Updating the economy

Published January 22, 2022

THE long-overdue rebasing of our GDP has boosted the economy’s size through improvements in the coverage area of economic activities. The calculation of national accounts to FY16 from FY06 has increased the economy’s size by almost 16.5pc to $347bn and jacked up the FY2021 growth rate from 3.9pc to a 14-year-high of 5.6pc. Even at the old base year, the GDP growth rate was revised up to 5.4pc owing to incorporation of the final data on industry, agriculture and services.

The updated accounts incorporate changes in prices, trade and industrial production indices over time. The economy’s revised value shows that its real size was underestimated by 11.3pc on prices of the previous base year of 2006. Gross national income has also increased to Rs59.3tr, with per capita income rising from $1,543 to $1,666. So what are the advantages and implications of this exercise for the government and public?

The rebasing of the GDP resulting in a higher growth rate and the economy’s expansion has spawned speculations that the government has fudged national accounts to paint a rosy picture and draw political capital. Such assumptions are uncalled for. GDP rebasing is a process of replacing an old base year with a more recent one — usually every five years — to keep pace with price evolution and changes in the economy’s structure over time to capture current economic conditions.

Read more: Govt, opposition spar in NA over growth claim

Thus the new GDP series reflects a more accurate picture of the size and structure of the economy, and incorporates new activities and technologies that had previously not been captured by national accounts. It will allow policymakers to use a new set of economic information, which is more reflective of the current structure than those based on the 2006 base year, and help them make evidence-based decisions.

The impact of rebasing is felt primarily in changes in the major macroeconomic indicators. Indeed, the reduction in public debt from 84pc of GDP to 72pc and external debt from 29pc to 25pc after the economy’s expansion will enhance the government’s bargaining power and create space to borrow more at home and from abroad to meet fiscal and external account needs.

Likewise, the 1pc reduction in fiscal deficit as a ratio of GDP will provide greater room for fresh sovereign guarantees pegged on the economy’s size. At the same time, a higher GDP indicates a significant drop in the tax-to-GDP ratio from 11.1pc to 9.5pc and exports-to-GDP ratio from 8.6pc to 7.4pc, underscoring that most of our economic troubles are rooted in poor fiscal efforts and low productivity.

Meanwhile, if anyone thought they can use the improved numbers to show that fewer people slept on empty stomachs or the number of unemployed had decreased because of rebasing GDP, they are mistaken. Rebasing doesn’t make countries or people richer; it is just about updated data for policymakers to take informed public investment and taxation decisions.

Published in Dawn, January 22nd, 2022

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