On 4 March 2021, Nepal’s Central Bureau of Statistics released national accounts statistics that were rebased to 2010/11 (FY2011) from earlier 2000/01. According to the latest rebased national accounts statistics, the size of economy was about USD 34 billion in FY2020 (USD 32.4 billion without latest rebasing). Likewise, the new base yields nominal GVA 5% higher than nominal GVA under the old base. In FY2011, the rebased GDP was USD 21.6 billion, which is 14.3% higher than USD 18.9 billion under the old base. Since the nominal GDP is now going to be larger than in the previous FY2001 base series, several statistics related to fiscal, monetary and external sectors that are expressed as a share of GDP could see slight downward revision. FYI, fiscal year (FY) starts from mid-July of t-1 year and ends on mid-July of t year (for instance, FY2020 refers to the period between mid-July 2019 and mid-July 2020).
Agricultural sector is expected to grow at 2.2%, down from 5.2% in FY2019, owing to delayed monsoon, shortage of chemical fertilizers, use of substandard seeds, and an armyworm invasion. The lockdowns disrupted agricultural labor, harvest and supplies too. This, however, is the only silver lining as the other two sectors are expected to contract. In an op-ed published in The Kathmandu Post on 19 October 2020, I argued that GDP in FY2020 will contract.
Industrial output is projected to contract by 4.2%, down from 7.4% growth in FY2019, as mining and quarrying, manufacturing, and construction activities were battered by the lockdowns and subdued demand. However, with the addition of new hydroelectricity in the national grid and improvements in water supply, electricity and utilities subsector is expected to grow by 25.6%.
Services output is projected to contract by 3.6%, down from 6.8% growth in FY2019 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. They together account for about 22% of GDP. Within services sector, public administration and defence, and mandatory social security payments are expected to grow at a rate higher than in FY2019. This reflects the increased government expenditure to support various temporary relief and income support measures for those affected by the pandemic.
In the chart above also, notice that GDP growth reached a high of 9% in FY2017 as economic activities rebounded (plus some base effect) after the devastating 2015 earthquakes and 2016 border blockade.
On the expenditure side, while consumption is expected to grow at 4%, slightly lower than 5.8% in FY2019, investment and net exports are expected to contract. Investment (gross capital formation) is expected to decrease by 21.2%, largely contributed by a fall in private investment. Public gross fixed capital investment is expected to contract by 5.4%, continuing on a contractionary trend since FY2018 as public capital spending continues to fall short of budgeted amount. Private gross fixed investment is expected to contract by 2.8%, down from 20.8% growth in FY2019, as the lockdowns created adverse environment for private sector. A larger export contraction compared to import contraction is expected to lead to overall contraction of net exports.
Here are some observations regarding the rebasing of national account statistics.
First, rebasing is a welcome development given that it helps to capture some of the structural changes in an economy over a period of time. It often includes inclusion of more of existing, new or disaggregated sectors, which usually happen in services sector as it tends to change more with time. The latest FY2011 series also incorporates recommendation of UN SNA 2008 (in place of SNA 1993) and adopts updated industrial division classification. So, it is inching toward more data accuracy and consistency with international practices. This is the fifth rebasing of national accounts statistics, following rebasing in FY1965, FY1975, FY1985, FY1995, and FY2001. I hope the CBS releases national accounts statistics for years prior to FY2011 using the new base so that historical comparison is consistent.
The new base series includes 18 subsectors and is updated to international standards industrial classification (ISIC) rev.4. The old base series included 15 subsectors and was consistent with ISIC rev.3.1. The value of economic activities each year (GDP) under the new base is higher for three reasons: (i) wider coverage of economic activities all subsectors except public administration and defense and other services (arts, recreational, etc); (ii) changes due to methodology especially for financial intermediation, and real estate and professional activities; and (iii) change due to classification especially for real estate and professional activities, public administration and defense, and other services. Overall, changes due to methodology, and wider coverage and use of new ratios accounted for 0.48% and 13.58%, respectively, increase in GDP in FY2011 under the new base.
Agriculture, forestry and fishing is now clubbed as one sector in the new series. In the industry sector, electricity, gas and water subsector is divided into two subsectors: electricity, gas, stream and air conditioning supply; and water supply, sewerage, waste management and remediation activities. So, the industry sector in the new base has five subsectors. Services sector is the one that has gone through most changes, particularly inclusion or expansion of new economic activities. Wholesale and retail trade now also has repair of motor vehicles and motorcycles. Hotels and restaurants subsector is now accommodation and food services activities. Transport, storage and communications is divided into two subsectors: transport and storage, and information and communication. Real estate, renting and business activities are now divided into three subsectors: real estate activities; professional, scientific, and technical activities; and administration and support service activities.
