ABSTRACT
High quality fiscal projections can make a considerable contribution to public financial management and the achievement of social goals. Where budget forecasts are consistently misleading the overall efficiency and stability of government expenditures can be jeopardized and the credibility of public financial management systems may decline. Nevertheless, the practice of fiscal forecasting in low income developing countries has received relatively little research attention. This chapter breaks with this trend and reviews the quality of macroeconomic and revenue forecasts in Mozambique for the period 1995-2005. As such it provides an example of how forecast evaluations can be undertaken and illuminates some of the key factors which affect the forecasting environment in Mozambique. Based on a unique dataset of forecasts and outcomes for both revenue and
macroeconomic variables, the following questions are explored:
What are the characteristics of the forecast errors? How have the forecast errors changed over time? How does the forecast model compare to a naive alternative forecast rule? What do the forecast errors tells us about the nature of the tax system? The structure of this chapter is as follows. In Section 2 the relevant literature on fiscal forecasts in developing countries is reviewed. Section 3 presents the dataset and develops the analytical framework. Section 4 presents the results, including a simple description of the forecast errors (Section 4.1), their decomposition into component parts (Section 4.3), a formal review of their unbiasedness and efficiency (Section 4.2) and an analysis of their accuracy compared to a naive alternative forecasting model (Section 4.4). In Section 5 explanations of the observed trends in forecasts errors are explored, considering in particular the use of forecasts as normative targets. Section 6 concludes.
