@farhan_9909, I'm going to answer each of your points individually.
So, saddle up for the ride.
why is Economy doing better compaed to the past 4-5 years
*Economic growth improved(3.7% in 2012 from 2.4% in 2011)
*INflation at 6.9% in the past even reached 25%
*KSE close to 17k mark
*Trade deficit decline from the past few months
*Export incirease(struck for the past few years b/w 20-24billions) this year expected to reach 28-30billions
First, just to clarify:
The country has missed the downward revised gross domestic product (GDP) growth target of 4.0 percent as the National Accounts Committee (NAC) on Thursday determined the GDP growth rate at 3.2 percent for ongoing fiscal year 2011-12.
Daily Times - Leading News Resource of Pakistan
N.B. These figures are based on
provisional data for the first nine months and do not include the last three winter months, during which energy and power crises are generally more
acute.
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Moreover, I assert that Pakistan's GDP growth figures are
fudged, and are likely to have been fudged for the current fiscal year.
In order to evaluate this, we will take a two-step approach: 1) historical trends, 2) means and motivation
1) First, let's take a look at the
historical evidence of Pakistan's Government fudging economic data to support claims about economic growth and/or poverty reduction.
Dr. Shakeel Ahmad is a former member of the Civil Services, Pakistan and Advisor to the Additional Secretary, Economic Committees and Regulatory Authorities (EC&R) of the Federal Cabinet. The flwg. is a brilliant article written by the Doctor that makes the following assertions:
I) Economic statistics are being fudged willy nilly.
II) There is a serious loss of credibility of government statistics since 2000.
III) Poverty & illiteracy levels are much higher than the massaged numbers indicate.
IV) Pakistan is now a laughing stock at international financial institutions
V) IMF/WB/UN are now questioning authenticity of Pakistani economic data
VI) Growth of the last 10 years was not driven by higher investment
VII) The national savings rate fell from 15% in 2001 to 9% in 2011.
VII) Low savings and low investments have created a future poverty trap
IX) More importantly, stagnant savings is explained by a negative contribution of household savings in physical assets, increase in deficit financing by the government and non-consequential savings by the corporate sector as a percentage of GDP. This latter phenomenon can be attributed to loss in profitability, repatriation of profits by multinational companies and closure of businesses due to their inability to compete in the external markets
X) Vulnerability & dependence on external assistance (Aid/IMF) has increased
XI) Pakistan in now caught in a vicious circle of low investment, low growth, low productivity.
After assuming responsibility as Finance Minister and subsequently as Prime Minister, Shaukat Aziz, did not tire of informing the nation that Pakistan had broken the IMF begging bowl and the State Treasury was overflowing with funds. In fact, he went on to state that Pakistan would soon become a donor country. According to him, the financial commitments and contribution made for Afghanistan's economic development were symbolic. Other countries could also expect Pakistan's assistance in the development of their economies. In order to justify his claims, national statistics were fudged. GDP figures for at least two preceding years were revised in 2005-06. This was unprecedented. The fallout effects were ignored. The first casualty was the loss of credibility of the data presented in the Economic Survey. Thanks to conniving bureaucrats serving in national institutions, poverty measurement instruments used in earlier estimations were discarded. Despite murmurs of dissent, new poverty measurement tools were used to produce results that could support the regime's contention of a rising Pakistan. According to these 'new' estimates, the percentage of population living below the poverty line had shown an impressive decline. This reduction in poverty was attributed to the sound economic policies of the economic managers. It was a different matter altogether that they had made the country a laughing stock of donors as well as the international financial institutions.
...
Institutions to invest | The Nation
Do read the rest of the article.
Dr. Shakeel Ahmad is not the only distinguished individual making claims about the falsification of Pakistani economic data. Dilawar Hussain is Senior Economics reporter at Dawn, who quoted economist Nadeem Naqvi, and made the same assertion about the
historical fudging of economic data not long ago:
Fudged GDP growth numbers
KARACHI, June 4 According to provisional numbers released in the Economic Survey for the financial year 2010, the Gross Domestic Product (GDP) growth stood at 4.1 per cent, representing a brilliant improvement over the 1.2pc last year.
The achievement was claimed to be in spite of severe challenges faced by the economy.
Interestingly, however, the Survey revises down the GDP growth of the previous two years (FY08 & FY09), which provided support to the headline growth rate for current year.
If the previous year`s figures were held at what they were (provisional 2 per cent GDP growth last year), the effective growth in FY2010 would work out to 2.9pc and not at the high mark of 4.1 per cent.
The IMF and the Asian Development Bank had also forecast below 3.5 per cent growth for the current financial year. Economists have noted that the GDP growth target for FY2010 was originally set at 5.8 per cent. And as the year progressed, the sun did not seem to shine that brightly on the economy, pushing managers to revise the target down to 3.4 per cent and then again to 2.5 per cent. Does that smack of a doctored growth?
Economists point out that there is a long history of such fudging of figures. The usual methodology to post a higher economic growth for the current year is to reduce the growth of the previous year.
