Policymaking at all levels of government requires precise, timely and accurate statistics to achieve various targets such as growth rates, government spending, or interest rate setting.
Data and information gaps, flaws in methodologies or calculation errors can cascade into policy decisions that ultimately lead to outcomes that affect the lives of people directly affected by such policies.
The datasets maintained by the Pakistan Bureau of Statistics (PBS) are a casualty of such limitations, which is adversely impacting the monetary, exchange rate and fiscal policy decisions.
There are a few economic datasets that public and private sector decision-makers use extensively. These are national accounts (such as GDP growth), inflation, balance of payment (external account), monetary and fiscal.
The balance of payment, and monetary-related datasets are published by the State Bank of Pakistan (SBP) and are accurate to a large extent. The fiscal numbers issued by the Ministry of Finance although have accounting issues such as the incorrect calculation of pension liabilities, are largely accurate.
The problem is with the numbers released by the PBS, which are mainly related to national accounts and inflation. These statistics, especially in the case of inflation, feed into the exchange rate (in the calculation of the real effective exchange rate or REER) and interest rates through monetary policy decisions, and these in turn impact fiscal accounts, growth, and inflation.
The PBS needs a major overhaul. Wrong computation of inflation and growth (as well as employment) is resulting in sub-optimal policymaking. The Bureau falls under the ministry of planning, which is in shambles. Economic planning in the country is not much different.
Specifically, there are some obvious flaws in the inflation methodology and weights assigned to the basket of goods. For example, the weight assigned to fresh milk is 25 percent, i.e. 25 percent of food expenditure goes into fresh milk.
Does any household (even the poorest ones) spend 25 percent of food expenditure on the purchase of fresh milk? The overall weights assigned to goods under the methodology require revisiting based on scientific surveys across the country.
An even bigger issue is energy price computation. In November 2023, when gas prices were increased, its impact on inflation was grossly exaggerated. The tariff regime for domestic consumers was changed by introducing higher fixed charges while the impact on the variable charges was lower.
The PBS computation accounted for the fixed charges and caused gas price inflation to be as high as 1,100 percent for certain segments.
The fixed charge had an additional impact of 2.2 percentage points in the headline inflation. This is the prime reason for the SBP’s decision to revise its FY24 inflation forecast from 20-22 percent to 23-25 percent. This then impacted the monetary policy decision and delayed a possible rate cut.
In turn, this has fiscal implications in terms of higher interest expense, and private borrowers have to pay higher interest charges. In its analysts briefing, the SBP also argued that PBS calculations had possible flaws, but decisions had to be made based on recorded and reported inflation.
The Energy Ministry is working on power tariff rationalisation where majority (70%) of the cost is based on the fixed costs (mainly capacity charges) while almost all the revenues are on consumption (variable basis).
The plan is to introduce (or increase) the fixed charges in the power tariff to balance it with the cost structure. If that happens, one wonders how PBS will compute inflation base effects, and how this will impact fiscal deficit, interest rates and exchange rate.
Apart from inflation, GDP computation has its own set of limitations. A major chunk of GDP is calculated based on crude estimates, which do not change with evolving economic conditions. About one-third of GDP is computed on such assumptions as the PBS has reduced ability to gauge and account for actual changes.
Invariably, for every rebasing, nominal GDP increases retrospectively, which implies that the nominal GDP is almost always understated. This means in 2025, when the 2016 GDP is going to rebase, the nominal GDP will increase significantly. The PBS may need to increase the frequency of rebasing so that the GDP can accurately reflect the size of the economy.
Analysts also take the unemployment and poverty numbers with a pinch of salt; many don’t take the employment numbers seriously.
It is evident that PBS requires massive institutional building and both federal and provincial statistical departments need to be strengthened and modernized.
Limitations of data computations, and inaccuracies in the official numbers have very clear consequences on the policymaking level with major impacts on the economy at large. One important structural reform is to revamp the PBS and the Planning Commission – sooner rather than later.
Copyright Business Recorder, 2024