By Hjoe Moono
On Friday 28th September 2018 during her budget speech, the Minister of Finance, Hon. Margaret Mwanakatwe said:
“Mr. Speaker, in 2019 Government will undertake an exercise to rebase the Gross Domestic Product, an exercise last conducted in 2012. The rebasing of the Gross Domestic Product will provide reliable and updated information on the current size and structure of the national economy. The rebasing will also provide Government with an opportunity to update and develop appropriate social and economic indicators to measure progress in achieving the objectives under the National Development Plans and the Sustainable Development Goals.”
Since that announcement, we have seen, heard and read stories about how this move is ‘politically’ motivated and ‘does not bring any value to Zambians’. What is evidently clear is that many people do not understand what GDP rebasing is, why it is done and the implications of such an exercise on the economy. I thought I dedicate some time to share what GDP rebasing is and why it is important for an economy like ours that has been undergoing transformation.
To start with, what is GDP?:
Gross Domestic Product (GDP) is an internationally recognised measure of the size and composition of an economy. GDP attaches monetary value to all the goods and services that a country produces in a given year. It is a measure of how well an economy is performing by capturing either its expenditure or incomes. The higher the GDP, the larger the size of the economy, and, on average, the more ‘developed’, statistically, a country is. Think of this at the household level – in our homes, we can tell how well off a family is by looking at the assets they have, the value of these assets and how much money they make or how much they spend – the same with countries.
Knowing the size and structure of the economy is as important as the economy itself:
It is an invaluable input in national development planning and helps the government know whether or not the country is growing or contracting. In addition, knowing the size and structure of the economy helps government assess its performance by disaggregating the source of economic performance. For example, if government has been investing heavily in agriculture for the purposes of economic diversification, and a review of the structure of the economy overtime shows that agriculture’s contribution to GDP has not changed, then this will indicate that such a policy move has been a failure, and information will aid future planning as well as assess what may have led to failure.
So when you really think about it, GDP measures are key as they provide a general overview of how an economy is doing. If GDP is high, , it is a signal that good things are happening or about to start happening – such as people getting more jobs or more money in their pockets or businesses beginning to boom.
In addition to the above, GDP measures help a country gauge itself against other countries. For example, in 2017, Zambia’s GDP was measured at about $25 Billion. South Africa’s GDP was for the same year measured at about $350 Billion and Kenya’s at $79 Billion. Comparatively, it means that the South African economy is 14 times bigger than the Zambian economy. It means that collectively, we need 14 countries the economic size of Zambia to make one South Africa. At the same time, the Kenyan economy is 3 times bigger than Zambia’s. During the same period, the Chinese economy was 480 times bigger than the Zambian economy. With regards economic might, therefore, at our current economic performance, Zambia is the size of a tiny mosquito in relation to China!
How is GDP Measured?:
The Central Statistics Office – a division of the Ministry of National Development Planning – collects data on all economic activities and their monetary value and then annually calculates Zambia’s GDP. Economically and statistically, there are two main approaches to calculating a country’s GDP; The Expenditure Approach and Income Approach. I will not bore you the economic jargon but briefly, under the expenditure approach, we compute GDP by calculating and summing all the monies spent by the different economic players in the country. For example, individuals/households or consumers in general spend money to buy various goods and services from businesses, and these businesses spend money as they invest in their business activities through, for example, purchase of machinery, farm inputs, or labour. Governments also spends money in the economy through its investments in roads, vehicles, medical equipment etc. Once all expenditures are summed, we have the country’s GDP.
The income approach is the reverse of the expenditure approach in that here, we focus on the money that individuals, household, firms and government earn. Income is of course earned by what we economists term ‘factors of production’: Wages/salaries paid to labour; Rent earned by land; Interest earned on capital investment and the profits made by entrepreneurs.
Since ideally we will spend what we earn, both the Income Approach and Expenditure Approach to GDP measurement should yield the same result. CSO does a fantastic job in reporting both methods in their statistical bulletins.
So why Rebase GDP?:
As the economy grows and evolves, GDP measures need to be recalculated to account for the new sectors that are emerging. For example, prior to the 1994, our GDP estimates would not capture the role of mobile telecommunications in Zambia because we had no mobile telecoms industry. It means that until the GDP was rebased, we underestimated our economic size because we ignored the new sector. In addition to including new sectors, the relative importance of GDP sectors change as time progresses. Recently, we have seen new economic activities such as gambling as well as the increasing importance of the real estate industry, construction and agricultural sectors. These changes need to be accounted for, hence the need for rebasing.
Rebasing our GDP given these developments is thus an important undertaking as it will provide government, private sector as well as the foreign sector with up – to – date information on the size, composition and relative strength of the Zambian economy. This information is key to making well informed planning and investment decisions.
At the household level, think of it this way:
If someone who was in school has now graduated and is contributing to the incomes and expenditures in the home, do you still treat them as students? No, rather, you acknowledge their contributions to the household, just as you would recognise a new member of your home such as an in-law who is contributing to the economic livelihood of your home.
Consequences of rebasing the GDP:
Once rebased, there are only two feasible outcomes:
Either the economy has grown further or that it has shrunk. It is, however, highly unlikely that the Zambian economy would have shrunk from the last GDP rebasing of 2012. Most likely, the Zambian GDP would have expanded, and this should thus make us ‘richer’, statistically, than in 2012.
We may all recall that Nigeria’s GDP was recently rebased from about USD 270 billion to USD 510 billion for 2013 with the increase of about 90% attributed to new sectors of the economy such as telecommunications, movies, and retail which were previously not captured or under-reported. As a result of the rebasing, Nigeria is now the largest country in Africa beating South Africa which had dominated the top for many years. This rebasing, however, did not reduce Nigeria’s poverty – it remained as before rebasing!
For Zambia, once confirmed that our GDP figures are higher after rebasing, the following will be obvious:
1. It will mean that our Debt to GDP Ratio will reduce, which implies that we would have more room to borrow than we earlier imagined. This will reduce the risk of debt distress.
2. Our Tax to GDP Ratio will further reduce, meaning that we would have to see more enhanced efforts to collect more taxes. Such efforts could be either increased tax rates or a broader tax base or the introduction of more innovative tax collection measures on already existing taxes.
3. We would cement our position as a middle income country as we head towards vision 2030.
I therefore doubt that there is anything sinister or political with such an undertaking.
I hope we are now all on the same page with regards rebasing. With the above, let us, however, agree that more than rebasing, what Zambia needs is a stimulation of the economy to create sustainable job and high disposable incomes and low poverty. Given what has been happening in our economy, we expect the rebased GDP measures to be higher, and therefore we may feel ‘richer’ than before rebasing. However, even with the new GDP measures, if poverty reduction programmes are not enhanced and sustained, we would have only grown as an economy on paper. Pessimists of this exercise argue, and rightly so, that while it is important to have up to date statistics on Zambia’s economic performance, such will not on their own lead to economic prosperity or change the reality on ground., and thus this calls for more to be done.
Please kindly share with many who may have had questions on this issue.
Good afternoon folks.