The need for accurate statistics is universally recognized and has become more important in transfer of economic activity from the public to private sector. In public sector, the managers have no personal stake but the state bears the cost of their mistakes. They hold things close to the chest, lest they are exposed to public criticism. If pressed, they conceal more than they reveal.
In contrast, the private entrepreneur personally faces the consequences and moves with caution. He seeks reliable information about the forces bearing on his business. In case of uncertainty, he would sit and watch. This situation adversely affects the economic activity, and calls for transparency and good governance. Reliable economic indicators and other economic datum attract foreign investment. In the absence of information, the investor will incur extra cost to collect the desired information, and if the cost is prohibitive, it may deter investment.
There is skepticism about the official statistics, even the government institutions have begun to question these. The State Bank in its Quarterly Report on the State of the Economy (QR) for the FY 03 had expressed difficulty in accepting the growth rate of the large scale manufacturing sector, observing; “In the face of the improved economic environment, the weak growth recorded by the large scale manufacturing (LSM), and the lower net credit from banks, relative to Q1-FY 02, is puzzling and inconsistent with the behaviour of other aligned indicators such as the corporate earnings, the manufactured export expansion, the domestic sales tax, and the import of machinery and raw materials. Thus, it is probable that the LSM growth depicted by the official statistics understates the true improvement.”
“Above all, the statistics on textile industry production did not show the buoyancy that should have been visible in the light of 16.5 per cent growth in its exports. One obvious explanation is that the export growth may lead primarily by the small-scale manufacturing or by the undocumented economy (on which the data is unavailable). Growth in the latter, in particular, would also help explain a part of the lower demand for credit from the banking sector.” The Economic Adviser of the ministry of finance has complained about the data on investment. He says, “the All Pakistan Textile Mills Association (Aptma) had recently said that the textile sector had invested Rs46 billion, but due to the Federal Bureau of Statistics’ (FBS) failure, it is not reflected in the books. “The adviser has underlined the need to reorganize the FBS, for true reflection of investments.
An attempt is being made to highlight limitations of three economic indicators viz-a-viz ‘the national income, the fiscal, and the monetary datum’. The most important are the national income accounts — which indicate the economic growth rate. These are prepared as a pre-budget exercise and are rough estimates, based on partial data of the actual performance during the first 9 months, supplemented by projections or targets for the year. As such, the revised growth rate invariably turns out on the lower side, by at least half a per cent. This puts the estimates for the following year in a better light. The most dramatic downward revision was in 1996 -97, when the revised rate was almost half; only 1.7 per cent as against the estimated rate of 3.1 per cent. The revision takes place not during the course of a year, but at the time of preparation of the estimates for the following year. By then, the focus shifts to that year and all is practically forgotten about the previous year except for comparison with the latest year. It is a pity that the guesstimates for the FY 2001-2, prepared and released in June 2002, are still being used, even though the period ended more than half a year ago, and the data indicating the actual performance of all sectors, including the budget is available for revision.
There is an inherent upward bias in accounts because of the assumption of the constant rate of growth for some sectors and sub-sectors. The rates assumed are: 5.3 per cent for the small-scale manufacture, 5.3 per cent for the ownership of dwellings, and 6.5 per cent for other services. Together, they account for more than one-fourth of the GDP. As such, these influence the overall growth rate. In the context of the lacklustre performance during 2001-2, the constant rates assumed for these sectors are obviously unrealistic. A concrete example is called for to bring home this point.
For instance. the rate assumed for the ownership of dwellings is 5.3 per cent, which is not in-line with the slow pace of construction in recent years. The output of cement, which is used as an input in this sector of the account, is a good proxy. Cement production during 2001-2 was better by mere 2.7 per cent. This rate will knock off the 0.2 per cent from the overall growth rate, reducing it to 3.4 per cent. Despite the increase, the average rate over a longer period also discredits the assumption. Similar correction for the other two assumed rates would easily shave off at least half a per cent of the overall growth rate. It can thus be safely ventured that the growth rate during 2001-2 was not even 3 per cent.
Fiscal data rejects the use of real economic resources by the public sector which affects the economic environment, and the welfare of the common man. As budget is not an exercise in bookkeeping which should provide necessary information for assessing the economic implications of revenue and expenditure. The budget has degenerated into “cash flow management’, severing its contact with the real economy. To begin with, the system of budgeting in Pakistan is “cash” based. That is cash received and paid. This means that the advance or the delayed payments would distort its relationship with the real economy. It is because of this cleavage that the world is moving away from “cash” to “accrual” accounting. The UN commends it for universal adoption for state budgeting. The cleavage had already assumed planning proportions in Pakistan due to the huge ‘circular debt’ and “contingent liabilities” in the public sector. That is a manifestation of degenerating fiscal discipline which is a matter of grave concern.
In recent years, a new factor of ‘conditionalities’ had been imposed by the IFIs. One of which is ‘lowering the ratio of the budget deficit to the GDP. In regard to honouring these commitments, the IMF keeps Pakistan on “Prior Action” and “Quarterly Performance Criterion” as a pre-condition for releasing the loan in instalments.
The ratio of the budget deficit to the GDP involves two variables, the economic growth rate, and absolute amount of the deficit. Since former is worked out on annual basis, it cannot be influenced for a short period.
This leaves the absolute amount of the budget deficit amenable to manipulation in the short-run. Pakistan earned quite a distinction when the government official, admitted of “fudging the fiscal data” to show compliance with the conditionality and a promise to behave in future.
