James D Rogers: Liquidity forecasting for monetary and fiscal management in
West Africa
Keynote address by Dr James D Rogers, Governor of the Bank of Sierra Leone, at the opening
ceremony of the Regional Course on Liquidity Forecasting for Monetary and Fiscal Management,
organised by WAIFEM, Bank of England and UK Treasury Department, Freetown, 17 April 2007.
* * *
Director General of WAIFEM, Dr. Chris O. Itsede,
Distinguished facilitators from the Bank of England and the United Kingdom Treasury Department,
Distinguished Course Participants,
Ladies and Gentlemen.
1.0 Introduction
On behalf of the President, His Excellency, Ahaji Dr. Ahmed Tejan Kabbah, the Government and
people of the Republic of Sierra Leone, it is indeed a pleasure to welcome you all to Freetown on the
occasion of the regional course on Liquidity Forecasting for Monetary and Fiscal Management
jointly organized by WAIFEM, the Bank of England and the United Kingdom (UK) Treasury
Department. l invite you to take some time off your crowded programme to visit tourist attractions and
appreciate the recovery the country has achieved since the ruins of the civil war. The smiles are back
on the faces of Sierra Leoneans, and visitors now have the peace of mind to savour the beautiful
scenery of Freetown.
On behalf of the Board of Governors, I wish to register our profound gratitude to the Centre for Central
Banking Studies of the Bank of England and the UK Treasury Department for collaborating with
WAIFEM to build capacity for macroeconomic management in the West African sub-region. Our
particular thanks go to Messrs. Simon Gray and Tony Smith, who represent these collaborating
institutions at this course, for taking time off their busy schedules to share their wealth of knowledge
and experience with us.
2.0 The need for liquidity forecasting
This course could not have come at a more auspicious time than now when all the countries in the
West African sub-region are operating the indirect approach to monetary management and for that
purpose most have instituted monetary policy committees (MPCs). MPCs bring together the major
stakeholders in monetary and fiscal management with responsibility, among other things, to derive the
quantum of liquidity for mop up from, or injection into, the economy through Open Market Operations
(OMO). The overriding objective has been to keep inflation at low and stable level. In recognition of
those objectives this course augurs well in filling the capacity gaps in liquidity forecasting as an
essential input in the design of sound monetary policy administration in countries of WAIFEM member
banks.
Ladies and Gentlemen,
3.0 Problems of liquidity forecasting
Liquidity forecasting is largely forecasting the monetary aggregates to obtain a reliable target of banks'
idle reserves thereby ensuring an efficient management of bank resources through the weekly conduct
of Open Market Operations (OMO). Two main components of the OMO forecast come to the fore: the
optimal level of demand for total bank reserves (ODR) and the estimated level of supply of total bank
reserves on the day of OMO (OSR).
FOMO = ODR - OSR
t t
where
FOMO = the OMO forecast for the day of trading.
In making forecasts of the monetary aggregates, ODR and OSR, in efforts to derive the OMO forecast,
the authorities face a number of problems. Permit me to highlight a few of them:
•
Difficulty with forecasting base money (monetary base)
Since total bank reserves (ODR) must always be consistent with the ultimate objectives of
monetary policy, its computation begins with a forecast of the desired demand for and supply
of money. However, while the computation of the demand for money is a fairly straight
forward affair, that of the supply of money is problematic. Herein lies the concept of the
monetary base: the supply of money is a function of the monetary base adjusted by the
money multiplier. Too often, some of the components of the monetary base are outside the
control of the monetary authorities. For example, as long as net credit to government, a
component of monetary base, remains outside the control of the central bank, it will be
difficult to achieve a stable monetary base, and hence a stable money supply. Again, the
requirement of the central bank to underwrite the issue of government debt instruments
deprives the bank of the control over its portfolio of government securities or NCG, another
component of monetary base. Of course, the bank has little control over the net foreign
assets, a major determinant of monetary base, especially where it is unable to sterilize
capital inflow. Thus liquidity forecasting is made difficult in circumstances where the central
bank exercises weak control over the components of monetary base and therefore money
supply.
