Pakistan Bureau of Statistics (PBS) has claimed Gross Domestic Product (GDP) growth rate of 3.94 percent in the current fiscal year (a projection as data for the last three months is pending) with members of the opposition and independent economists dismissing it as an over-estimation.
Asad Umer as Minister for Planning, Development and Reforms under whose administrative control the PBS operates, jumped into the fray on Tuesday claiming that: (i) challenging data based on International Monetary Fund (IMF) or World Bank projections/estimates is not appropriate. His rationale: in 2019-20 post Covid-19 growth rate projections by these two international financial institutions were negative 1.5 and negative 2 percent respectively while today the two cite the government revised estimate of negative 0.4 percent. True, besides no international financial entity has enough manpower on the ground to calculate GDP. Domestic economists however challenge data premised on lack of synchronization in government/industry released data; (ii) there was no controversy on GDP components including exports, the rise in large scale manufacturing sector (LSM), and last but not least the rise in individual crops output (though Umer acknowledged that cotton crop did not achieve the target) as proof positive that GDP has grown by nearly 4 percent; and (iii) insisted that the Khan administration has no intention of misleading the public on data – a claim that can be fully supported based on both Umer and Shaukat Tarin’s previous history.
Be that as it may, a government has the capacity to overstate the GDP growth rate and perhaps a more relevant approach may be to focus on which components of the GDP may have been responsible for a rise in the growth rate.
The recent uploaded PBS data presents total investment figures up to 1999-2000 and thenceforth presents gross capital formation data. The Economic Survey 2019-20 notes the growth rate of total investment as negative 1.3 percent in 2018-19, and positive 8.4 percent July-March 2019-20 while gross fixed capital formation was negative 12.79 percent in 2018-19 (in comparison to 2018-19) and 0.09 percent in 2019-20 (over the year before). PBS has noted that the bulk of the 13.91 percent rise in gross capital formation (GCF) this year may be attributed to gross fixed capital formation (GFCF) against 6.97 percent last year.
The difference between total investment and GCF is that the latter reflects the new value added in the economy that is invested rather than consumed (and therefore cannot be substantiated by a rise in sales) and may not include: (i) deduction of depreciation of other fixed assets, or assets beyond replacement; or (ii) take account of disposals by focusing on additions to fixed assets that include land improvements, road building/dams/bridges/schools/hospitals/housing, etc that are a component of the Public Sector Development Programme (which has historically been the prime mover of growth in this country) as well as commercial and industrial buildings; or (iii) has complete inventories data though the PBS notes that inventories rose by 4.69 percent in the current year compared to the year before (a claim that is inexplicable given the massive rise in sales this year and severely suppressed demand the year before).
Expenditure approach for calculating GDP has besides investment the following components: consumption (private), government (consumption), and exports minus imports. PBS indicated a 7.3 percent rise in total private consumption in 2020-21 over the year before and only a 4 percent increase in government consumption over the year before. However, inexplicably, it indicated a 16 percent rise in total consumption (private and government) in 2020-21 compared to 2019-20.
The Economic Survey 2019-20 reveals that the government consumption rose by 9.9 percent in 2018-19 (over the year before), by a whopping 22.89 percent in 2019-20 due no doubt to Covid-19 (over the year before) and needless to add total outlay in 2020-21 is budgeted to rise again in the current year by 11 percent (though actual data would be released a month or so after the end of the fiscal year on 30 June). This rise is not on the back of higher domestic revenue but on a massive rise in domestic borrowing as well as foreign borrowing thereby fuelling the budget deficit – not a desired source of GDP growth and a factor that would no doubt impact on Tarin’s capacity to get the IMF to agree to a re-phasing of the harsh February 2021 conditions.
