Estimation of the quarterly GDP

Pakistan has committed to the IMF in the Memorandum of Economic and Financial Policies, as part of the Stand-by Facility, that by end of November 2023, the Pakistan Bureau of Statistics (PBS) will have compiled and disseminated the Quarterly National Income Accounts for the first quarter of FY 2023-24. Such quarterly estimates are currently not produced.

The preparation of the quarterly GDP series will represent a major step forward in the development of an early warning system on what is happening to the economy. This should help in improving the quality of economic management and facilitate a faster policy response, especially to negative developments.

The expectation is that the PBS will have finalized the methodology and identified the data sources for estimation of the value-added in each sector of the economy on a quarterly basis. The quarters will correspond to the official quarters in the financial statements by government.

The understanding is that the PBS will publish its statement of the methodology used for estimation of quarterly value-added in each sector of the economy. Simultaneously, it will publish for the first time an estimate of the quarterly GDP by sector for July to September 2024.

This move towards estimation of the quarterly GDP of Pakistan comes after considerable delay. India has had quarterly GDP series since 1996. This has greatly facilitated short-term planning and policy responses.

Pakistan fortunately has a monthly Quantum Index of Manufacturing (QIM) for the large-scale component of the sector prepared and disseminated by the PBS. An analysis of the quarterly variation in the sectoral growth rate in value-added at constant prices in 2021-22 reveals that it was substantial. It was 5.4 percent in the second quarter and jumped up to 15.6 percent in the next quarter. This variation highlights the need for quarterly estimates of value added at the sectoral level and thereby for the GDP as a whole.

A basic question is: what are likely to be the factors, which lead to quarterly/seasonal variation in economic activities? The potentially most important source of seasonality is the crop cycle. In Pakistan, we have the two crop seasons, Rabi and Kharif.

Therefore, the peak of agricultural crop value-added is likely to be in the harvesting quarter and the trough at the time of sowing, downstream manufacturing and other activities then peak with a lag after the harvesting, especially since almost 28 percent of industry in Pakistan is dependent on the input of two crops, cotton and sugarcane.

The other major contributing factor to quarterly variation is the level of temperature at different times in the year. Construction activity is likely to be more at the time of low temperatures. As opposed to this, demand for and generation of electricity is likely to peak in summer months with higher demand, especially by domestic consumers.

Research was undertaken at PIDE by Dr A. R. Kemal and Dr Farooq Arby to identify the peak and trough quarters of different sectors in the Pakistan economy, based on application of the standard methodology for isolation of the trend and seasonality in a time series up to 2003. The estimated quarterly shares of output by sector are presented in Table 1

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                                                  Table 1
                                       Quarter wise Share of Value-Added
                                             by Sector in Pakistan
                                                                                                              (percent)
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                                                                   Quarter                                      percent
                     Share of                                                                                Difference
                        GDP           July-         October        January        April-          Total         of Peak
                     (percent)      September      -December       -March          June                             and
                                                                                                                 Trough
=======================================================================================================================
Agriculture            22.9           18.6           33.7           22.0           25.7           100.0            81.2
Industry               18.5           22.0           23.8           29.4           24.8           100.0            33.6
Services               58.6           23.8           25.6           24.6           26.0           100.0             9.2
GDP                    100.0          22.3           27.1           24.9           25.7           100.0            21.5
=======================================================================================================================
Source: Kemal, A.R. and Arby, F., PIDE
=======================================================================================================================

As expected, agriculture output peaks in the second quarter at the time of harvesting in the Kharif season. Manufacturing activity peaks one quarter after the peak in agriculture. Seasonality is less pronounced in the services sector. Overall, the difference in value added is 21.5 percent between the peak and trough quarters.

We eagerly look forward to the publication by the PBS on the Methodology for Construction of Quarterly National Accounts and the first quarterly estimates for July to September of 2023-24. It will be interesting to see if the seasonality patterns in sectoral output identified above also emerge from the forthcoming PBS estimates.

There is a need to highlight that the first stage in the exercise is quarterly estimates of value-added by sector of the GDP. The second stage of the exercise ought to be quarterly estimates by the various expenditure components of the national income of Pakistan. This will reveal the quarterly imbalances, if any, between supply and demand over a typical year in different segments of the economy.

Copyright Business Recorder, 2023