How large is the gross national income? It depends how it is measured, by the purchasing power parity or the exchange rate. And yet the national income in both cases be may be under- estimated by the failure of developing countries like Pakistan to update periodically their national accounts on the basis of structural changes in production and pricing of products.

According to the World Bank Development Report 2005, Pakistan's gross national income (GNI) was at $306 billion in fiscal year 2003 when calculated on the basis of purchasing power parity (PPP).The GNI dropped sharply to $69 billion under the commonly used exchange rate related World Bank Atlas method.

With volatility in forex markets triggered by speculation, it is now realized that fluctuating exchange rates are not an appropriate device to arrive at realistic national income estimates. GNI is converted into international dollars using the PPP conversion factors because, says the World Bank report, the nominal exchange rates do not always reflect international differences in prices.

China becomes the world's second largest economy when its gross national income estimates are measured by purchasing power but it's status drops to 5/6th when the exchange rate-based Atlas method is used.

In comparative terms based on the magnitude of its operations, Pakistan State Oil stacks up with the Fortune -500 companies, at or around the 460th position, says PSO.The firm has lost its earlier position in the magazine's list of top companies because of massive depreciation of the rupee over time, says PSO managing director Tariq Kirmani.

Measured by purchasing power, Pakistan has a 30 million strong middle class enjoying per capita incomes of $8000-$10,000, says Dr Ishrat Husain, Governor of State Bank.

Pakistan's Gross Domestic Product rises to $98 billion by re-basing the national accounts from 1980-81 to 1999-2000 that captures some though not all of the missed out economic activities. The methodological details of re-basing have not been made public and are awaiting approval of the IMF.

These variations in GNI by application of different modes, indicate that cold statistics created by faulty accounting systems do not fully reflect the living economic reality.

Now, to come to how the national accounts are computed. The World Bank says:At the PPP rate, one international dollar has to have the same purchasing power over domestic GNI that the US dollar has over the American GNI. PPP rates allow a standard comparison of real price levels in countries, just as conventional price index allows comparison of real values over time. The PPP conversion factors used here are derived from survey conducted in 118 countries.

Under the World Bank Atlas method, GNI comprizes Gross Domestic Product plus net receipts of primary income from foreign countries. Data are converted from national currency to US dollars, using a three year average of exchange rates to smooth the effects of transitory exchange rate fluctuations.

A key issue in Pakistan is to have timely re-basing to make national accounts more representative and depict the true picture of the economy.Pakistan has delayed its re-basing exercise by two decades when the international practice in developing states is to do it every five or 10 years. Now, a decision has been taken to update national accounts every five years.

In the last budget, the antiquated 1980-81 benchmark on which the National Accounts estimates were based, was not fully updated. The structural changes brought about by many of the new range of products, enterprizes and economic activities like courier services, travel agencies, mobile phones etc were captured.

Thus, the coverage of manufacturing items has increased from 91 to 128. The GDP size in 1999-2000 increased by 19.5 per cent, agriculture by 18.5 per cent, industries by 18 per cent and services by 20.8 per cent over the base.

Per capita income in US dollar terms was estimated at $526 for the year 1999-2000 compared to $441 in the old base. In fiscal 2003, the per capita income was put at $470 as measured by World Bank Atlas method and $2060 on the basis of purchasing power parity. Similarly fixed investment showed an improvement by 34.3 per cent in 1999-2000 mainly due to improved coverage.

Yet,there are many activities which are still to be covered in the accounts. These include IT related businesses.

The significance of updating national accounts cannot be over-emphasized.It is the size and the prosperity of the market that attracts both foreign and domestic investment. Fortunately, re-basing done last year was well-timed as it coincided with the investment-led economic growth. As domestic investment has picked up fast, it may encourage some foreigners to have a fresh look at the growing emerging market.But investments depend on key factors like stable exchange rate, low interest charges and competitive corporate tax rates.

Here one of the key issues facing the economic managers is to come to grips with speculative trading in currency as witnessed from July to October 29 this year leading to loss of rupee value by 5.5 per cent against the dollar. It forced the State Bank to take over the responsibility of making oil import payments from the inter-bank market and to place some curbs on financing procedures of imports in general.

The speculation was taking place as the greenback was depreciating with the Financial Times London predicting that "the greenback could be on the edge of the cliff." US current account deficit had shot up to 5.7 per cent of the American GDP. UBS economists reckoned that dollar's trade weighted value might need to fall by another 20-30 per cent in next two years to stabilize United States external liabilities to its GDP.

Apparently, Pakistan's financial markets lack maturity. In retrospect, the speculation was a misadventure.