We are witnessing an economic contractionRevised and rebased statistics provide a more accurate picture of the economy.
The latest release of national accounts statistics—which generally refers to data pertaining to the value of economic activities computed using output, expenditure and income-based methods—by the Central Bureau of Statistics (CBS) is a welcome development. The rebased national account statistics, at 2010-11 prices, depicts a more accurate picture of economic activities, particularly the size of the economy and sectoral shifts in value-added economic activities or structural changes.
It shows that although the size of the economy increased to about US$35 billion, an upward revision by US$1.5 billion, gross domestic product likely contracted by 1.9 percent in the fiscal year 2019-20. The revised data also reveals that economic performance was weak even before the health, economic and livelihood mayhem created by the pandemic. The statistical bureau now needs to release back a series of national accounts statistics using the 2010-11 base so that comparative analysis and sectoral changes based on historical data can be appropriately construed.
Revised and rebased
Rebasing typically includes expanding coverage of economic activities, adding new or disaggregated sectors or changing the methodology used to measure economic activities so that they better reflect structural changes. For instance, the earlier industry sector comprised of four subsectors, but is now expanded to five subsectors by disaggregating electricity, gas and water into electricity, gas, steam and air conditioning supply; and water supply, sewerage and waste management. This facilitates tracking progress separately for the electricity and water supply subsectors—both of which are expected to add large capacities in the coming years.
The services sector has gone through the most changes, particularly inclusion or expansion of new economic activities. Transport, storage and communications activities are divided into two subsectors: transport and storage, and information and communication. Real estate, renting and business activities are divided into three subsectors. These and other changes have increased subsectors within the services sector to twelve, up from eight earlier.
The new data series is consistent with the international standard industrial classification of all economic activities (rev.4) and the system of national accounts 2008, which is the latest version of the international statistical standard for national accounts adopted by the United Nations Statistical Commission.
Using the old methodology and 2000-01 as the base year, and assuming early resumption of economic activities, the CBS estimated, in April 2020, that the GDP could grow by 2.3 percent. The government interpreted this as confirmation of the effectiveness of countercyclical fiscal and monetary measures rolled out to address the crisis. However, the latest revised data with the new 2010-11 base year reveals a completely contrasting picture: the economy will actually contract by 1.9 percent, thanks to a severe slump in industrial and services activities.
The agriculture sector is expected to grow by 2.2 percent, down from 5.2 percent in 2018-19, owing to a delayed monsoon, shortage of chemical fertilisers, use of substandard seeds and a fall armyworm invasion. The lockdowns also disrupted agricultural labour, harvest and supplies. Industrial output is projected to contract by 4.2 percent, down from 7.4 percent growth in 2018-19, as mining and quarrying, manufacturing, and construction activities were battered by subdued demand and lockdowns. Services output is projected to contract by 3.6 percent, down from 6.8 percent growth in 2018-19, owing to the severe impact of lockdowns and supplies disruptions on wholesale and retail trade, transportation and storage and accommodation and food service activities. These are high contact services activities, which together account for about 22 percent of GDP.
Importantly, the latest data captures the structural changes in the decade between rebasing. Between 2000-01 and 2010-11, the share of agriculture and industry sectors declined, but the services sector increased. This unusual structural change bypassed the industry sector, whose share in GDP declined to 14.7 in 2010-11 under the new base, down from 15.5 percent in the case of the old base. Last year it was barely 15.4 percent of GDP, almost the same as the wholesale, trade and repair subsector. Meanwhile, the data reveal a higher consumption level than earlier reported (91 percent of GDP), but lower investment, exports and imports.
The latest data release also changes the perception about some macroeconomic indicators. For instance, as a share of GDP, tax revenue, net domestic borrowing, outstanding public debt, money supply, exports, imports and remittances, among others, are now lower than previously estimated. These will be further revised when CBS releases actual figures next year.
The data confirms that the economy was already performing poorly before the pandemic hit Nepal. Growth reached 9 percent in 2016-17 due to base effect, which refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base, and then started to decline steadily. It happened despite propping up consumption and investment through massive post-earthquake reconstruction efforts and national and subnational elections. The much-touted benefits of a stable government and expedited approval of investment laws and policies did not yield much of a result. The claim of creating a solid foundation for high economic growth (about double-digit annual average) and prosperity is losing steam. Political instability, bureaucratic hassles, bad governance, and low capital spending continue to affect private sector investment and growth momentum.
The CBS also released quarterly data which shows that the economy contracted by 15.4 percent in the fourth quarter of 2019-20 (mid-May to mid-July 2020) and by a further 4.6 percent in the first quarter of 2020-21 (mid-August 2020 to mid-October 2020). This points to the severe impact of lockdowns on high contact industry and services activities. Given that some services sector activities continue to remain affected throughout 2020-21 and the shortage of chemical fertilisers is affecting agricultural output, there is less likelihood of a sharp recovery in 2020-21 despite commendable progress in vaccination.
It is important for the bureau to release back series national accounts data that are consistent with the new base year. Additionally, the statistics bureau needs to release quarterly data for all sectors dating back to at least 2010-11. This is crucial to determine the historical trend and conduct a comparative analysis of sectoral composition and determinants of growth. Let us hope that CBS will publicise the full series data in its next release of preliminary growth estimates at the end of next month.