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Understated GDP

It’s no news that informal economy is significant in Pakistan. What some would not know is that within documented economy, not everything is measured in GDP computation. It can be said with confidence that GDP is significantly understated in Pakistan. Once the ongoing rebasing exercise is done, ratios like debt to GDP or fiscal deficit to GDP will look better. On the flip, measures like tax to GDP or exports to GDP will appear uglier.

The rebasing exercise is under process for long. The new inflation (CPI) measures are out. Nothing on GDP yet. The capacity at Pakistan Bureau of Statistics is often found wanting. Chief Statistician is yet to be appointed. The government should expedite the process. The improved GDP numbers would dilute the debt and deficits ratios. This will bode well for getting foreign investment traction.

In India, analysts suspect that the GDP is overstated. In Bangladesh, journalists fear that economic growth reported numbers are inflated. The data on automobiles, cement and petroleum consumption growth in neighbouring economies depict that GDP computed growth is higher than ground realities. The case is opposite in Pakistan. Here domestic consumption data during 2015-18 is implying actual growth higher than stated. Pakistan remained inward looking while neighbours focused outward. Now economic thinking is shifting at home. It’s imperative to depict encouraging picture to investors and buyers.

GDP was last rebased in 2006, and nominal GDP was increased by 8 percent. Earlier in 2000 rebasing, it was increased by 22 percent. The anecdotal evidences suggest that the real economic growth is understated during 2015-18. Census of Manufacturing Industries (CMI) is taking place. Door to door surveys show that growth in number of firms is significant. The response from Karachi is poor and the survey could not be completed yet. This writer’s hunch is that nominal GDP can shoot up by 25 percent. The same argument holds true for inflation which is probably understated during 2015-18.

There are signs of underreporting in manufacturing (LSM) and services. The Large Scale Manufacturing (LSM) constitutes 10 percent of GDP. Its production estimates are based on surveys. The data is provided by companies. Usual practice is to under report data to evade or avoid taxes.

There is variation in data provided by one group from the other even both are using same data sets. For example, PBS takes data from the OCAC to track petroleum products production for LSM – but it virtually always varies from OCAC’s own numbers. The production of buses, trucks and motor cycles by some of the players are not included in the LSM. Another example is production of Engro Chemicals, which caters to one-third of the entire domestic demand of caustic soda, is not included in the LSM.

Globally, the LSM comprises 22 broad categories of industries. In Pakistan it captures only 15 sectors. The data pertaining to manufacturing of wearing apparels & dressing; publishing, printing products & recorded media; fabricated metal products (except machinery & equipment); office & accounting machinery and computers; medical precision & optical instruments; and recycling of metal and non-metal waste scrap, plastics, and packaged food, are not included. In this fiscal year, the major growth in textile exports is recorded in value added products – readymade garments, knitwear, bed wear etc. However, textile contribution in LSM is up to cotton cloth. Further value addition is recorded nowhere.

The case of under-reporting is more visible in services sector. A few modern services were included in 2000 and 2006 rebasing. Consumerism has moved to next level since then. Numerous value-added services grew in designing, branding and retailing in urban centers. The real estate and construction businesses have become big. Information technology’s (including e-commerce) share has increased.

Private school and health services mushroomed since 2006. Services like education, health, beauty parlors, restaurants, gymnasium etc. are not fully measured in GDP. In case of CPI, the weight of education and health combined is 6.6 percent. How much of your monthly expenditure is spent on these?

The biggest share of services is in wholesale and retail segment. Its weight in GDP is at 18.9 percent (higher than agriculture-18.5%). At the time of 2006 rebasing, the big malls, super markets, textile retailing brands could have been counted on fingers. Now in DHA Lahore, there are more supermarkets than what probably were in whole Pakistan in 2006. The growth in retail and trading sector is much lower than the profitability growth in FMGC during 2015-18.

The services sector contribution in economy is deemed to be significantly higher than what is recorded in GDP. The story of manufacturing is not much different. In agriculture, apart from major crops, there is no sane measure to compute minor crops and livestock. The benefits of opening up economy cannot be fully exploited without recognising the actual economic constituents.

Ali Khizar, "Understated GDP," Business Recorder. 2020-01-02.
Keywords: Economics , Documented economy , Fiscal deficit , Economic growth , Petroleum consumption , Economic constituents , Engro Chemicals , Medical precision , Optical instruments , Textile , FMGC , GDP , CPI , LSM , OCAC

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