ARTICLE: Key macroeconomic ratios - debt, fiscal and current account are measured in terms of nominal GDP and feed into determination of crucial indicators on country ratings. The investment and debt decisions by global lending and investing organizations are based on the economic risk, and for that debt to GDP, fiscal deficit to GDP, and similar ratios are critical.
The numerator in these ratios are actual figures while the GDP is computed based on a previous year base. Changing sectoral weights in GDP are not incorporated in nominal GDP computation, unless the GDP is rebased. Global-best practice is to rebase the GDP every five years; in neighboring India, it is done every ten years. At home, the wisemen at P and Q-blocks in federal capital follow no hard and fast rules. In 1999-00, GDP was re-based after twenty years, and in 2005-06 it was rebased again after six years. A fresh rebasing exercise has been in the offing for the past 3-4 years where GDP shall be rebased to 2015-16. The buzzword suggests that the new series will be released by the end of this fiscal year.
This will alter several key economic ratios. For example, debt to GDP is calculated as total public debt (Rs36,397bn) divided by nominal GDP (Rs41,727bn). The ratio is at 87 percent. If the nominal GDP is increased by 10 percent, upon rebasing, the debt to GDP ratio may fall to 79 percent. If the nominal GDP increases by 15 percent, the ratio may reach 76 percent. Similarly, fiscal deficit, current account and other ratios will fall further.
The question is whether it is rational to assume nominal GDP shall increase. There is no apparent reason to not have at least 10-15 percent upward revision in nominal GDP. In the last two rebasing exercises, the nominal GDP saw a substantial increase. In FY00, the GDP was rebased after 20 years. The nominal GDP from FY81 base to FY00 base increased by 21.6 percent. In FY06, the GDP based on new base increased by 7.8 percent from the FY00 base. A simple extrapolation suggests that nominal GDP shall increase by 12 percent in FY20 based on a shift to new FY16 base from FY06 base.
There was a significant alteration in key ratios under previous rebasing exercises and had an impact on investment and debt profiles. Debt to GDP ratio fell from 101 percent in FY99 to 76 percent in FY00, even though debt was increasing. Similarly, in FY06, debt to GDP ratio fell from 54 percent on new base from 58 percent in the previous year on old base. By the same token, in FY21, debt to GDP ratio may fall to the 1970s from late 80s after the rebasing.
The rebasing exercise should have been completed in 2018; but work is still in process. The government should think of revamping Pakistan Bureau of Statistics (PBS) as a whole. Even after the rebasing, the fear is that a complete snapshot of economy might not be possible. Around one third of GDP is calculated based on constant growth rates or other similar assumptions. The primary data availability in Pakistan is weak. How can economists and analysts make a right diagnosis in the absence of accurate data? Think of a doctor prescribing a medicine to control blood pressure based on measurement taken on a faulty gauge. Theoretically, this may increase chances of myocardial infarction.
Economy is no different. Central banks make decisions on interest rates and other variables based on the primary data released by the Bureau of Statistics. In Pakistan, SBP's capacity is better than that of any other public sector body. But it counts for little how skilled the central bank team is if the data set is faulty.
PBS is one of the weakest links in Pakistan's economic planning processes. Inflation, growth, and employment data are collected and computed by PBS. Every other policy decision is based on these measurements. There is no Chief Statistician at the office. This post is as important as that of the SBP governor. The primary data generating institution is technically orphan. The Planning Minister should put own house in order rather than spending airtime on every other political issue. The Chief Economist's position at Planning Commission is vacant too.
Pakistan does not even compute quarterly GDP data. Even annual numbers have shortcomings. The country is considered an agrarian economy. Yet, major crops data is based on guesstimates. Pakistan does not have reliable estimates of wheat production, livestock, poultry, or their yields. Similarly, manufacturing surveys are not a full reflection of ground realities either. Modern services in GDP do not depict actual weight in urban centers. Inflation data is not satisfactory. Employment data is nothing but a joke. And the list goes on.
With this weak primary data collection, the evidence and data-based decision-making will continue to remain missing.
Copyright Business Recorder, 2020