The realities of growth

The rebasing of national income accounts has provided a great and sudden opportunity to the government when it comes to the new figures of economic growth.

The new figures of economic growth have given confidence to the government to boast about its economic successes. The government has been under pressure owing to the depressing economic conditions in the – with high inflation, widening trade gap, challenging current account deficit, debt management issues and tough IMF conditions for resumption of the Extended Fund Facility (EFF). The new figures have provided some respite.

The rebased national income accounts have made the government optimistic that the economy is probably moving in the right direction. But the fact is that nothing has changed on the ground. It is, essentially, a feel-good factor with an overriding effect on all other factors. The rebasing exercise jacking up GDP growth figures does not make countries or people rich. And inflation cannot be arrested through rebasing nor employment generated through new fancy figures. Even then, though, the revision and rebasing of accounts definitely help policymakers make informed decisions regarding public investment and the taxation system on the basis of GDP growth. And there is no harm in revising prices, replacing the old base year with a recent base year as per international best practices.

The rebasing of national accounts of Pakistan from 2005-6 to 2015-16 duly endorsed by the World Bank, IMF and ADB have provided an opportunity to the government to jack up figures of GDP growth. In fact, the UN had developed the System of National Accounts, standardising national income accounting across the globe. The IMF, ADB and EU also endorsed the system. National income accounts are a comprehensive, consistent and flexible set of macroeconomic indicators displaying and delineating the structure of the economy.

Economic indicators show the overall trends in economic development and growth in the economy. In the case of Pakistan, the new figures of economic growth, after rebasing, show a positive and encouraging trend, especially with GDP growth of around 5.5 percent. While noticing a positive effect on personal income, GDP growth rate, improved debt-to-GDP ratio, we do see a negative impact on tax-to-GDP ratio that has gone down from 9.6 percent to 8.5 percent.

The Pakistan Bureau of Statistics (PBS) compiled data of national accounts through 36 surveys/studies out of a total of 42 assigned exercises in compliance of international best practices and standards and rebased the national accounts in line with the 2008 System of National Accounts. The data of key economic indicators was compiled from three sectors of economy comprising agriculture, industry and services sectors. The National Accounts Committee (NAC) in its 104th meeting held at the Ministry of Planning, Development and Special Initiatives decided to rebase the national accounts by changing the base year from 2005-6 to 2015-16. The size of the economy jumped up from almost $298 billion to around $347 billion, a great leap forward by all means.

There is an old adage that there are three types of lies: lies, white lies and statistics. Figures don’t quite tell everything. The same is the case of the new happy figures of economic growth of Pakistan after rebasing of the national accounts. They have provided nothing in substance but have given confidence to policymakers to make informed decisions based on new income accounts at the national level.

The rebasing saw the economy swelling over by about Rs3.1 trillion jacking up growth rate to 5.6 percent through new methodology. But what about population explosion, hike in inflation, soaring prices of commodities, widening income-expenditure gap, debt management, exchange rate issues, job creation and large-scale manufacturing – affected due to the new economic conditions put forward by the IMF as prior actions including but not limited to the autonomy of the State Bank of Pakistan? The most crucial question is whether there is any change in economic conditions after rebasing of national accounts. The answer is in the negative.

I have been writing that Pakistan is facing the brunt of high oil prices, commodity prices and rising food inflation. The loan portfolio has crossed all limits with rising debt-servicing that is a real headache. One can imagine the situation on the ground from the fact that foreign loans soared to $127 billion, including the foreign loans of $10.4 billion obtained just in the last six months of the current financial year. Circular debt is another headache. The trade imbalance is a serious danger entailing consequences for the current account deficit. The monetary policy of the State Bank is a harbinger of no hope. The IMF programme entanglement is posing another threat, shattering hopes for any improvement in the coming days and months.

Commodity and food prices have broken all records – as well the backbone of the economy and the people. All sorts of price indices including the Consumer Price Index (CPI), Sensitive Price Index (SPI), Wholesale Price Index (WPI) have crossed all records in the last three years.

Another disturbing factor in debt management is power and energy-related circular debt currently standing at about Rs24 billion. The main chunk of this circular debt is related to capacity payments, which can be categorised as bad management decisions made at the time of finalising agreements with Independent Power Producers (IPPs). But the benefit of the doubt goes to the decision-makers at that time in government for having a crisis situation in Pakistan, as electricity was not available even to households, and the government had no financial resources to invest in the power sector.

The trade imbalances in the form of almost double imports than exports eating up resources needed for costly imports make things worse. Pakistan needs to enhance its exports through diversification of exportable goods and services, especially in IT exports. The Special Economic Zones (SEZs) under the China-Pakistan Economic Corridor (CPEC) need to be established sooner than later to enhance diversification and branding of exports. There is, in fact, a need for industrial clusters to be created through SEZs to boost and enhance exports, taking maximum use of electricity by utilising the full capacity of power plants and getting rid of capacity payments.

Instead of celebrating the new GDP growth rate, there is an immediate need to arrest inflation and control prices, especially food prices. Monetary policy tools need to be carefully used to stabilise prices, enhance exports, and create an investment atmosphere to ensure growth. Exports need to be enhanced through promotion of SEZs and diversification of supply chains.

Lastly, a huge loan portfolio and debt servicing require immediate policy intervention from the government for placing a better debt management system, as it has all the potential to become a vicious circle disturbing the economy for many years.

The writer is an economist.