Did Pakistan’s Economy Grow by 3.94% During FY2020-21?

Did Pakistan’s Economy Grow by 3.94% During FY2020-21?
Is the government exaggerating the quantum of economic growth, or is the ‘surprise’ merely due to the phenomenon of ‘base effect’?

The National Accounts Committee (NAC) of Pakistan, in its 103rd meeting on Friday 21st May, approved provisional estimates of GDP growth as 3.94% for the fiscal year 2020-21. This was widely reported as a ‘surprise’, since it surpassed all expectations: those of the IMF (who projected growth at 2%), the World Bank (at 1.5%), the State Bank of Pakistan (at 3%), and even the government’s own Ministry of Finance. So how is this possible? Is the Pakistani government fudging the figures, or is some kind of statistical sorcery at play here?

Notwithstanding the debate over PTI’s economic management and overall policy direction, the first argument pertaining to these indicators is that they are merely projections, and not yet established as bona fide representative statistics of economic trajectory. These values have been calculated by the Pakistan Bureau of Statistics (PBS) for the period starting in July 2020 and ending in March 2021. As time progresses, the economic modeling systems at PBS, the State Bank (SBP) and government ministries will not only update the figures for the full 2020-21 fiscal year and year-on-year comparatives, but will also revise the statistics for past periods.

For example, the NAC meeting revised growth figures for 2019-20 (further downwards from -0.38% to -0.5%) as well as for 2018-19 (upward from 1.91% to 2.1%). Since the estimates for past years are also thus ‘revised’, this introduces a statistical impact called ‘base effect’: that the base values for calculating percentages of change themselves change. In order to overcome the quantitative anomalies introduced by such ‘changing of the goalpost’, the average is usually calculated for multiple fiscal years. This means that, on average of course, the Pakistani economy has only grown between 1.6% and 1.8% per annum for each of the close-to-three years of PTI’s government.
According to objective estimates by experts, the true value of Pakistan’s GDP growth (on year-on-year basis) would actually amount to approximately 3.3% for fiscal year 2020-21. This lends credence to the original PBS and SBP valuations.

More importantly, objections were raised at the 3.94% GDP growth projection during the NAC meeting. SBP’s chief economist Dr. Muhammad Ali, opined that according to the SBP’s macroeconomic modelling, the growth rate was closer to 3% than to 4%. Advisor to the Ministry of Finance Dr. Imtiaz Ahmed, noted that the 13.8% growth in gross fixed capital formation (GFCF) could not sustain the GDP growth estimate of nearly 4%. Finance Ministry representatives also questioned the impact of foreign remittances on consumption and investment, two core components of GDP valuation. However, it must be clarified that – according to prevalent practices – this growth is not being driven by public and private consumption, which is calculated as a residual statistic and is not calculated through data collection in Pakistan.

When the NAC reconvened after a break for Friday prayer, the Ministry of Finance withdrew its objections, whereas the SBP persisted in protestation and focused on agricultural data pertaining to wheat production. It should be noted that the astonishing estimate of 3.94% is ascribed to wheat production estimates as well as the growth in large-scale manufacturing (LSM) during the outgoing fiscal year. Moreover, the services sector remains a reliable driver of economic growth, witnessing better-than-expected performance in the wholesale and retail trade sectors even as the transportation sector was hit hard by pandemic restrictions.

It has also been reported that the PBS was “pressured” by a “non-elected cabinet member” to project GDP growth at 4%. Though the PBS initially resisted, maintaining that the estimate would be below 3.5%, the figure on 3.94% was eventually presented at the National Accounts Committee. After the NAC approved these projections, government ministers and PTI supporters promoted this ‘surprisingly positive’ growth figure as the result of Imran Khan’s leadership despite the pressures imposed by the coronavirus pandemic. The opposition, however, has contested the 3.94% estimate and thoroughly disparaged the government for misleading the public and fudging the growth figures.  Finance Advisor Shaukat Tarin has also confirmed the provisional GDP growth rate of 3.94% and criticized attempts to make controversies at the figure.
While arguing over the merits of whether FY2020-21 growth projections should be closer to 3% or 4%, Dr. Ashfaque Hasan Khan has recommended that the government set a GDP growth target for the upcoming fiscal (2021-22) at 4% and avoid setting a ‘dangerous’ target of 5% for itself.

But the fact remains that, even though 3.94% is a provisional estimate and only a projection subject to later revision, there are serious doubts about the figure being overstated – to the detriment of unbiased economic analysis as well as to the government’s performance indicators for the future. And there are other concerns about the economic indicators that the government is bragging about. Minister for Planning and Development, Asad Umar, claimed that Pakistan’s total GDP jumped by $33 billion, and GDP per capita increased by 13.4% from $1361 to $1543. On closer inspection, it has been revealed that the government has erroneously calculated this value of GDP per capita: by using latest GDP estimates but outdated population statistics. If the GDP per capita figure is calculated according to the latest population census, the estimate actually falls from $1361 to approximately $1100.

Another worrying factor is that while Pakistan’s economy is depicted as being on a solid growth trajectory, the industrial subsector of electricity and gas (generation as well as distribution) has witnessed a phenomenal contraction of 22.96% against a projected growth target of 1.4%. Even the layman is forced to consider: how does an economy grow when its provision of essential inputs such as electricity and gas supplies are declining?

Finally, with Pakistan’s yearly population growth estimates at 2.2%, a GDP growth rate of 4% remains insufficient for dealing with endemic poverty and rising unemployment. Pakistan requires a growth rate of no less than 6% per annum on a sustained basis to overcome these pressing socioeconomic challenges.

Shemrez is a research analyst specialising in economic security and the political economy of terrorism, extremism and identity. He most recently served as an intelligence officer at NACTA, Government of Pakistan, where he helped establish the Joint Intelligence Directorate (JID). He tweets at @shemrez.