For the first time in the countrys history, quarterly GDP growth has been publicly announced. Though this is a step in the right direction, PBS should have released its computation methodology and the detailed numbers that culminated into the reported growth rate. A summary of the sectoral growth rates is shown in table 1. In particular the estimated growth rate of services is on the high side, for reasons given below.
There is an imperative for issuing details especially since the growth rate of five percent is significantly higher than that reported over the past five years (average growth of 2.9 percent). In the absence of a publicly available methodology and detailed numbers, it is but natural that economic pundits and analysts alike are eyeing the reported growth rate with some suspicion.
Generally, there are two widely adopted approaches used to compute GDP numbers: sectoral calculations and the expenditure method. The former uses numbers from agriculture, industrial and services sectors to provide an aggregated growth rate. Since it is hard to compute the growth of the heavy weight services sector, the expenditure approach of the second method is more appropriate.
BR Research used proxies in the expenditure approach to calculate the quarterly GDP and that in contrast with the government released numbers came out about 2.8 to 3.0 percent in the first quarter (please see table 2 for details).
Using this method, national income is broken into the following components: private consumption expenditure; public consumption expenditure; gross capital formation and exports (net of imports) of goods and services.
It is simpler to calculate public consumption expenditure based on the first quarter released fiscal operation numbers by the Ministry of Finance. On that basis, the governments current expenditure on goods and services has increased by 13.6 percent, which when adjusted for inflation (avg CPI: 8.1%), provides a real growth of 5.5 percent in the first quarter.
Then it is easier to find gross capital formation which has three components. Public capital formation is the sum of Federal and provincial development budgets rolled out. That has been sliced considerably to curtail the fiscal deficit, so real growth here registered a decline of 42.8 percent. The other components are private capital formation and investment in housing.
By using a proxy of import of machinery, the private capital formation is computed at a healthy growth of 24 percent which is primarily due to increased investment in the power sector. The housing component is estimated based on use of cement which remained stagnant at last years level. Aggregating these, BR Research recorded growth of 2.1 percent in overall gross capital formation.
The third component in the expenditure method is exports net of imports which can be computed using numbers provided by either PBS or SBP. Growth in export of goods and services in dollar terms was negative 6.1 percent. This decline is attributable to loss of growth in services sector mainly due to absence of defense exports, consisting of inflows from the Coalition Support Fund, during the first quarter.
The most important part of GDP is private consumption expenditure which has the highest weight of 77 percent and is difficult to compute given the constraints of data availability. Tax revenues from indirect taxes are used as a proxy to compute growth in this magnitude as consumption is directly linked to General Sales Tax, Petroleum Development Levy and Excise Duty.
In a nutshell the non-food consumption data is available via taxes. It gives us a nominal growth of 12.6 percent, which when adjusted for inflation, comes to 4.5 percent. If we assume that food consumption also grew at a comparable nominal rate, higher food inflation would slice the real growth in that segment.
**Summing up all these numbers, the GDP growth is computed at 2.8 percent which is lower than the growth rate reported by the government (5 percent). This breakdown reiterates the need for greater transparency in the governments methodology for calculating economic aggregates including the GDP growth rate. **
It is readily conceded that the above estimates are subject to a margin of error because of the use in some cases of proxies. However, given the lack of high growth in exports and development expenditure, two major drivers of growth, it is unlikely that the GDP growth rate reached 5 percent in the first quarter of 2013-14. This is despite a visible upsurge in large-scale industrial production.
We hope that PBS will shortly release its methodology for estimation of quarterly GDP along with the estimates for the first quarters of 2012-13 and 2013-14.