As an example, the GDP figure for FY2008 was unveiled at 2.0 per cent, the country showing to have performed better than the rest of the regional economies. But the number was achieved by a hard work on cooking up figures with the earlier year`s (2007-08) growth drastically revised downwards to 4.1 per cent from 5.8 per cent.
Economist Nadeem Naqvi asked to comment, said on Friday evening that it called into question the quality and integrity of all data from Federal Bureau of Statistics.
"How can anyone do any social or investment planning under such circumstances and how can economic policies be correctly framed? he asked.
Fudged GDP growth numbers | Latest news, Breaking news, Pakistan News, World news, business, sport and multimedia | DAWN.COM
From the above, it is evident that historically, Pakistani
bureaucrats have been
accessories to the
embellishment of economic data to substantiate the totally concocted claims of some Pakistani politicians.
2) But, what about more recently? Is there cause to believe that Pakistan's economic data may be falsified owing to certain politico-economic motivations: to mask underlying economic weaknesses, for example, in order to match donor expectations such as the IMF's; or to provide solicitation for the politically rambunctious statements of Pakistani statesmen? There certainly is, as this article indicates:
Asia Times Online :: Pakistan revenues fudge deepens IMF loan doubts
Key points from the article:
- Background: IMF-stipulated Govt. debt-GDP ratio as a precondition for Pakistani securing of a multi-billion dollar bailout package
- An admission that Pakistan's tax receipts fell well short of their target in the financial year ending June, 2011 after earlier reports that Govt. revenue and tax receipts had exceeded their target by fudging debt-GDP ratios.
- The target for revenue collection was previously thrice revised, and the failure to meet the (third) revised revenue target prompted Pakistani economic managers to massage the economic figures, as debt-GDP was a core IMF demand for retrieving the current ~$11.3 billion bailout program.
- After the IMF "appeared to have got wind of the real figures", the authorities officially conceded the revenue shortfall.
- Had the latest debt-GDP figures, still hovering around 60%, been initially declared to the IMF, it would have led to the imposition of stiff penalties. The only way to avoid those penalties was to reduce the debt, by:- 1) inflating tax revenue; or 2) inflating GDP.
- The pressurized "reconciliation of figures" led to the resignation of the central bank governor, the chief economist and auditor general all in the same month.
- Achieving the new debt-GDP targets will be difficult as the [revenue] base has been reduced by 38 billion rupees, making inflating GDP the only viable method of debt-GDP ratio target achievement.
The fact that Pakistan also has
no independent regulatory watchdog with teeth, such as the CAG of India, also subjects the Pakistani Government's statistics to further
incredulity.
Much of the inflated GDP owes itself to
large public spending through the PSDP by a federal government mired in
political expediency. This article from the Business Recorder, in Oct 2012, is instructive:
[...]During FY13, Planning Commission is responsible for monitoring and disbursing of Rs 233 billion under the PSDP while another Rs 27 billion worth of special projects, commonly known as People's Works Programmes are separately being looked after by the Cabinet Division. Such special projects are mostly undertaken on the directives of the Prime Minister's Secretariat.
Political motives appear to dictate the selection of projects to a large extent. In certain cases, funds allocated for the entire fiscal year, were released in one go instead of following a four-staged disbursement schedule. Some of the projects that were not part of the PSDP were subsequently approved in haste and funds released upfront, even before completing mandatory scrutiny and approval of the process. For example, three newly conceived projects with a total cost of Rs 7.6 billion in the constituency of Prime Minister Raja Pervez Ashraf were not part of the PSDP approved by the then Prime Minister. These were cleared last month at a hurriedly called meeting of the central development working party and are yet to be approved by the ECNEC. In some cases, increased spending for development projects was at the cost of some crucial projects of public importance in health and education sectors as well as human rights. For example, no money was released in the first quarter for eight public health projects for which Rs 12.9 billion had been allocated for the current year. Projects aimed at bringing the Baloch back into the mainstream were also ignored as the government did not release any funds for Rs 1.7 billion worth of Dera Bugti and Kohlu packages.
...
Unjust use of development resources | Business Recorder
Owing to this
inflated expenditure by a Government gearing up for elections, which in turn is inflating the Federal Govt.'s
debt, the
embellishment of
GDP statistics by the GoP in order to achieve
indispensable IMF-prescribed debt:GDP ratios is all but
necessary.
The above clearly indicates that Pakistan has a
strong incentive to fabricate this year's GDP growth rate, the
means to achieve it and
no independent regulatory body to detect and confront it, unless brought to the notice of the IMF through some fortuitous concourse of circumstances.
The
expansion of Govt. debt both as a means to finance the ever-growing deficit and as part of PPP-inspired, PSDP-routed urban-rural redistribution policies has led to an
ever widening revenue-spending deficit, which is impacting adversely the
debt:GDP ratio, a key barometer of IMF tranching. Given the
short-term nature of this problem, the Govt. sees fudging revenue [and fiscal deficit] or GDP statistics as the only viable solution.
Unfortunately for the GoP, revenue statistics and revenue sources are far less opaque and far more easily auditable; the GoP discovered this when it tried to fudge those figures before. On the other hand, GDP statistics are much more complex; and are therefore easily obscured, especially in the
absence of an
independent, regulatory financial watchdog.