The administration claims that private consumption has been fuelled in recent months on the back of a significant rise in sales of cars/motor cycles/cement – a claim substantiated by a rise in the services sector (wholesale and retail trade being major components) by 4.43 percent this year against negative 0.55 percent the year before. This rise in sales may also be attributed to: (i) inflation in single digits in the current year as opposed to double digits in 2019-20; (ii) suppressed demand in 2019-20 as a consequence of severe contractionary monetary and fiscal policies till March 2020 (pre-Covid19) which stifled productivity and lockdowns post March 2020 due to Covid-19 has since been restored; and (iii) easing of these contractionary policies that led to pumping of hundreds of billions of rupees into the economy which in turn fuelled GCF and as per government claims, jump-started private sector investment.
Exports rose from 18.39 billion dollars July-April 2020 to 20.88 billion dollars this year – a rise of 13.5 percent which is: (i) credited to a low base; and (ii) diversion of orders from India/Bangladesh. Details on the SBP website indicate that the export receipts declined in all major items – food group, carpets, surgical, sports and leather with a rise of 211.9 million dollars in textiles most likely because of exports orders being diverted from India/Bangladesh to Pakistan. The major rise was in other exports – 377 million dollars. Be that as it may, the current account has performed remarkably well in spite of a steadily worsening trade deficit in the current year due to the rise in remittances – a trend one hopes will continue.
Agriculture accounting for 19.19 percent of GDP, grew by 2.77 percent this year on the back of improved crop output in all but cotton crop, however not being highlighted is the fact that this is lower than the 3.31 percent growth in 2019-20.
Manufacturing, accounting for 12.79 percent of GDP, grew by negative 7.39 percent in 2019-20 and with this low base growth this year was 8.71 percent indicating that it has yet to reach levels of the mid to late 2020s.
Services sector accounting for 61.68 percent of GDP in the current year is projected to grow by 4.43 percent with: (i) wholesale and retail trade (18.82 percent of GDP) projected to grow by 8.37 percent this year against negative 3.94 percent last year, (ii) transport, storage and communication (12.18 percent of GDP) grew by negative 0.61 percent this year against negative 3.80 percent last year, (iii) finance and insurance grew by 7.84 percent (3.72 percent of GDP) as opposed to 1.13 percent last year, and (iv) housing services grew by 4 percent (6.97 percent of GDP) with exactly the same rate as last year.
One would urge Asad Umer to allow private sector statisticians to revisit some of the recently uploaded PBS data on national accounts including: (i) 4.7 percent growth in LSM this year in the table titled “gross fixed capital formation private sector by economic activity” compared to the year before and 2 percent in 2019-20 over 2018-29 but claiming far greater success in growth of small scale manufacturing sector of 21.1 percent in 2020-21 compared to the year before and 18.1 percent in 2019-20 over 2018-19; (ii) private sector construction suffered negative 23.6 percent growth this year (in spite of the amnesty scheme and other substantial fiscal and monetary incentives) while government registered a growth of 17.5 percent in this sector in 2021 compared to the year before. In 2019-20 private sector registered positive growth of 15.3 percent over the year before while the government sector witnessed an unbelievable 328 percent growth in construction sector in 2019-20 compared to 2018-19; (iii) private sector finance and insurance grew by 0.5 percent in the current year in comparison to the year before while last year it grew by 6.9 percent compared to 2018-19;while the government witnessed negative 14.5 percent this year over last year against positive 19.9 percent in 2019-20 over 2018-19; (iv) autonomous/semi autonomous witnessed a whopping 38.3 percent rise this year (in spite of persistent claims of poor performance) against negative 32 percent in 2019-20 compared to 2018-19; and (iv) transport and communication government sector inexplicably witnessed positive 229.6 percent change this year over last year (with PIA’s international operations all but stalled, railways registering negative 28.4 percent growth, post office/PTCL negative 68.3 percent growth and Pakistan Steel Mills remaining non-operational) while others (unnamed) registered positive 229.6 percent growth.
Not included in GDP is the large informal sector which in Pakistan is considered to be 50 percent of the legal economy, the contribution of a housewife/farm labour/haris, and those who do not file their tax returns or comply with their tax obligations (a number considered very significant). It does not indicate the distribution of wealth within an economy or whether the poverty levels are rising or not.
In short, the time for euphoria is premature at best and there is a need to turn the debate towards the performance of key GDP components.
Copyright Business Recorder, 2021