Rebasing and improving compilation procedure of national accounts for Sri Lanka

By Department of Census and Statistics

 

Gross Domestic Product (GDP)

GOP can be used to gauge the health of a country’s economy. It can be defined as the monetary value of all finished goods and services produced within an economic territory in a specific period. It is measured in three approaches which are production, expenditure and income that are presented at current and constant prices. GOP is the most important indicator in the System of

National Accounts (SNA).

The System of National Accounts (SNA)

The System of National Accounts (SNA) is the internationally agreed standard set of recommendations on how to compile measures of economic activities. The SNA describes a coherent, consistent and integrated set of macroeconomic accounts in the context of a set of internationally agreed concepts, definitions, classifications and accounting rules.

 

What is rebasing?

Rebasing of the national account series is the process of replacing an old base year with a new and more recent base year. The base year provides the reference point to which future values of the GDP are compared. The base year was changed from 2002 to 2010 for compilation of national accounts statistics.

 

Reasons for selecting 2010 as the base year

•  The Economy of Sri Lanka was relatively stable in the year 2010
•   It is recommended by the UN to change the GDP base year every 5 or 10 years and it is suggested to change the base year to one that ends with ‘0’ or ‘5’
•  The conflict prevailed over three decades and choosing any year between 2002 and 2009 as the base year was not warranted. On average the economy became stable by 2010

Reasons for rebasing the GDP

• n    To capture changes in current economic structures, since many changes occurred in the global, regional and local economic activities over the past decade which influenced the economy of Sri Lanka
• n    To adopt new economic activities to the national accounts system. The economic structure of Sri Lanka has changed in the past decade and has had an impact on distribution patterns and products
• n    To introduce new concepts, scope, methodologies, valuation and classifications which will benefit users for detailed analysis
• n    To adopt the latest version of SNA (SNA -2008).

Benefits of rebasing

•  Improving quality of the GOP
• Improving international comparability of the GOP
• Rebased GOP results enables policy makers and analysts to obtain a more accurate set of economic statistics that is a truer reflection of current realities, for evidence-based decision-making
• Rebasing reveals more accurate estimates of the size and structure of the economy by incorporating new economic activities which were not previously captured
• It will enable the Government to have a better understanding of the sectoral growth drivers, and sectors where investment and resources should be channeled in order to grow the economy, create jobs, improve infrastructure and reduce poverty

Improvements introduced with the rebasing

​

a.     Adoption of United Nations System of National Accounts 2008 (SNA-2008)

b. Adoption of classification of sectors

c. Expansion of production boundary

d. Inclusion of economic activities of households

e. Adoption of internationally recommended classifications

a. The System of National Accounts (SNA) 2008

SNA 2008 is the latest version of the International Statistical Standard for the National Accounts, adopted by the United Nations Statistical Commission (UNSC). It is a statistical framework which provides a comprehensive, consistent and flexible set of macroeconomic accounts for policy making, analysis and research.

b.    Adoption of Sector Classification

One of the recommendations of the SNA is to compile the national accounts according to the sector classification too. Sector classifications of economic activities are as follows:

• Non-Financial Corporation (NFC)
• Financial Corporation (FC)
• General Government (GG)
•  Household (HH)
• Non-Profit Institutions Serving Household (NPISH)

c. Expansion of production boundary

Some of the important economic activities were not fully captured in the previous National Accounts Statistics of Sri Lanka. Those are included under the rebasing exercise in a more systematic manner to the maximum extent possible.

Example - Some highly profitable emerging services such as private education, private health services, legal services which were not fully captured in the existing system will be mostly captured under the rebasing exercise.

d. Inclusion of economic activities of households

Under the previous system, production activities of households were not fully captured due to unavailability of household production data. Quarterly Survey of Industries (QSI) and Annual Survey of Industries (ASI) which are main data sources for national accounts compilation, conducted by DCS covered only organised industrial activities. Under the revised methodology more household economic activities are covered to a large extent through a method called Labor Input Method (LIM).