Second, rebasing, to some extent, captures the structural changes in the decade between the rebasing. Between FY2001 and FY2011, the share of agriculture and industry sectors declined, but that of services sector increased. This confirms the unusual structural transformation whereby the decline in agriculture sector is picked up by the increase in services sector, bypassing the industrial sector. Moreover, the larger share of services sector is also due to wider coverage of economic activities and changes in methodology and classification. Even with this, wholesale and retail trade, and vehicular repair activities as a subsector accounts for about 15.2% of GDP, which is similar to the share of the entire industry sector (mining and quarrying; manufacturing; electricity, gas, steam and air conditioning; water supply, sewerage, and waste management; and construction). The massive post-earthquake reconstruction boosted mining and quarrying, and construction activities, leading to a slight uptick in the share of industry sector in GDP from FY2017 onwards.
Third, rebasing increased the share of services sector in GDP and hence the severity of impact of the pandemic as well. The high contact services such as wholesale and retail trade, and repair activities; transportation and storage; and accommodation and food service activities were also the most affected by the lockdowns and social distancing norms. This contributed to the larger contraction of services sector in FY2020 and its eventual effect on GDP contraction.
Fourth, on the expenditure side, the rebasing exercise has reinforced the argument that consumption is higher than earlier reported. It is largely fueled by remittance income, which has drastically increased since FY2001. Investment, exports and imports were lower than expected. In FY2011, the share of consumption in GDP was 86% under old base but 92.9% under the new base. It increased to 91.1% of GDP in FY2020 under the new base with private consumption accounting for about 88% of total consumption.
Gross capital formation, or investment in general terms, was markedly down in FY2011: 27.7% of GDP under new base compared to 38% of GDP under the old base. It increased to 31.3% of GDP in FY2020. Notice that under the old base investment was reported to be about 50.2% of GDP, but almost half of it was change in stocks, which is derived residually and hence includes statistical discrepancy/error as well. Under the new base, statistical discrepancy has been as high as 9.5% of GDP (in FY2018). It is estimated to be 4.6% of GDP in FY2020. Public investment is reported to be higher under the new base than under the old base but private investment is reported to be lower under the new base. Over years, while public investment, as a share of GDP, is declining (thanks to receding public capital spending absorptive capacity), private investment is increasing, reaching 23.9% of GDP in FY2020.
Imports of goods and services are expected to be 28.4% of GDP under the new base as opposed to 32.9% of GDP under the old base in FY2011. Imports are expected to be 33.6% of GDP in FY2020 (under old base it was reported to be 40.1% of GDP). Exports of goods and services are expected to be about 6.7% of GDP in FY2020, down from 7.8% of GDP in FY2011.
Fifth, using the new base gives a higher per capita GDP as GDP itself is revised upward. For instance, the value of goods and services produced in the country in FY2020 (or GDP) was USD 32.4 billion under the old base. It has increased to USD 33.9 billion under the new base, which means size of the economy increased by about USD 1.5 billion. Per capita GDP is now estimated to be USD 1134 and per capita GNI USD 1148 in FY2020. Per capita GNDI (which includes remittance inflows as well) was USD 1430 in FY2020 (or 126% of GDP). These are all in nominal terms.
Since consumption is too high, gross domestic savings is automatically low. It dropped to 8.9% of GDP in FY2020 from 15.7% of GDP in FY2019. Gross national savings was about 35% of GDP in FY2020, down from 42.5% of GDP in FY2019.
Sixth, since nominal GDP has increased, all other macro indicators expressed as a share of GDP have also been automatically revised downward. Tax revenue will be about 17.8% of GDP. There may not be much change in fiscal deficit as a share of GDP because expenditure will also be arithmetically lower. Current account deficit will now be around 0.8% of GDP. Merchandise exports and imports will be 2.7% and 29.7% of GDP, respectively in FY2020. Workers’ remittances would drop to around 22% of GDP in FY2020. Outstanding public debt in FY2020 was 36% of GDP (37.7% of GDP under the old base), up from 27.1% of GDP in FY2019.
Seventh, rebasing is a good exercise and needs to be done periodically. Let us hope that the CBS will publish national accounts estimates (both real and nominal) for years prior to FY2011 as well using the new base year. This is important to ensure correct comparison and interpretation. Creating a back series using the new base year is an important exercise for the statistics bureau. Otherwise, people will start reporting real GDP growth using old base year for up to FY2011 and then use the latest base year FY2011 onwards.
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The CBS also released quarter data for up to the first quarter of FY2021. The economy contracted, y-o-y in the last quarter of FY2020 by 15.4% and then further contracted by 4.6% in the first quarter of FY2021. The impact of COVID-19 and the lockdowns on the economy is clearly visible from the slump in GDP numbers in the two quarters. This has technically pushed the economy into recession as two consecutive quarters of GDP contraction is usually referred to as recession. This quarterly series is also based on the new base. The CBS has not released full related sectoral data and the chart below is from the presentation slides CBS uploaded in its website..