So, given that achieving required debt:GDP ratio targets is
imperative, and that in the presence of a ballooning fiscal deficit and no real tax reform,
massaging the GDP numbers is the only option, how does the GoP go about evincing that:
Well, the following article provides a brief glimpse:
Double-counting: GDP overestimated, may be slashed by 10%
By Shahbaz Rana l Published: April 29, 2012
ISLAMABAD: Pakistan's economy was reported to stand at Rs21 trillion this year – except, it may not have been.
The size of the country's economy will shrink by up to Rs2.5 trillion, or roughly 10%, after reports surfaced that the value of some goods and services were 'counted twice' in calculation of the Gross Domestic Product (GDP) for the last several years.
The 'correction' has major implications, and places a question mark on authenticity of key economic indicators.
Major 'correction'
The 'double-counting' surfaced after Pakistan Bureau of Statistics (PBS) rebased the economy, shifting the base year for calculations from fiscal 1999-00 to 2005-06.
The rebasing has reduced the size of the economy, earlier assessed to be Rs21 trillion, to less than Rs19 trillion, said an official of the finance ministry.
Last year's GDP has also shrunk by up to Rs1.5 trillion, the official added.
While a top official of National Accounts called it a "mistake that has been corrected," the error has sent the government's economic managers back to the drawing board to rework all economic indicators not just for the next year, but for the last seven years at least.
The disclosure may also delay the announcement of next year's budget as national accounts figures are used in the Economic Survey of Pakistan and the Annual Plan for the next fiscal.
The governing council of the PBS is meeting next week, chaired by the finance minister, to revisit the national accounts, according to Secretary Statistics Sohail Ahmad.
Impact of the error
How does this correction torpedo calculations for the current and projections for the next fiscal?
The budget deficit for the current fiscal, initially estimated to be around 6.5% of GDP, will soar to around 9% after the correction, said an official from the finance ministry.
Last year's deficit, calculated to be 6.6%, will increase to about 7.2, the official said. The debt-to-GDP ratio for the current fiscal, estimated close to 60% of GDP, will rise to about 70% after the rebasing, he added.
Defending the 'correction'
An official of National Accounts said the department "will not hide mistakes anymore just to appease the finance ministry."
Some of the goods and services were counted twice, and that has been addressed, he said, citing the example of water supply which was listed under two separate heads.
"It is better to accept readjusted size with an implication of a couple of trillions instead of letting the GDP artificially increase for many more years," he added.
Neither officials from the National Accounts, that works under the Statistics Division, nor the finance minister or secretary were available for comments, despite repeated attempts. Finance Minister Dr Hafeez Shaikh has already asked the Statistics Division to place its work for 'review' in front of the governing council of the PBS.
Possible ramifications
The error may invoke penalties from International Monetary Fund (IMF) since all key economic indicators – like the debt-to-GDP ratio, the budget deficit and economic growth – were reported on an inflated GDP size for at least ten years.
The country entered into three programmes with the IMF during that period. Though there is no official confirmation, Pakistan is also negotiating a fresh programme with the Fund.
Double-counting: GDP overestimated, may be slashed by 10% – The Express Tribune
So,
double counting has traditionally been the méthode de choix for fudging economic data.
Moreover, the following article also make it apparent that
re-basing has enabled Pakistani economic managers to
revise economic growth in subsequent years downward, and thereby
claim higher growth rates [year-on-year] for the current year:
Daily Times - Leading News Resource of Pakistan
Some key points:
- The base year revision from 1999-00 to 2005-06 enabled the downward revision of subsequent fiscal growth rates and an upward revision of the current [year-on-year] growth rate.
- In the new base year: 2005-06, the share of agriculture in GDP went up from 19 to 23 per cent; while for mining, manufacturing, construction and energy, gas and water supply, the rebasing resulted in a lower share in the economy, going down to 21 per cent from 25 per cent.
- The overall GDP at market prices for the new base year has slightly decreased by 0.4 per cent. As a result, the average annual growth rate between 2005-06 and 2010-11 decreased from 3.7 per cent to 2.9 per cent [in real terms].
- Despite this [at constant 2005-06 prices] the Government missed its target growth rate of 4.0% and clocked 3.2% for the current fiscal.
A third and perhaps unique method of inflating GDP has been the
arbitrary retaining of old base year values in certain sub-sectors of the
service sector, by far the biggest component of GDP:
The government missed the services sector growth target of 5% as the biggest component of the economy grew by 4.1%. However, the decision to keep the old base year helped achieve growth targets in sub-sectors of the services sector.
Reverting to old base year: Economy grows by 3.67% this year, but misses target – The Express Tribune
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Just a word of caution: the large payments to the IMF that you are currently seeing and that are being celebrated by the Pakistani Government as being indicative of their repayment-ability, are in fact payments enabled by the taking of even more loans: including about $60 million in soft loans from Saudi Arabia, $200 million in short-term loans from the Islamic Development Bank and about $180 million in loans from the United States. $2.8 billion are due to the IMF by the end of this fiscal, and not repaying them will lead to the imposition of even more penalties and a worsening B-o-P crisis.
