PBS formula for inflation — and the proposed change

The Pakistan Bureau of Statistics (PBS) is the official body responsible for collecting and disseminating data relating to all aspects of the economy including those pertaining to GDP growth, employment, wages and inflation. It was first looked after by the Finance Ministry. But now, perhaps on the prodding of the international financial institutions, like the IMF and the World Bank, it is now working under the supervision of the Ministry of Planning and Development. Inflation figures are collected by the PBS based on various sectors, like consumer items, manufactured goods and agricultural products, as well as different regions such as inflation in urban and rural areas of the country. No separate data is collected on a provincial basis.

The lack of provincial data is an issue of much debate but foreign to the pressing question at hand. The formula for calculation of different inflation indicators involves giving weightage to different items of consumption and use. Since wages, prices and consumption patterns are likely to change over time, the relative weightage given to different categories of items requires constant updating. However, the extent to which incomes and consumption patterns vary and change in a slow growing economy is a matter that must be taken into consideration. For similar reasons, the base year relative to which the present rates of inflation are calculated also need to be changed periodically. According to the practice that continues for the last 60 to 70 years, the base year for calculating inflation as well as other economic data has been changed decennially. The base year presently in use by PBS is the inflation rates of the financial year 2015-16. In case the base year is brought forward to 2021 or 2022, the present rate of inflation will stand deflated, showing a lower level of inflation.

The formats for calculation of CPI, SPI and food inflation are standardised and generally accepted and practised the world over, though certain countries collect and disseminate data relating to much wider areas of the economy than others. This comprehensive economic data forms the basis of all economic and financial planning, forecasting and policy-making in the country. It is also used internationally for the purpose of calculations and decision-making regarding estimates of credit and investment worthiness of the economy. These figures are collected both on an annual basis as well as periodically, on a weekly, monthly and quarterly basis. They are regularly disseminated, shared and are publicly available.

It is no news that the government is thinking of changing the formulae for calculating inflation that are internationally used and accepted. Since the change has been proposed at a time when general inflation rates — particularly those of consumer and food items — are high for the last three years, it cannot be viewed without serious doubt as to its justification, timing and acceptability. Obvious and reasonable questions will be raised on whether the government wants to depart from the internationally accepted and applicable practices and changing the formula to enable a rosier picture than what the facts actually show. How will this make any difference in the prices that consumers actually experience?

The proposal is bound to raise questions whether it is aimed at concealing the actual figures of inflation. This may seem sound from a political point of view but it will single us out as an economy whose financial data is fudged and undependable, and on which no economic or financial forecasting or planning or decision-making is possible. It will certainly throw our inflation rates into doubt, which is an important indicator of economic performance. It is also the base upon which the purchasing power parity of currency, per capita incomes, average wage rates and standard of living are determined. These indicators are of crucial value not only for making decisions about the financial and credit worthiness of the economy but also for purposes of making domestic investment decisions. At a time when the economy is going through a period of near stagflation and foreign exchange crisis, can we afford to throw the authenticity of our basic economic data into international doubt or disrepute for temporary political gains? Certainly, there are matters of national importance that must not be made contingent upon ephemeral considerations of policy gains.

National interest must take precedence over partisan gains. The proposed policy shift to change i) the relative weightages of goods in the price basket; ii) the weightages of urban versus rural area in inflation rates computation; and iii) the base year to only six years as opposed to the accepted ten years must be made open to public debate. The considered opinion and input of economists and those specialising in this field must be obtained through a wide and transparent debate before any decision is taken. The views of the provincial governments, the academia and institutions working in the economic and financial sectors will also be important. This process of consultation is necessary to examine the rationale and determine the advisability, justification and value of such a decision. An informed policy in this crucial area of economic management is necessary to avoid complications and problems for the economy that cannot afford unnecessary tinkering at this critical juncture.

Published in The Express Tribune, December 15^th, 2021.

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