Updating the Macroeconometric Model of Malaysia

TOR (Work program proposal – February 14, 2018)

OBJECTIVE

The main objective of this work program activity is to update the Macroeconometric Model of
Malaysia (MMM) and build capacity within the Ministry of Finance (MOF) to fully utilize the
model, and sustain its use over time, in order to support informed policymaking, including via
the preparation of the Economic Report.

PROPOSED WORK PROGRAM

The proposed program will be comprised of the following components:

 Update and review the MMM: Update the MMM for data published up to end-February
2018.
 Implement the model in the MFMod front-end: Port MMM into the MFMod front-end
to improve usability.
 Model transfer and training: The World Bank team will provide three one-week training
sessions aimed at building capacity within the MOF to use the model for forecasting and
policy analysis. The training will also focus on how to update the model for new data.
 Post-handover support: Additional remote support for troubleshooting and guidance as
required after the delivery of the training sessions.

Model review, update and extensions

The World Bank team will update the MMM for data released by the Malaysian Department of
Statistics to end August. This includes updating the model for the 2015 Input-Output table. As
part of the update, the model’s equations will be reviewed for statistical robustness. In
addition, the team would discuss with the MOF any extensions needed to improve the model’s
capabilities. Some potential extensions include the following.

Improving industry-level forecasts

Integrating industry-level forecasts into the core model. E.g. separately identifying the
oil versus non-oil sector. This would allow MOF to better forecast the outlook for the
non-oil sector versus the oil sector. It would also improve the fiscal revenue forecasts
since the tax base for some items are concentrated in the oil sector. In addition, it would
allow MOF to perform analysis at the industry level, such as analyzing the effects of
changes in commodity prices on the economy. Currently, the industry forecasts are
developed by a satellite model using a “top down” approach. Hence the model can
estimate the effects of macroeconomic shocks on various industries but it is not well
suited to estimate the effects of industry-level shocks on the wider economy.

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 Review fiscal detail
The team will review the modelling of key revenue items in the Malaysian Budget, to
ensure that all key revenue lines are captured and modelled appropriately. In particular
the team will review the modelling of sales tax, services tax and the GST following the
implementation of the GST in 2015.

Implement MMM in the MFMod front-end

In this component of the activity, the model will be ported from Excel into the MFMod front
end. The MFMod front end is used internally by the World Bank and other governments for
forecasting and policy analysis. It consists of a user-friendly Excel interface, whilst using Eviews
for estimating and solving the model. The MFMod front end combines the strengths of Excel
(easy to use and familiar to most) with the strengths of Eviews (transparent and flexible
programming of model equations). Moving the MMM from an Excel-based model to the
MFMod front end is likely to improve its usability and longevity. Currently, the MMM is
challenging to update and extend since it involves working simultaneously with many
workbooks.

Model Transfer and Training

In this component, all of the code and data associated with the model will be transferred to the
government. The training of the model will be in stages, due to its inherent complexity and the
need to build local capacity to independently maintain and operate the model in the near
future. As part of this component, at least three one-week workshops will be organized, to
provide intensive hands-on training. These workshops will strengthen the capacity of MOF staff
to work with the model, and will also strengthen a broader policy analysis and debate on key
economic challenges. These workshops are summarized below.

An initial mission with the updated MMM model. The course will begin with the
economics underlying the MMM. Participants will then complete hands-on exercises to
learn how to forecast and conduct policy simulations with the model. At the end of the
training week the World Bank team will receive feedback from the MOF on the model to
refine it.
In addition at the end of the first mission, participants will also be asked to work on two
separate notes. One note summarizing the forecast they developed and a second policy
analysis note. A key skill for participants is to be able to interpret the results from the
model in a way that is accessible to policy makers. These two notes would help
participants build this skill.

The second mission entails working on the refined model as well as starting to work with
the Eviews backend. This includes an introduction to EViews programming. The World
Bank will provide participants with feedback on their notes during the week. At the end
of this second mission participant will be asked to refine their forecasting and policy
notes.

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 The final mission will focus primarily on the Eviews backend and updating the model for
new data. In this workshop, participants will be asked to update the model for new data
released since end-October.

DELIVERABLES AND TIMELINE

The proposed work program activity comprises of the following deliverables:

 Updated model: the initial version of model and accompanying materials will be
delivered to authorities during the first mission, tentatively scheduled for March 2018.
The final version of the model will be delivered during the final mission in July 2018.
 Training and capacity building: The first training is tentatively scheduled for March
2018, the second training in May 2018 and the third training in July 2018.

INPUTS

The activity is estimated to require 26 World Bank staff weeks, with a cost of approximately
US$ 220,000, to be covered under the terms of the partnership agreement between Malaysia
and the World Bank Group (Office Services Agreement).

The task team leader for the assignment will be Dinar Prihardini (Economist), with support from
Andrew Burns (Global Lead for Macroeconomic Modelling), Shakira Binti Teh Sharifudin
(Country Economist) and Richard Record (Lead Economist for Malaysia).

Overall guidance will be provided by Deepak Mishra (Practice Manager for Macroeconomics
and Fiscal Management) and Faris Hadad-Zervos (Country Manager for Malaysia).

Administrative support will be provided by Aziaton Binti Ahmad (Program Assistant).