysis at the Ministry / central bank / or other governmental agency(ies) feeds into the economic policymaking process - MFP - Outcome: Authorities have a baseline understanding of their existing macroeconomic forecasting, policy analysis and analytical capabilities and opportunities for improvement - Annual Assessment Rating: 4 Fully Achieved - Outcome Rating Date: 6/27/2024 Outcome indicators and assessment: - Diagnostic or scoping have produced baseline and opportunities for improvement - Baseline Value: none - Target Value: yes - Current Assessment Value: yes as of 6/27/2024 Milestones: - Milestone Name: N/A - Target Completion Date: (not provided) - Milestone Actual Completion Date: (not provided) - Milestone Rating: (not provided) ### Objective: Develop capacity in macroeconomic forecasting and policy analysis to support policy decision making and communications - MFR - Outcome: Improved analytical skills, and better macroeconomic forecasting and policy analysis capacity - Annual Assessment Rating: 3 Largely Achieved - Outcome Rating Date: 6/27/2024 Outcome indicators, baseline, targets, and current assessments: - Relevant staff demonstrates the capability to independently operate the MPT and other auxiliary analytical models and tools - Baseline Value: MPT is not operated by staff - Target Value: MPT is completed by staff, supported by TA, and staff demonstrates an absorption of knowledge to forecast with the MPT, analyze its results and produce different scenarios - Current Assessment Value: Approximately 75% of the desired outcome has been realized as of 6/27/2024 - Relevant staff have successfully built required skills to strengthen forecasting and policy analysis — to be measured by an increase in average score results in a survey covering a range of macroeconomic issues and forecasting techniques - Baseline Value: Staff doesn’t have experience with forecasting and policy analysis based on a model - Target Value: Staff has complete understanding of how model-based forecast and policy analysis system works and uses it to prepare policy recommendations - Current Assessment Value: Around 50% of the outcome was achieved as of 6/27/2024 Milestones (with dates and ratings): - Staff demonstrates its ability to understand economic theory behind of the model, predict and interpret its behavior - Target Completion Date: 1/31/2023 - Milestone Actual Completion Date: 11/24/2023 - Milestone Rating: 4 Fully Achieved as of 6/26/2024 - Staff demonstrates the successful acquisition of skills in the macroeconomic policy analysis and diagnostic topics covered by the project, during the exercises and presentations they conduct between and during the missions. - Target Completion Date: 4/30/2023 - Milestone Actual Completion Date: (not provided) - Milestone Rating: 3 Largely Achieved as of 6/26/2024 - Staff demonstrates the successful acquisition of skills in forecasting topics covered by the project, during the exercises and presentations they conduct between and during the missions. - Target Completion Date: 8/31/2023 - Milestone Actual Completion Date: (not provided) - Milestone Rating: 3 Largely Achieved as of 6/26/2024 - Staff can successfully go through the forecast development process with the MFT (including modification of equations) - Target Completion Date: 11/24/2023 - Milestone Actual Completion Date: (not provided) - Milestone Rating: 3 Largely Achieved as of 6/26/2024 ### Outcome: Analytical models and forecasting tools are developed and operational - Annual Assessment Rating: 3 Largely Achieved - Outcome Rating Date: 6/27/2024 Outcome indicators, baseline, targets, and current assessments: - Macroeconomic Projection Tool (MPT) is developed in the form of an Excel-based macroeconomic framework for forecasting and policy analysis, respecting accounting relationships - Baseline Value: MFT is not suitable for forecasting or policy analysis purposes - Target Value: MFT is fully developed and used to produce annual macroeconomic forecast with focus on FX reserves projection - Current Assessment Value: the Macroeconomic Foundations Tool (MFT) is now fully developed and has been thoroughly tested. With the inclusion of the new short-term forecasting module, it will significantly improve the process of updating annual forecasts, offering more reliable and dynamic forecasting abilities. as of 6/27/2024 Milestones (with dates and ratings): - The CBI staff prepares pre-production customized version of the MFT which includes oil sector, under ICDMF guidance - Target Completion Date: 12/29/2023 - Milestone Actual Completion Date: 11/24/2023 - Milestone Rating: 4 Fully Achieved as of 6/26/2024 - The CBI staff develops production version of the MFT and applies it for a baseline forecast development - Target Completion Date: 3/15/2024 - Milestone Actual Completion Date: 6/14/2024 - Milestone Rating: 4 Fully Achieved as of 6/26/2024 - The CBI staff operates the MFT to produce regular baseline forecast and scenarios, in particular for FX reserves, and uses it in the CBI policy-making process - Target Completion Date: 12/31/2024 - Milestone Actual Completion Date: (not provided) - Milestone Rating: 2 Partially Achieved as of 6/26/2024 - The CBI staff produces regular macroeconomic forecast report based on the inputs from MFT - Target Completion Date: 3/31/2025 - Milestone Actual Completion Date: (not provided) - Milestone Rating: 1 Not Achieved as of 6/26/2024 *ANNEX II: RESULTS FRAMEWORK (tarea2026055 - ANNEX II: RESULTS FRAMEWORK)* --- _Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026055.pdf_