THE recently released SBP Annual Report contains analytical explanations of practically every trend in the economy witnessed last year.

One area that that has immense significance for economic planning and reacting to developing trends in the economy are the moving statistics gathered, analyzed and reported by Federal Bureau of Statistics (FBS). SBP report is forthright in pointing out that FBS performance was not up to the mark in some areas, and these weaknesses gave commentators enough room to criticize official policies. In the light of these observations, turning FBS into an autonomous institution merits serious consideration by the government.

The primary reason why SBP appears unhappy with FBS is the basis used by FBS for calculating ‘core’ inflation index. The argument against FBS-reported core inflation is that the formula for calculating it doesn’t exclude items with volatile prices; including them distorts the reported FBS figure of the index.

In principle, the argument has merit but, apparently, the compulsion for questioning the core inflation index reported by FBS is not what we are being made to believe.

SBP’s frustration is understandable because it has to fix its ‘discount rate’ (the index for basing interest rates for all other tenors) slightly above the going rate of core inflation. Any method of calculating core inflation index that keeps it high builds pressures for raising interest rates.

Recently, when the FBS-reported core inflation index overshot nine per cent for two consecutive months, demands for upping the ‘discount rate’ from its existing level (also nine per cent) gained momentum.

On the other hand, given the existing burden of its domestic debt and the prospects of a higher fiscal deficit in 05-06 (resulting from higher projected demands for public expenditure created by the October 8 earthquake), to contain its debt servicing burden within manageable limits the government tried to prevent a rise in interest rates, realizing little that such move would lead to pervasive distortions in the economy. It also placed the SBP in tight spot.

Succumbing to these pressures, SBP introduced its own core inflation index on October 20, by excluding from its version of the index a wider variety of fuel and lighting items. The exclusions made by SBP include CNG, electricity and gas prices. It had the desired effect; with one stroke of pen core inflation index dropped to 7.99 per cent from its FBS-reported figure of 9.22 per cent thus rebutting the argument for an increase in the Discount Rate. For the present, all seems honky dory because the ‘discount rate’ now exceeds core inflation index by 1.61 per cent.

There is, however, a question mark hanging on this clever jugglery with figures. The argument against the FBS-reported core inflation index was that it included items with volatile prices.

Going by that logic, items that deserved exclusion had to have volatile prices but the prices of CNG, gas and electricity are not exactly volatile. Prices of these items are regulated by the government but, more importantly, they change no more than once or twice a year. They therefore don’t fall in the category of items with volatile prices.

It is true that CNG is imported and because its international prices fluctuate, and for argument’s sake it should be treated as an item with volatile price even if its price is not allowed by the government to fluctuate too often. But analyses by Jehangir Siddiqui & Co. Ltd. indicate that two items that don’t fit into this category are gas and electricity. Gas is an indigenous item and 66 per cent of electricity it is generated by thermal energy.

By excluding gas and electricity prices from its version of core inflation index, SBP may be contradicting its own argument against the FBS-reported core inflation index. This reinforces the view that the compulsion for refining the core inflation index was purely academic; it had more to do with keeping interest rates from rising.

Containing interest rates within manageable limits is not an ignoble objective for a central bank to pursue, but taking a questionable route to achieving that objective merits introspection.

Somewhere in his many dramas George Bernard Shaw makes one of his characters say that “economists know little more than explaining every phenomenon in terms of supply and demand” – an over-simplification that the likes of him sometimes resort to. But he wasn’t entirely off the mark.

Economists often tend to be dispassionate, in fact cold-blooded in their logic. In the case of devising inflation indices they overtly portray this tendency.

Inflation hurts the poor – the vast majority that inhibits the earth. Can anyone deny the fact that, to the poor, rising prices of everything that they buy (irrespective of their price volatility) represent inflation? Irrespective of how the economists choose to calculate its index, the real level of inflation doesn’t change. Yet, for achieving doubtful aims, economists sometimes allow themselves to be used by the politicians to distort economic realities.

By reporting core inflation index below its real level, economists would be promoting a distortion that will have a pervasive effect on the economy because this index will determine the price of money.

Economists have failed consistently in appreciating that a distortion in the price of money distorts price structures in every sector of the economy which, over a period of time, generate socio-economic fallout that most governments eventually find beyond their capacity to manage. Politicians can choose to be short-sighted. Professional integrity demands that economists warn them about the consequences of being short-sighted and not join their club.

Whatever formula the economists may use to under-state inflation, this reality manifests itself boldly. All that the economists end up with is reduced credibility. They are seen as the promoters of make-believe realities.

Under-reporting inflation only encourages day dreaming instead of facing up the reality. Governments end up under-performing and the economy as a whole suffers; realities don’t vanish simply because we acquire habits that befit ostriches.

The make-believe life style that we have got used to leaves progressively lower capacity for facing up to realities. We are not prepared to accept that over the past three years we have given savers a raw deal because giving them a fair deal could have jacked up the borrowing cost of both the government and the industry. This tendency strengthens the belief that the system works only for the government and the industry; poor masses are a lower priority of the system.

What is disappointing is the fact that while the SBP Annual Report accepts this distortion and its harmful effect on domestic savings, the SBP is still pursuing a course that will give the savers negative real rates of return.

Instead of facing up to the ground realities, we seem to be fiddling with the rules to make things appear brighter than then really are. It is both deceptive and un-professional – things that a central bank must avoid.