The Finance Minister has apparently asked the World Bank to undertake a study to estimate the 'true' Gross National Product (GNP) or Gross National Income (GNI) of Pakistan, as reported by a leading English-language daily in the country. The expectation is that this will lead to a significant increase in the size of the national economy, of even up to 25 percent.
If this happens, what are the implications? First, the public debt to GDP ratio will come down sharply, probably below the limit of 60 percent of the GDP imposed by the Fiscal Responsibility and Debt Limitation Act. This will indeed be a very ingenious way of managing the public debt. Further, it could once again restore Pakistan's position with respect to India. Currently, India's per capita income is higher by 9 percent. This gap could be eliminated by the re-estimation of Pakistan's GNP in US $ and contribute greatly to boosting the national ego.
However, there is also a downside. It will imply a lower ratio of tax revenues, exports and investment to GDP. This will further expose the structural weaknesses of Pakistan's economy. For example, the estimated level of investment was 20.5 percent of the GDP in 2005-06. Following rebasing it turned out to be 17.7 percent of the revised GDP. Similarly, the tax to GDP ratio fell from 10.5% to 9.8%.
The World Bank actually does estimate already the Gross National Income (GNI) of all countries in US dollars. The approach is different from that adopted by national statistical agencies. It is based on the application of the ATLAS method, which at least partially adjusts for the over or undervaluation of the national currency with respect to the US dollars.
According to this method, the GNI of Pakistan is estimated at $ 272 billion in the calendar year of 2015. With this size, it is ranked as the 41st largest country immediately after Singapore, Malaysia and Egypt. The corresponding estimate of the GNI by the Pakistan Statistical Bureau (PBS) is $ 295 billion, higher by $ 23 billion or 8 percent. Therefore, handing over the re-estimation of GNP to the World Bank may even imply a fall rather than an increase in the size of Pakistan's economy. The basic reason for this is that Pakistan's currency is currently significantly overvalued. If in the foreseeable future, the rupee depreciates then the GNI in US dollars will fall further.
The re-estimation of the GNP is tantamount to what is known as the 'rebasing' exercise of national income. The last such exercise was completed by the PBS in 2012-13. It led to change in the base year of GDP at constant prices from 1999-2000 to 2005-06. Technical assistance was provided by the German NGO, GIZ.
The rebasing did lead to an increase in the GNI by 7 percent. Much of the increase was in the agriculture and service sectors of the national economy like minor crops, livestock, wholesale and retail trade, housing services and transport, storage and communications. Value added in the industrial sector was actually brought down by 16 percent, with a fall of almost 64 percent in small-scale manufacturing.
Earlier, a rebasing exercise was undertaken in 2003, during the tenure of the Musharraf government, to change the base year from 1980-81 to 1999-2000. This led to a bigger rise in GNI of almost 20 percent. Here again, bulk of the increase was concentrated in sectors, characterised by mostly informal activities, like wholesale and retail trade, transport and communications and social, community and personal services. In addition, the livestock and mining sectors jumped up substantially in size.
The consequence of this rebasing exercise was that it facilitated Pakistan's progressing from low income and joining the ranks of (lower) middle income countries by 2007-08. This has been considered as a major achievement by the Musharraf government. Whether the 20 percent jump in GNI from 1999-2000 onwards was illusory or real is difficult to judge seventeen years later.
What is likely to be the impact of a rebasing exercise in 2017-18? On the positive side, the GNI could be augmented by proper estimation of emerging and fast growing economic activities like private security, information technology, Islamic banking, courier and internet services, public transport, etc. Also, the informal economy may have expanded at a more rapid rate, especially the part linked to illicit transactions.
However, on the negative side, the input-output coefficients have increased significantly since 2005-06. This implies that the value-added component in the value of production is lower. The prices of agricultural inputs like fertiliser and fuel for tube wells have gone up faster than commodity prices. Similarly, the prices/tariffs of electricity and gas inputs have gone up at a relatively fast rate. Also, imported intermediate goods prices have increased at a more rapid rate than manufactured output prices. The likelihood is that a rebasing exercise could lead to a contraction in the size of the agricultural and industrial sectors while the value added in the services sector could go up significantly. At this stage, the net impact of rebasing on the size of the national economy is not clear.
The precondition for a proper rebasing exercise is the availability of data from recent censuses or surveys of particular sectors. PBS has been updating surveys on labour force, household income and expenditure and access to basic services, more or less, annually. But the last Census of Establishments was undertaken in 2005, Census of Manufacturing Industries in 2005-06, Livestock Census in 2006 and so on. These primary data collection exercises will have to be undertaken to provide appropriate benchmarks for rebasing. As such, the re-estimation of GNP could take up to two years, especially since the PBS is currently fully pre-occupied with the ongoing Population Census and probably not in a position currently to undertake more surveys.
Also, the logical international agency for providing technical assistance is not the World Bank but the United Nations Statistics Division. The latter institution has developed the System of National Accounts (SNA), which is used globally and provides technical support to member countries.
The expectation is that an objective resizing of the economy from the new base year onwards will eventually not only provide a more accurate estimate of the size but also of the annual growth rate of GDP in recent years. This is essential because the present Government has tended to exaggerate significantly the economy's growth rate since 2013-14.
(The writer is Professor Emeritus and former Federal Minister)