Example - Some professional services such as architectural services, beauty culture services provided by households were not fully captured, but will be covered under this rebasing exercise.

e. Adoption of internationally-recommended classifications

Internationally-accepted standards of classification for economic activities and products, ISIC & CPC respectively, developed by the United Nations, are adopted in the new methods as recommended by the System of National Accounts. As a result, national accounts estimates can be disseminated in broader categories without any duplications or omissions.

Example - Under the existing system, banking, insurance and real estate activities were encompassed as one activity. The rebasing exercise separated the above activities into three activities as given below, facilitating compiling statistics for each level.

• Financial intermediate services except insurance and pension funding
• Insurance, reinsurance and pension funding
• Real estate activities, including ownership of dwelling

The improved GOP estimates are expected to provide a better basis for measuring economic output and growth; informed policy making; and monitoring progress towards the development goals relating especially to poverty alleviation.

In order to increase the quality of GOP, Supply and Use Table (SUT) matrix is also applied.

Supply and Use Tables (SUT)

SUT is an integrated model that allows compilation of more reliable, consistent, and internationally comparable estimates of GOP. SUT describes the balance between flows of production and consumption (goods and services) and income generated from production. The SUT also shows the linkages among industries, sectors and products coherently.

 

The framework of SUT

SUT framework comprises of two equations that should be fulfilled.

• Supply = Use
• Output = Input

Supply and use table provides the detailed description of transactions with goods and services realised in the year. It shows resources (output, import, net taxes on products) and uses (intermediate consumption, final consumption, gross capital formation and exports) of goods and services.

 

Advantages of SUT

• SUT framework ensures internally consistent data for each activity and product category
• Data from different sources appear in a systematic and organised fashion
• Allows the compiler to eliminate inconsistencies and to identify and fill data gaps
• Allows compilation of more reliable values for GOP
• Shows linkages among industries, products and sectors coherently

Revision policy

Numbers of indicators are used in compiling National Accounts Statistics (NAS). However, there are instances where the required data is not available at the time of releasing NAS. Therefore, the NAS released need to be updated when the data is available. This is one of the reasons for having a revision policy. The DCS has introduced a revision policy for NAS with the changing of the base year. Data releasing calendar of NAS which was prepared based on the revision policy for year ‘t’ is given in Box 1.

 

Experiences of other countries

When revising compilation procedures, various countries have experienced different scenarios with respect to the values of national accounts compiled under the old and new compilation procedures.

Few examples of other countries are given in Table 1.

Table 1 shows old and new GOP values of few countries that have undertaken rebasing exercise recently. Magnitude of the differences between old and new series depends on the improvements made in compiling NAS of those countries.

Figure 1 reveals that some countries had underestimated their GOPs before rebasing exercise, while other countries had overestimated.

 

Most Important questions of Rebased GDP

In view of the rebased estimates, does it mean that Sri Lanka’s NAS for the previous years have been inaccurate?

The rebased NAS are better reflection of the true size and structure of the economy. It does not mean the old series and its SNA are wrong; it means we are capturing more activities and measuring better.

 

What comes next after this exercise?

This release is preliminary and a refinement is being undertaken, including a more extensive use of the Supply and Use Table (SUT) framework. DCS plans to release full set of national accounts (GOP by production, income and expenditure approaches) and economic accounts shortly.

 

To think twice

•  GOP Rebasing will not change the facts of our economy overnight. It will not make poverty and unemployment disappear instantly. However, it gives more accurate data on the economy to enable policy makers to make informed decisions
• GOP revision does not actually change our wealth position; it only makes us aware of our real net worth and those charged with managing the economy will now have more access to credible information on the GOP
•  Rebasing may change nothing but it measures accounts for structural changes in economic activities, base prices and inflation trends in the country in more correct and accurate manner
• Economic indicators are used to make critical national decisions that allocate scarce resources and it is absolutely vital that we ensure they are accurate