Sri Lanka has recently revised the key indicators of economy, Gross Domestic Product (GDP) and economic growth in the past four years after changing the base year and the new calculations have lowered the economic growth during the last two years significantly from previously reported figures.
The Department of Census and Statistics (DCS) said the move is to keep up with international practices resulting in the change of the base year from 2002 to a more recent 2010 and including additional data after identifying several new data sources in the calculations. The following is the full press release issued by the DCS.
National Accounts were calculated by the Central Bank of Sri Lanka (CBSL) as well as Department of Census and Statistics (DCS) until the year 2007. But thereafter, only DCS has been responsible for calculating National Accounts. Specially the indices; Gross Domestic Product (GDP) and Economic growth rate are two of the key indicators of National Accounts. These indices are used for socio-economic analysis to make policy decisions on finance and state revenue.
GDP is calculated by subtracting intermediate consumption from output, which is the value added plus taxes and less subsidies. GDP has been publishing since the year 2002 annually as well as quarterly. Until now, economic growth rate has been calculated using the year 2002 as the base year. Usually base year should be revised once in five years with the view of reflecting the changes in the economy. Accordingly, DCS has decided to move the base year from 2002 to 2010. While keeping the Central Bank of Sri Lanka and other relevant institutions informed, DCS has arranged to compute annually and quarterly National Accounts from 2010 to 2014 using production approach. Further, national accounts estimates will be published by DCS from the second quarter of 2015 with new base year 2010.
When revising the base year on calculating National Accounts, in addition to moving old base year to a more recent new year other improvements are also made. Following are characteristics of national accounts calculated under new base year.
Due to not having adequate data sources, etc. after several years, base year has been revised from 2002 to 2010. Some countries have revised base year at similar intervals. Changes in the economy during the period 2002 – 2010 reflected in the National Accounts under the new base year.
Considering 2010 as the base year, GDP for 2010 is Rs.6,413,668 million while, it was Rs.5,604,104 million taking 2002 as the base year. This is a 14.4% level change. But by 2014 this percentage declined to 5.6%.
Due to the reasons explained from 2.2 to 2.5 below, it is possible that national account statistics compiled under new and old base years are not equal.
2.2 Adoption of System of National Accounts (SNA)
United Nations (UN) organization has introduced a manual called “System of National Accounts” giving recommendations to calculate the National Accounts. It was first published in 1953 and revised in 1968, 1993 and 2008. Here, SNA 2008 was used to the maximum extent possible.
2.3 Use of International classifications
International Standard Industrial Classification (ISIC) revision 4 has been introduced to classify economic activities. Therefore, it is able to calculate economic activities by lowest level and it facilitates for international comparisons. Hence locally adopted version of ISIC version 4; Sri Lanka Standard Industrial Classification (SLSIC) was used in compiling National Accounts.
2.4 Use of new data sources and application of new methodologies
The main constrain that Sri Lanka is facing as in many other countries on calculating National Accounts is unavailability of proper data sources. So far National Accounts were calculated under this constrain. But, now several new data sources were identified for economic activities for which there had not been adequate data sources. The methodologies identified through consultancies, training programs, workshops and experiences of other countries were applied in the calculation procedures.
2.5 Enhancing the production boundaries
Up to now it has not been possible to cover certain new activities of the economy due to practical difficulties such as lack of data. Uncovering some household economic activities is an example for that. But, application of new methodologies and use of new data sources, the economic activities of Sri Lanka has been covered as much as possible.
2.6 Plan on publishing National Accounts under the new base year
• National Accounts will be published until fourth quarter of 2015 with year 2002 as the base year.
• Under the new base year; 2010, national accounts will be published from the first quarter of 2010 onward annually and quarterly.
• Estimates of a quarter will be published within 75 days after that quarter and these dates will be published through the data release calendar of DCS website.
2.7 Frequency of revising the base year
Base year should be updated regularly to calculate national accounts. Accordingly, base year will be revised at least once in five years with the view of depicting the changes in the economy.
2.8 National Accounts Revision Policy
There are some situations where some of the relevant data sources are not ready before finalizing the national account statistics. Hence, as in many other countries, a policy on national accounts amendments is introduced for Sri Lanka. Accordingly, national accounts estimates issued for a particular quarter/year can be amended after obtaining the final relevant data sources. The timeframe for amendments will also be published on DCS website.
