The Pakistan Economic Survey [PES] for 2018-19 was released last month. This was immediately followed by the presentation of the Federal budget documents for 2019-20 to the National Assembly. The Pakistan Bureau of Statistics (PBS) continues to publish on a monthly or weekly basis the statistics on key indicators like the rate of inflation, quantum index of manufacturing, external trade, etc. In addition, specialized data is released by a number of Agencies like the SBP. These different sources enable analysis of macroeconomic trends in Pakistan.
The objective of this article is to highlight likely defects in estimates of different macroeconomic magnitudes for 2018-19. This has primarily involved examination of the consistency in the data revealed by the above-mentioned diverse sources. Issues are raised about the estimated GDP growth rate and the average monthly inflation rate in 2018-19. Further, the sizeable difference in the estimate of the consolidated budget deficit as revealed by the relevant estimates of the SBP and as contained in the budget documents is also highlighted.
GDP growth rate
The year just completed has witnessed a big slowdown in economic activity. Output of two leading sectors that drive the overall growth process, major crops and large-scale manufacturing, has actually declined. This is unprecedented. Consequently, the output of many of the services that have forward or backward linkages with the primary and secondary sectors has also been affected adversely.
However, PBS has estimated a GDP growth rate of 3.3 percent in 2018-19. One of the reasons for this growth is the extremely high growth rate of 40 percent reported in electricity generation, its distribution and gas distribution sector. Even though this sector is relatively small, with a share in the GDP of less than 3 percent, it has accounted for almost one third of the GDP increase in 2018-19.
There is a need for PBS to clarify how such a high growth rate was achieved in a sector that is bedeviled by large and rising circular debt and big distribution and billing losses. In fact, according to the energy statistics in the PES, generation and consumption of electricity increased by 2 and 17 percent respectively in the first nine months of 2018-19. There was only 1 percent growth in gas sales. Consequently, the 40 percent growth rate represents a gross exaggeration. Adjusting for this already reduces the GDP growth rate in 2018-19 by 0.8 percentage point.
The next overstatement of growth is likely in the largest sector of the economy, namely, wholesale and retail trade. The question is how the sector could have shown a growth rate of 3 percent, when the volume of items traded has actually fallen? Output of crops is down by 5 percent; manufactured goods by 2 percent and imports by 6 percent. At best, the growth rate of the sector is likely to be between 1.5 to 2 percent, due possibly to some increase in trading margins.
The third sector where the growth has probably been overstated is transport, storage and communications. Given the decline in volumes of goods to be transported, it is surprising that the PBS reports a growth rate of 3 percent in the sector. In fact, the consumption of HSD oil has fallen by over 15 percent during the year. The telecom sector has reached a mature stage of growth and the number of mobile phones has increased by 6 percent during the year. There is the likelihood that the overall growth rate of the sector may even be negative in 2018-19.
Overall, it is highly unlikely that the GDP growth rate was 3.3 percent in 2018-19. A more accurate and unbiased estimate of the growth rate of the economy in 2018-19 is close to 2 percent.
Rate of inflation
The primary measure of the rate of inflation is the Consumer Price Index [CPI]. It has remained single-digit throughout 2018-19, reaching a peak of 9.4 percent in March 2019. The other indicator, which is tracked on a weekly basis, is the Sensitive Price Index [SPI]. This index reveals a double-digit rate of inflation since February 2019, reaching a peak of 13.1 percent in May 2019.
The difference between the two indices is that the CPI is a more comprehensive measure and also quantifies the rate of inflation in housing rents and a number of services. The largest weight in the CPI is of rent. The surprise is the low reported rate of inflation in rents of only 6.3 percent in June 2019 as compared to the overall rate of 8.9 percent. Actually, given the growing housing shortage, especially in the large cities, the trend over the last five years has been for the increase in rents to be faster than the overall rate of inflation. For example, in June 2018 it was over 7 percent as compared to 5.2 percent according to the overall CPI.
Overall, there appears to be some understatement of the rate of inflation, as measured by the CPI, in 2018-19. Adjusting for the underreporting of the rise in rents, it is highly likely that inflation is operating at a double-digit rate, like the SPI.
Budget deficit
The revised estimate of the budget deficit in 2018-19 is 7.2 percent of the GDP, according to the budget documents. However, it appears to have been significantly understated by the MOF. An alternative approach has been adopted for quantification of the deficit involving the determination of the borrowing by Government from different sources to finance the deficit.
According to the SBP, the total bank borrowing by the Government in 2018-19 is Rs 2,182 billion, with Rs 2,937 billion from the SBP and retirement of debt with the commercial banks of Rs 755 billion. External borrowing up to May 2019 is estimated at Rs 535 billion while the magnitude of non-bank borrowing is Rs 626 billion, also up to May 2019. Therefore, the total borrowing aggregates to at least Rs 3,343 billion.
The bottom line is that the budget deficit in 2018-19 is above 8.6 percent of the GDP. The target was 5.1 percent of the GDP. The actual deficit has exceeded the target deficit by as much as Rs 964 billion. This reflects poorly on the quality of financial management by the MOF.
Overall, examination of the statistics from different sources reveals, first, that the GDP growth rate has been significantly overstated at 3.3 percent in 2018-19. It is probably closer to 2 percent. Second, the rate of inflation is higher than that reported by the CPI. It is operating at a double-digit rate, as opposed to 8.9 percent in June 2019. Third, the budget deficit in 2018-19 is substantially larger at over 8.6 percent of the GDP as compared to 7.2 percent of the GDP reported by the MOF. Economic conditions in 2018-19 have, therefore, been even worse than generally perceived.
(The writer is Professor Emeritus and former Federal Minister)
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