•
Difficulty with forecasting total bank reserves (R)
Total bank reserves is also a component of monetary base, B, where
B = Currency outside banks (COB) plus bank reserves (R)
R = vault cash (VC) + bank balances with the central bank (BDCB)
Again to forecast the components total bank reserves (R) efficiently, there is need to understand the
intricacies of monetary survey sufficiently well, understand the financial environment, know the stance
of current monetary policy and the short-term outlook of financial developments.
•
Data constraints
The data used in forecasting the monetary aggregates are too often not firm, or where firm,
data are characterized by breaks in series. Such data include those of real gross domestic
product (GDP inflation, revenue, expenditure, float items etc. These data series
R),
sometimes are constructed using different base years, making comparisons of series even of
the same variable problematic.
Besides weak data series, there is also the problem of coping with lags in monetary data. The
computation of the estimated supply of total reserves (OSR), on the day of OMO market often involves
several days lag. This means that to be able to obtain OSR, where "t" is the OMO market day, the
compiler must be able to project both the sources and uses of monetary base, several days prior to
the OMO market day say OSR The techniques for doing this are yet to be fully developed in all
t-3.
WAIFEM constituent countries.
•
Determination of public sector borrowing requirement
The primary target for OMO is the difference between the estimated supply and demand for
money under equilibrium conditions. But in arriving at the ultimate target for OMO, the
excess supply needs to be adjusted to accommodate public sector borrowing requirement in
the period. Thus there would be need to make the problematic forecasts of government cash
revenue and expenditure, including float items. In this regard some of our member countries,
notably Ghana have taken considerable strides through the application of some appropriate
software.
•
Capacity for econometric forecasting
Familiarity with the use of econometric techniques is a sine qua non for liquidity forecasting.
Too often, WAIFEM has had to run courses in econometric modeling and forecasting in
order to bridge these gaps and it has resorted to improved monetary and fiscal policy
formulation in the sub-region.
Ladies and Gentlemen,
Lessons in capacity building needs
I have not made any pretensions to proffering exhaustive analysis of the problems of liquidity
forecasting. I believe the expert faculty at your disposal will do just that. However, from the
presentation thus far, it is clear that a lot of capacity gaps will need to be filled if member countries
must conduct monetary and fiscal policies at the cutting edge of best practices. An articulation of the
gaps is therefore in order.
•
Capacity for analysis of monetary survey
Staff in monetary and fiscal policy departments must be familiar with the intricacies of
monetary survey - a consolidation of both the balance sheets of central banks and deposit
money banks. The monetary aggregates are summarized in the assets and liabilities sides of
the survey. The financial database for liquidity forecasting is contained in the monetary
survey.
•
Training in macroeconomic relationships
The staff of the relevant departments of Central Bank and Ministries of Finance and National
Planning Commission should be familiar with macroeconomic relationships and financial
programming. To this end, an advantage should be taken of WAIFEM/IMF annual courses in
financial programming.
•
Training in econometric modelling and forecasting
Familiarity with econometric methodology is critical to effective conduct of liquidity
forecasting for sound monetary policy. Again WAIFEM's courses in Econometric Modelling
and Forecasting is a welcome initiative to bridge capacity gaps.
•
Understanding the macroeconomy
Finally, liquidity forecasting cannot be effectively done without sufficient understanding of the
macroeconomy, stance of demand management policies and outlook for the future. All this
constitutes the environment in which forecasting takes place.
4.0 Conclusion
In this address, I have sought to sensitize you about some of the critical issues in liquidity forecasting.
I believe that the expert faculty placed at your disposal, will give you an exhaustive treatment of the
subject matter. At this juncture, permit me to express our sincere appreciation to Messrs Simon Gray
and Tony Smith of the Centre for Central Banking Studies of the Bank of England and the UK
Treasury Department, respectively for taking up our call to facilitate this course.
I would like to take the liberty to invite you to avail yourselves of this opportunity provided by this
course. Once more I enjoin you to feel at home here in Freetown and enjoy the warmth and hospitality
of our people.
On this note, it is my singular honour and privilege to declare open the Regional Course on Liquidity
Forecasting for Monetary and Fiscal Management.
I thank you for your attention.