2. International Monetary Fund (IMF) Program for Improving National Accounts and Price Statistics (Project on the Implementation of the System of National Accounts and the International Comparison Program)
IMF launched a program to improve National Accounts Estimates of some selected countries and Sri Lanka is among those countries. This project was implemented during the period of 2011-2015 and assistances provided by the program includes training programs and consultancies. The DCS staff was trained through the project in compiling National Accounts, Rebasing, etc.
4. Comparability of old and new GDP levels
GDP rebasing gives more accurate data on the economy to enable policy makers to make informed decisions.
GDP at current prices of old (2002 base year) and new series (2010 base year) cannot be compared due to differences of coverage, estimation method and classifications used in the compilation process. Change of the size or level change of Sri Lankan economy can be measured by comparing GDP at current prices. It should be noted that GDP at constant prices for two series cannot be compared as the base years are different.
5. New GDP Series
A. From second quarter of 2015, the year 2010 will be used as the base year for compiling National Accounts. Therefore, GDP, its growth rate and other macroeconomic accounts compiled using new base year 2010 will be considered as official national accounts statistics.
B. GDP values for the period from 2010 to 2014 compiled using 2002 and 2010 as base years are compared in Table 1.
C. The compilation of National Accounts for base year 2002 will be terminated after the fourth quarter of 2015.
Sri Lanka’s newly compiled gross domestic product data may be technically correct and it has shown that GDP was understated during the last regime, and but the start date for the new data model is suspicious, former Central Bank Governor Nivard Cabraal said.
Sri Lanka’s nominal GDP for 2014 (at prices current at the time) was estimated under a 2002 model at 9784 billion rupees, was revised up to 10,291 billion rupees under the new method.
“So GDP is not 74.9 billion dollars, but it is 78.8 billion US dollars (in 2014),” Cabraal told reporters. “Our per capita GDP was earlier estimated at 3,625 dollars. That has increased to 3,795 dollars.
“That means the situation was much better than we thought when Mahinda Rajapaksa handed over the country.”
He said the 2012 GDP growth which was revised up to 9.2 percent from 6.2 percent, made the growth in the subsequent two years much lower.
“That looks like a ‘jillmart’,” Cabraal said, referring to a term used by the elected ruling class to refer data or other manipulations by themselves or state workers to deceive their opponents or ordinary citizens in the street “By 2014 there definitely a set of economic data that was not being captured, that is why the totality of our GDP was understated.
He said in 2012, steps were taken to contract the economy, with a credit squeeze, and the sharp rise in estimated GDP seemed ‘sinister.”
Sri Lanka’s central bank fired a massive credit bubble in 2011, accommodating oil subsidies with printed money and keeping rates down, which then hit the balance of payments requiring sharp corrections in the form of higher interest rates and fuel price hikes in 2012.
Analysts have warned that a similar bubble is being fired now.
The credit momentum did not halt till mid-2012, when all central bank interventions in forex markets were stopped.
“In that year growth could not have gone up from 6.2 to 9.2 percent. It is not reasonable,” Cabraal said.
“That is where I see some political action. But the final action I see as being reasonable. I don’t dispute that.”
It has been suggested that the last regime dragged its feet on releasing the new dataset because growth rates were seen coming down.
Many economists however have pointed out that GDP calculations are flawed and that it is a neo-Mercantilist statistical method that has no foundation in real life.
In a sharp downturn for example when a credit collapse reduces all economic activity, GDP can go up simply because imports contract, despite an economy virtually ‘collapsing’ in the experience of ordinary people.
GDP also takes into account salaries of state workers as GDP, including spending on war. Before the Second World War, when GDP was not formalized as today such activities were not considered as productive.
But today ‘military Keynesianism’ has come to stay, despite the real damage the state inflicts on an economy not just through war, but through all state unproductive spending, money printing and currency depreciation.
Cabraal said Sri Lanka’s debt to GDP was now revised down to 71.9 percent of GDP, which was better than the earlier figure.
Reporters told Cabraal that there were questions about the total central government debt as tens of billions of bonds, especially those issued to bailout loss-making state enterprises, have been kept out of the total debt.
Cabraal said he was not aware and would check and reply at a later date.