The GDP growth rate

The Pakistan Bureau of Statistics (PBS) has revealed the final estimate of the GDP growth rate for 2018-19 and the preliminary estimate of the GDP growth rate for 2019-20. This is contrary to the past practice whereby GDP estimates were included in the Pakistan Economic Survey and only got known after the release publicly of this Survey by the Ministry of Finance just prior to the presentation of the Federal Budget to the National Assembly.
This early release of the GDP estimates by the PBS must be appreciated. It gives an opportunity to analysts to see the accuracy of estimates and trends thereof for the previous year and the current year. Usually, GDP estimates are generated on the basis of the first nine or ten months of the year. As such, these estimates are treated as provisional in character and finalized only after the full twelve months information becomes available.
However, there is an interesting pattern here. The divergence between provisional and final estimates could be positive or negative and large or small depending upon the performance of the economy in the fourth quarter versus the first three quarters. But it is perhaps surprising that the divergence between the provisional and final GDP growth rates during the tenure of the previous government was unbelievably small at 0.1 to 0.3 percentage points.
Clearly, the PBS had developed the amazing ability to predict with almost perfect precision the annual GDP growth rate three months in advance. There is of course the likelihood that the growth rate was initially overstated and there was a reluctance to revise it downwards so as to preserve the extent of overstatement of the GDP growth rate.
There is, however, a big change this year. The PBS has reduced the provisional estimate of GDP growth rate of 3.3 percent for 2018-19 by as much as 1.4 percentage points to the final estimate of 1.9 percent. Clearly, the PBS has been given greater autonomy in engaging in more accurate and unbiased reporting. This is perhaps attributable to the change in Ministry to which PBS is attached. During the tenure of the previous Government the controlling Ministry was the Ministry of Finance. Clearly, this Ministry had a vested interest in reporting a higher GDP growth rate to create the perception of good performance since the formulation of most of the economic policies were in its domain. The new Government took the very appropriate decision of transferring the PBS to the Ministry of Planning. This Ministry is likely to have a stronger motivation to present the real state of the economy.
There were, in fact, apprehensions when the PES of 2018-19 was released that the GDP growth rate of 3.3 percent was on the high side. I had written an article in this daily suggesting that the growth rate in some sectors was overstated. More recently, in a TV interview I had suggested that the likely growth rate in 2018-19 was 1.9 percent. It is indeed a pleasant surprise to see the PBS finalizing exactly this growth rate for 2018-19.
Where have been the downward adjustments in sectoral growth rates? The first case is the electricity generation and distribution sector. I had pointed out that the reported growth rate of the sector at 40.5 percent was completely infeasible. In the final estimates, this growth rate has been brought down to 14.4 percent.
Other sectors where the 2018-19 growth rates have been brought down significantly are construction, wholesale and retail trade and government services. Overall, these four sectors explain 96 percent of the reduction of the GDP growth rate from 3.3 percent to 1.9 percent in 2018-19.
Turning to the provisional GDP estimates for 2019-20, the PBS was faced with daunting challenge of quantifying the big impact of Covid-19 on the economy in the last quarter of 2019-20. The resulting estimate is of a negative 0.4 percent GDP growth in the year. Such negative growth has been experienced only once before in 1951-52.
The economy was probably on the path of close to 2 percent growth in the first three quarters of the year. This implies that for the annual growth estimate of negative 0.4 percent, the fourth quarter growth rate will be a large negative 7.6 percent.
The sectors which are likely to exhibit significant negative growth rates in 2019-20 are large-scale manufacturing, wholesale and retail trade and transport and communications. The PBS has rightly assessed the nature of the sectoral impact of Covid-19. However, the impact may be greater in light of the quantum fall in exports and decline in demand for consumer items due to rising unemployment and poverty. Developments in the ongoing quarter will need to be closely monitored.
The IMF has assessed that the GDP will fall more by 1.5 percent in 2019-20. This is also close to estimates by other international agencies. It is possible that some sectors could be impacted more by Covid-19 or other factors. The first such case is the crop sector. PBS expects major crops to grow by 2.9 percent and minor crops by 4.9 percent. However, the wheat crop may be lower due to water shortage and locust attack. Minor crop prices have risen substantially during the year, especially in the case of vegetables, and this largely reflects big supply shortages. As such, a positive growth rate in the crop sector is unlikely.
The large-scale manufacturing output has fallen by as much as 23 percent in March. If this fall persists and increases then the growth rate could be even less than projected by PBS. Similarly, construction activity, both public and private, has visibly slowed down and may not demonstrate a positive growth rate. Over the 9 months, July to March, domestic sales of cement have shown near zero growth and output by the cement industry fell by16.6 percent in March. Further, it is again unlikely that the electricity and gas sector will achieve as high a growth rate as 17.6 percent in 2019-20.
Overall, the efforts by the PBS for earlier release of GDP estimates must be appreciated. The time has come now for the Statistics Agency to take major steps in improving the quality of the National Income Accounts in Pakistan. First, the base year should be moved up from 2005-06 to 2015-16 as has already been done in the case of the Consumer Price Index. Secondly, a methodology needs to be developed for quarterly estimates of the GDP. This will greatly facilitate short-term planning and enable faster policy adjustments in the country.
(The writer is Professor Emeritus at BNU and former Federal Minister)