Usage of Economic Statistics in Monetary Policy-making in Bank of Uganda By BANK OF UGANDA A Presentation at an International Meeting for Developing a Programme for the Implementation of the 2008 System of National Accounts (SNA 2008) and Supporting Statistics for ECOWAS and COMESA Countries: 9 th – 13 th December 2013 Statistics House – Kampala, UGANDA

2 Content 1.Overview 2.Economics statistics for monetary policy formulation 3.National Accounts and Monetary policy formulation 3.1. National accounts & monetary policy in ITL 3.2. Other Uses of National Accounts Statistics 3.3. Challenges in using National Accounts Data 3.4. Recommendation to Improve NA data 4.Conclusion

3 1. Overview Statistical information is a vital input in decision making by all economic agents: government, central bank, private sector market participants and households. The mission of the Bank of Uganda is to ensure price stability and a sound financial system. One of the core mandate of the bank of Uganda is the conduct of monetary policy to ensure price stability. For price stability the key indicator is inflation, measured by consumer prices index. The bank currently uses the inflation targeting lite policy framework Monetary policy-making is founded on a host of theoretical assumptions and models, which needs to be verified using concrete statistical data. The Bank of Uganda requires lost of statistical information on the economy from which to base monetary policy decisions. The information requirement covers the activities and behaviours of all economic agents within the economy, in the form of: Bank and non-bank financial information External sector developments (i.e. BOP statistics) Fiscal sector statistics The real economy (i.e. GDP, perceptions of real sector). Time series quantitative information is of unquestionable importance in in the exploration of the linkages economic activities and construction of forecast. The financial and external sector statistics are generated by the banks actvities and UBOS provide all other statistics not compiled by the bank.

4 2. Economics statistics for monetary policy formulation Under inflation targeting lite framework since July 2011 the following statistical information is required: Monetary statistics/survey: provides information on deposits, loans and interest rates of supervised financial institutions as well as central bank balance sheet. The liberalization of the current and financial account has necessitated the increase use of the BOP statistics to in order to analyse external influences on domestic monetary policy developments. Financial markets statistics are especially in establishing the transmission of monetary policy into particular segment of the financial market, analysis of inflation expectation, etc. The required information are: Exchange rate statistics Foreign currency interest rates developments Portfolio investments and Financial derivatives Information on inflation and factors contributing to inflation as well as expectation of the real economy Headline, core (underlying) and inflation expectations Business confidence index (perception) Consumer expectation

5 National accounts statistics GDP and its growth rates Estimates of output-gap Fiscal statistics: role of fiscal development in influencing demand in the economy: Government expenditure Government revenue Public debt information Macroeconomic statistics for structural modelling to improve understanding of the monetary policy transmission mechanism and the reaction function derived from interest rate changes in financing and investment behaviours. Monetary transmission mechanisms Inflation forecast for the short and medium term 2. Economics statistics for monetary policy formulation

6 3. Usage of National Accounts in Monetary policy formulation The national accounts bring together into one overall framework the different aspects of the economy. They are therefore vital for policy makers, analysts and researchers to examine the performance of the economy and make comparisons with other economies (international standards, SNA 2008). national accounts aggregates and sector accounts. the rest of the world economy statistics. Key national accounts indicators that play a central role in policy decision are:  gross domestic product (GDP) and growth rates,  income per capita  Fixed capital formation and sectors  public deficit as a percentage of GDP, The national account provides useful data on activities of non- financial corporations and households and their contribution to total output.

7 GDP growth rates from that national account is very useful in the underlying assumption for forecasting out-put gap and other macroeconomic aggregates required for monetary policy. The national accounts is useful in monetary policy formulation particularly in making projections of the activities of non-financial corporation and households to establish the transactions and sectoral balance sheet consistent with GDP growth and inflation. The national accounts provide various balance sheet indicators/ leverage ratios and estimates of debt service which are useful for financial stability review. 3. Usage of National Accounts in Monetary policy formulation

8 In ITL monetary policy framework, the policy stance is influenced by the outlook for inflation; mindful of economic growth, & exchange rate stability. Understanding the current state as well as outlook of the economy necessitates models and forecasts. Managing the economic pressures on an economy at any point in time is aided by estimation of the gaps from the long term trends of inflation, growth, exchange rates, interest rates, among others. 3.1 National accounts & monetary policy in ITL

9 National accounts provide information that helps to evaluate the demand pressures exerting on the capacity of an economy i.e. the sources of price pressures in the models and forecasts of the economy. Yet, while national accounts are available on quarterly and annual basis, monetary policy decisions are monthly. Moreover, the data come with a three-month lag; forcing analysts to fill in the gaps using proxies. Forecasting, an inexact art, is made difficult without timely & reliable data. Moral: national accounts are critical to policy decision making not least because they provide the best information about demand and therefore inflationary pressures on an economy. 3.1 National accounts & monetary policy in ITL

10 ITL comes with unprecedented central bank openness especially the communication of the future trajectory of the economy on which the policy stance is based. Yet, unreliable or absent national accounts data at high frequency means that often central bank forecasts will have errors. Such forecast errors may also result from revisions of the published data. Forecast errors lead to policy errors, which are costly & risk undermining the credibility of the Bank. BUT, they are inevitable. Indeed, the great physicist Niels Bohr, famously remarked “prediction is difficult, especially about the future”. Accordingly, the improvements brought by 2008 SNA will reduce the fog with which we central bankers are cursed strain through in order to project inflation & advise on the policy stance. 3.1 National accounts & monetary policy in ITL

Other Uses of National Accounts Statistics National accounts provides useful information for financial stability review, in particular for identification of risks and vulnerabilities to the various sectors of the economy Core national accounts figures are often used to develop and monitor macro-economic policies detailed national accounts data can also be used to develop sectoral or industrial policies, particularly through analysis of input-output tables National accounts are used in a wide range of areas, including: economic research, policy analysis, macro-economic forecasting and fiscal surveillance.

Challenges in using National Accounts Data Quarterly GDP produced with a lag of three months while monetary policy requires more frequent (monthly) and timely data to guide policy decisions. Short quarterly GDP series for macroeconomic modelling. Disaggregation and coverage of national accounts data

Suggestion to Enhance Utility of National accounts data in policy formulation Ensure timely availability of seasonally adjusted quarterly data, covering: income, savings, consumption capital formation and wealth by institutional sectors without compromising quality; Integration of non-financial assets in to the balance sheet of non-financial corporation and households Increase coverage of data set to improve estimates

14 4. Conclusion Statistics provides the foundation for macroeconomic analysis and policy making, the availability of timely time-series data is a perquisite for an effective formulation, assessment and communication of the monetary policy decisions and forecast The national accounts provides information on the activities of agents within the economy, which is vital in guiding monetary policy formulation and forecasting the aggregates. ITL require more timely and accurate data for monetary policy To ensure high quality and utility, the production of statistics should adhere to the principal of impartiality, reliability, relevance, cost effectiveness, statistical confidentiality and transparency.

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