This paved the way for short-term Standby Agreement (SBA) with the IMF in early 2001, and governs the new longer-term IMF Poverty Reduction Growth Facility (PRFG) sanctioned after 9/11.
How the budget deficit conditionality has been complied with makes a classic example of innovative economic management. So far, the fiscal data was released on annual basis and an idea about the amount of budget deficit was given in the monetary data as borrowing from the banking system for the budgetary support.
This indicates the position on a net basis, that is deducting the bank balance of the government from the gross borrowing.(PSEs are shown separately). The following Table shows the trend on a monthly basis for the last three years.
The end-quarters are dates for the compliance with the Performance Criterion. The above table clearly shows a new pattern of massive retirement of credit during the last month of a quarter and its more or less reversal in the following non-criterion month.
The retirement of credit for budgetary support can be possible only through a surplus budget. In some cases there is a massive swing of over Rs87 billion (June-July 2001) in just one month. A graphic presentation of the phenomena brings out the sharp short-term swings.
A surplus of Rs54 billion in the end of the fiscal year when there is a mad rush to avail the lapsing grants is unbelievable. All this, which suggests a radical change in government transactions, is too good to be true.
It requires an indepth analysis of how this is managed and that will be a fascinating piece of research. Nevertheless, some tell-tale signs are there. First is the simultaneous opposite behaviour of the heading ‘other items’ as shown in the table.
The other is the withholding of refund of duty drawbacks until there is a great hue and cry by the business. This is nothing but plain manipulation of cash flow which has nothing to do with the real data, when used as input for other indicators.
The fiscal data goes into the national income accounts, which reflects the production and the use of real resources. In the present form it is not good for that purpose.
Manipulation of cash flow to show compliance with performance is not necessary. Authorities may be afraid that the non-compliance might break the agreement, as has happened in the past. If so, they are forgetting the difference in environment.
As a matter of fact, the IFIs are under the US influence, and their major shareholders always look towards the US nod. At the moment, it is the American generosity towards Pakistan for latter’s role in anti-terrorism campaign.
The IMF is already turning a blind eye to many non-compliance of agreements, and waivers in regard to tax collection targets, the CBR reforms, privatization of state enterprises, etc,. A waiver of the budget deficit conditionality is not too much. It would be naive to believe that what strikes a layman would escape the hawk-eyed levy. Their benign neglect is just a part of their strategy.
The authorities in Pakistan would be well advised not to play to the gallery and add to future problems, but to put their nose to the grinding stone and deal in earnest with the difficult problems pertaining to public finance, as well as other key sectors.
At times, there is confusion about the government reliance on borrowing from the banking system. According to the SBP Annual Report (AR) for 2001-2, the monetary analysis reveals this to be Rs12.5 billion (SBP -Rs.112.0 billion and Scheduled Banks +124.4 billion) and the same figure appears in the Summary of Public Finance (consolidated).
However, moving to the table on financing of the federal government expenditure, (credit from the banking system is shown at Rs62 billion. The implication is that the provincial government retired the heavy balance. The report does not contain information on the provincial budgets, hence the difficulty to check on that.
Distortion in monetary data by cash management by the government has been mentioned above. In compiling the monetary data the SBP follows an archaic system, much of which is a relic of the British Raj.
The scope of the data is confined to scheduled banks, while a number of financial institutions have emerged which perform banking functions but are left out because they are not classified as such. There is an array of the DFIs, the leasing companies, the investment banks.
Their quantitative importance is underlined by the fact that during 2001-2, the DFIs, excluding the ADBP and the IDBP which are scheduled banks, had disbursed Rs4.3 billion in loans, while the leasing companies and the investment banks had extended Rs19.8 billion. The leasing companies alone disbursed Rs14.4 billion.
In the same period the scheduled banks credit to private sector increased by Rs37.7 billion. In 1999-2000 it was only Rs18.3 billion. There is a revolution under way in the financial sector in terms of new institutions and products all over the world. The scene in Pakistan has also radically changed, though not to that extent.
It is time the central bank took cognizance of the changes that have already taken place and revise the concept and scope of the money supply to comprehend that. For this the SBP should not take a narrow view and restrict itself to those institutions which are under its control. It must also arrange to obtain information on a regular basis from all those institutions whose operations have credit implications.
Distribution of credit is also important to ensure that productive activity in various sectors of the economy is not hampered for the want of credit. With the shift of emphasis to private sector, the flow to that sector needs to be closely watched. The analysis of changes in monetary assets has seen refinement so far as the public sector goes, but no such attempt has been made in regard to the private sector. As a result this does not depict the true picture.
There is a serious distortion caused by the bad debt, which is huge and still growing. The extent of the distortion is obvious. For instance during 1999-2000, the increase in the scheduled banks credit to private sector was Rs18.3 billion, while the non-performing loans (NPL) rose by Rs 17.4 billion and the defaulted loans by Rs5 billion. During July-September 2002, the credit to private sector increased by Rs26.9 billion, while the NPL rose by Rs11 billion, and there was “deletion and write-offs of Rs8.2 billion. As of end-September 2002, the NPL of the scheduled banks (commercial banks — specialized banks) stood at Rs232.7 billion, recording an increase of Rs17.4 billion over the year.
The State Bank should indicate clearly these elements of the NPL, the DL, and the write-offs in the ‘Causative Analysis’ to give a correct picture of the use of credit for economic activity by the private sector.
To sum up, the crucial economic indicators mentioned above need an early revision to make them truly reliable for every user in and outside government so that they provide a sound basis for decision making.