A credible statistics is instrumental in planning and economic development. Although it was too late but rebasing is an appreciable act on the part of the government. Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers. Loan pricing will be done by adding base rate and a suitable spread depending on the credit risk premium.
The United Nations has developed the System of National Accounts (SNA/1993) for standardizing the national income accounting across the globe. The National Income Accounts (NIA) are comprehensive, consistent and flexible set of macro-economic accounts based on internationally agreed concepts, definitions and accounting rules.
The NIA statistics are compiled by the countries to meet the needs of governments, private analysts, policy makers and decision takers. The major use of these statistics are to assess how a country’s economy is growing or contracting over short to medium term.
The economic and financial analysts are particularly interested in the behavior of an economy at various stages in the economic cycle. It is quite common to see analyses that compare the extent to which an economy has emerged from a recession compared with that of earlier stage.
The changes over time as observed in the current price estimates depict a combination of a change in prices and a change in the underlying volumes. Therefore, compilation of estimates adjusted for the effects of price change (i.e. constant price or “volume” estimates) is an important component of any national accounting system.
Basis points are the unit of measure used in finance to describe the percentage change in the value of financial instruments or the rate change in an index or other benchmark. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. Likewise, a fractional basis point such as 1.5 basis points is equivalent to 0.015% or 0.00015 in decimal form. The increase from 10% is either 50 basis points (which is 10.5%) or 500 basis points (which is 15%). Although basis points primarily designate yields and interest rates, they may likewise refer to the percentage change in the value of an asset such as a stock. For example, an analyst may describe how a stock index rose 134 basis points throughout the trading day. This represents a 1.34% increase in the value of that index.
The ministry of planning and the Pakistan Bureau of Statistics rebase the national accounts as well as price statistics after every five years, as both go hand in hand to capture more areas and economic activities that have taken place in the last couple of years. However, this time around the accounts and prices were rebased after 10 years.
As a result of the rebasing exercise, the growth rate improved from the earlier estimate of 3.94pc to 5.4pc, while the size of the economy rose to $346.76 billion from the provisional estimate of $296 billion, according to the National Accounts Committee, which approved these figures on Thursday.
On Thursday January 20, 2022, the 104th meeting of the NAC, chaired by Planning Secretary Abdul Aziz Uqaili, approved the revised figures of Pakistan’s gross domestic product (GDP). It revised the economic growth rate for 2020-21, this time from 3.9 per cent to 5.37 per cent. This is the second time the GDP rate for 2020-21 has been revised, from an initial 2.3 per cent set in the 2020 annual budget to 3.9 per cent later. NAC approved revised estimates of GDP growth for 2020-21. The growth in 2020-21 was 5.37%. The size of the economy grew in dollar terms as the rupee strengthened against the greenback — the highest-ever increase in any year.
Planning and Development Minister Asad Umar announced that the new growth data is for the fiscal year 2020-2021. He explained that the previous estimate was based on July, 2020 to March 2021 numbers, while the new data covers the entire fiscal year from July 2020 to June 2021. He further added that this is the 2nd highest growth in the last 14 years. Higher growth versus provisional estimates which were based on July-March numbers, which was due to strong industrial growth in April-June period.
Separately, the planning ministry said that the statistics bureau shifted its economy’s baseline, which further pushed the figure up to 5.57%, and with the new 2015-16 baseline, the total GDP has reached USD 346.76 billion with USD 1,666 per capita income.
This long-overdue rebasing of our GDP has boosted the economy’s size through improvements in the coverage area of economic activities. The calculation of national accounts to FY16 from FY06 has increased the economy’s size by almost 16.5pc to $347bn and jacked up the FY2021 growth rate from 3.9% to a 14-year-high of 5.6%. Even at the old base year, the GDP growth rate was revised up to 5.4% owing to incorporation of the final data on industry, agriculture and services. Per capita income has also been re-calculated from the earlier figure of Rs246,414 for 2020-21. The per capita income in dollar terms has jumped to $1,666 from earlier projections of $1,543 during the fiscal year.
The updated accounts incorporate changes in prices, trade and industrial production indices over time. The economy’s revised value shows that its real size was underestimated by 11.3% on prices of the previous base year of 2006. Gross national income has also increased to Rs59.3 trillion. The rebasing of the GDP resulting in a higher growth rate and the economy’s expansion has spawned speculations that the government has fudged national accounts to paint a rosy picture and draw political capital. Such assumptions are uncalled for.
GDP rebasing is a process of replacing an old base year with a more recent one and usually done every five years. This keeps the pace with price evolution and changes in the economy’s structure over time to capture current economic conditions. The 1pc reduction in fiscal deficit as a ratio of GDP will provide greater room for fresh sovereign guarantees pegged on the economy’s size. At the same time, a higher GDP indicates a significant drop in the tax-to-GDP ratio from 11.1% to 9.5% and exports-to-GDP ratio from 8.6%c to 7.4%, underscoring that most of our economic troubles are rooted in poor fiscal efforts and low productivity. The new GDP series reflects a more accurate picture of the size and structure of the economy, and incorporates new activities and technologies that had previously not been captured by national accounts. It will allow policymakers to use a new set of economic information, which is more reflective of the current structure than those based on the 2006 base year, and help them make evidence-based decisions.
The impact of rebasing is felt primarily in changes in the major macroeconomic indicators. Indeed, the reduction in public debt from 84% of GDP to 72% and external debt from 29% to 25% after the economy’s expansion will enhance the government’s bargaining power and create space to borrow more at home and from abroad to meet fiscal and external account needs.
It is also a fact that structural changes take place in the patterns of production, consumption and investment in an economy. The relative prices of various products also subjected to various changes in the economy over a period of time.
The government is trying to include new economic activities. Dedicated surveys and studies have been conducted to capture the share of economic activities in the economy. Input output ratios of various industries have been updated, which has resulted in better reflection of their contribution in the economy.
An important question is how often the base period should be changed. Practices in this respect vary considerably, with some countries keeping the same base period for as many as 10 years or five years, and some changing the base period every year.
It is desirable to change base periods frequently, especially in times of large changes in relative prices and rapid economic development. It is noteworthy that change of base year has an impact on the growth rates of components of the GDP. Normally relative prices tend to change in a way that is inversely related to changes in relative volumes (i.e. the commodities for which prices become cheaper tend to have a higher volume growth). As a result, the overall measure of growth will tend to overstate the growth because when constant price estimates are rebased, the growth rates observed for major aggregates will change from those, which were based on, an earlier base year.
Sometimes the changes can be very significant, which can lead to problems for national accountants in trying to explain why the constant price GDP growth rates have been “revised” compared with those previously published.
[box type=”note” align=”” class=”” width=””]The author, Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. Mr. Shaikh could be reached at [email protected][/box]