GDP estimates: fudging under way?

The economic recession in Pakistan is getting worse. GDP contraction is happening at a much faster pace than was expected. The numbers are shaping up uglier than what many analysts had predicted earlier. With every passing month, the picture is getting bleaker.

The size of the economy in FY23 may contract by 1 percent or even more. However, at the same time, the Dar School of Fin-count-onomics (half-baked finance, accounting and economics) is in play to juggle the numbers.

This is evident by the delay in the meeting of the National Accounts Committee (NAC) which was supposed to happen last week.

There are two problems for finance minister Ishaq Dar. One is that last year’s (FY22) GDP growth numbers are being revised upward, and that is making growth even lower this year due to a high base effect. And the second and scary explanation is that economic numbers in the last few months have shown falling output across several industries and sectors of the broader economy.

Reportedly, the GDP numbers for the last year (FY22) are being revised upward to 6.5 percent from provisional 5.97 percent. Such a revision is a regular feature, as the provisional numbers are based on nine months (or so) data which are extrapolated for the full year. Then the high-powered numbers in the last few months are massively down due to import restriction and demand destruction.

The provisional number for this year (FY23) is estimated in a range of negative 0.8 to 1.0 percent, based on the available data so far. And perhaps, the number could go down to 2 percent.

Now, with delay in NAC meeting some fear that the finance minister may attempt to influence the authorities to juggle the numbers to show lower growth last year (FY22) and better than actual numbers for this year (FY23).

The fear is not misplaced, as in the last regime of Pakistan Muslim League-Nawaz (PML-N), such practice did happen, when the whole team was locked in a room till it was ensured that growth assessment was made to look rosier.

And even SBP (State Bank of Pakistan) is shying away from giving any number. In its recently published half year report, SBP has indicated that FY23 GDP growth may be significantly lower than its projections of 2 percent. It is obvious that once again SBP is behind the curve.

This fiscal year started on a bad note. First, import restrictions were imposed on the engineering sector from the first month (July 22) and have continued to date. As weeks and months passed by, the list of restricted imports only became longer in tandem with the severe decline in foreign exchange reserves. Moreover, inflation – due to revision in energy prices, currency depreciation and shortages— dented demand of other items too.

Then smack in the middle of the Q1-FY23, the agricultural value chain was devastated by floods which led to a significant loss of livestock and crops such as cotton and rice.

The overall numbers are shaping badly. Large-scale manufacturing (LSM) is down by 25 percent in March 2023 – which is the steepest monthly decline ever, excluding the last quarter of FY20 (also known as Covid quarter).

In 9MFY23, LSM is down by 8.1 percent with three straight quarters in red. Barring beverages, export quantities of garments, football, and all other industries are in the negative. And we are yet to reach the bottom, since the fourth quarter will surely be deep in the red.

Although LSM’s direct share in GDP is less than 10 percent, its decline has an overall impact on the economic value chain. A significant decline in LSM activity leaves a massive dent on the small-scale manufacturers from the SME segment, which supplies raw materials and parts to large corporates.

And the other impact is in the distribution and retail segment; for example, car and white goods dealers, who are feeling the heat too.

Energy consumption is another important indicator of overall economic growth. Here the situation is bad. Electricity generation is down by 23 percent in April 2023. It is down by 10 percent in 10MFY23. Petrol sales are down by 25 percent in April 2023; whereas the dip is at 17 percent for 10MFY23 on cumulative basis.

The story of diesel is even dismal. Its sales have declined by half in the last two months and 10 months sales have declined by 28 percent. The sales’ dip indicates fewer goods being transported from ports and factories to wholesalers to retailers. Thus, there is a dip in overall economic growth.

There is no good story to tell in construction. Cement sales are down by 18 percent in 9MFY23 and now they’re at 2019 levels. The story of steel is perhaps even more dismal. And real estate as a sector is down as well.

The bottom line is that there is a severe decline in manufacturing and a significant fall in agriculture (due to floods). And services sector, which has a lion’s share in GDP, is linked to these two. Thus, wholesale and retail along with other sectors may contract in a big way. The GDP is likely to take a big hit.

The question is how bad the numbers could get. This writer’s estimates are that GDP may be down by 1.5-2 percent, at least. This hit is not coming without a record high inflation. The latest recording of headline is 36 percent and FY23 average inflation is likely to be around 30 percent. And sensitive price index’s recent recordings are fast approaching 50 percent.

The negative growth and high inflation constitute a double whammy at a scale never witnessed before in the country’s history. People are feeling the heat; but still there is some hangover of stellar growth of last two years, i.e., one year of negative growth and record high inflation may be absorbed by segments as economy is contracting from two consecutive years of 6 percent or more growth (last such period of very high consumption led growth was witnessed during 2004-07).

However, the patience of both masses and businesses may turn into agony, if low growth and inflation continue into the next fiscal year. Unfortunately, none of the signs till date shows that things might get better.

Copyright Business Recorder, 2023