by Ajith Nivard Cabraal Former Governor the Central Bank of Sri Lanka

The “Pumping-up” of Nominal GDP

In May 2017,a few weeks after the Gross Domestic Product (GDP) figures for 2016 were officially announced, I pointed out how the Real GDPGrowth for 2016 was blatantly “pumped-up” as well as manipulated by the authorities, and how GDPGrowth for 2016 was shown as 4.4%when it was a mere 2.2%. My article was carried under the title,

“Rs. 231 billion Mega Growth Scam” by several mainstream newspapers.

In such Article, I detailed how certain dubious and ad hoc adjustments had been made to the Nominal GDP and GDP Deflator figures of several years in order to change the Nominal and Real GDP Growth rates in general,and to increase the Real GDP Growth Rate for 2016 from 2.2% to 4.4%, in particular.

In that regard, I showed how a massive GDP value of Rs. 231 billion which had been originally “accounted” for in 2015, was “shifted” from that year and “attached”to 2016, and how the GDP Deflator was brazenly misused to “adjust” the Growth rates for 2014, 2015 and 2016. I also showed how those “creative” adjustments had made an absolute mockery of the computation of GDP in Sri Lanka.

My accusations were met with a deafening silence by the Sri Lankan Government authorities, who,strategically avoided a public debate on the issue. The Opposition too,did not add pressure to highlight this scam, perhaps because it did not comprehend the strategic importance of this vital issue and perhaps also because,at that time, the Bond Scam exposure was at it’s peak and hence they may have been pre-occupied with exposing that fraud and found it difficult to focus on another. Whatever may be the reason, the “Growth Scam”foisted on the unsuspecting public and investors up to and until 2017, failed to attract sufficient public attention. That apathy may have led the Masterminds of this organised “Growth Scam”to believe that they have successfully got away with their deception, and convinced them that they could do it again and again. That is probably why the authorities have resorted to their data manipulation practice this year too.

Nominal GDP, Real GDP and GDP Deflator

At this stage, it may be relevant to provide readers a brief understanding of the fundamental technical terms, in order to appreciate more fully, the magnitude of the Growth Scam perpetrated by these authorities.

“Nominal GDP”is the value of all goods and services produced in a country during a particular period of time (typically a year). Current Market Prices are used to determine such value, and only “final” goods and services (those consumed by the end user) are included.

“Real GDP” is the value that is arrived at by adjusting “Nominal GDP” for differences in price levels,using a scientifically computed deflationary factorreferred to as the “GDP Deflator”. As would be expected, nominal values of GDP over different time periods vary due to changes in quantities of goods and services and changes in general price levels. Hence, adjusting for the price levels (or inflation) is necessary, if comparisons across different time periods, are to be made. When reference is made to “Economic Growth”, it is normally “Real GDP Growth” that is referred to, unless specifically stated otherwise.

“GDP Deflator” is an economic measure of inflation which is the factor by which the Nominal GDP is converted to the Real GDP. The GDP Deflator is a vitally important measure in macro-economic analysis,because Nominal GDP includes inflation, while Real GDP does not. Since the GDP Deflator converts Nominal GDP to Real GDP, it is often considered a more accurate measure for price inflation, and Economists generally prefer this ratio because the GDP Deflator is not based on a fixed basket of goods and services which could change with people’s consumption and investment patterns, unlike pure price indices (e.g., Consumer Price Indices). In fact, in the case of the GDP Deflator, the “basket” for each year is the total set of all goods that are produced domestically, weighted by the market value of the total consumption of each of such goods. Naturally therefore, the GDP Deflator, like the values for inflation, is a economic measure that needs to be computed with utmost care, consistency and professionalism, and is not a measure that should to be trifled with, or changed at anyone’s whims and fancies, or for collateral political purposes.

The Background and Anatomy of the “Growth Scam”

Over the past three years, under the so-called “Good Governance” regime, the GDP Deflator has become a widely fluctuating macro-fundamental, and Tables 1 to 6 clearly reveal that the GDP Deflator and the Nominal GDP figures have been liberally adjusted (nay, manipulated), to change the GDP Growth figures for 2014, 2015, 2016 and 2017,with gay abandon.

Nevertheless, those same authorities who have been quick to arbitrarily “adjust” the value of the GDP Deflators, have been cunning enough to maintain the Colombo Consumer Price Index (CCPI) figures without change, probably because they would have surmised that any change to the more familiar “inflation rates”would have led to undue attention towards their Scam.

It must also be stated that, when considering the scale and magnitude with which this Scam has been set in motion, it is very likely that the top Government Leaders would have given their blessings to the effort to “massage” the GDP figures, in order that the GDP and other numbers appear somewhat respectable, knowing fully well that it was not. As is obvious, it would have been mainly in the government politicians’ sinister interest to do so, since it is mostly those politicians who would have had the motive to portray a robust growth to gain political mileage, and not the technical officials who are mere compilers and analysers of the data.

This high-level political involvement seems highly probable, particularly because the entire country has already seen how a certain government politician took it upon himself to “announce” the re-based figures with great vigour, thereby gathering some political kudos upon himself and his political Party. That attitude suggests that the subsequent “pumping-up” of the GDP figures from 2015 to 2018 would also have been carried out with the knowledge, blessings and active support of the political leaders who would have wanted to show-off “window-dressed” benign figures that are far better than the pathetic, distressing results at the ground-level. Accordingly it is likely that this Scam has been carried out by a “Growth Manipulating Team”, possibly consisting of one or two Political Masterminds and a few key officials from the institutions responsible for the collection, analysis and dissemination of the economic data. In that context, reference would be made to such Group as the “Growth Manipulation Team” hereafter. As would be observed from this article, the “Growth Manipulating Team” seems to have commenced the “Growth Scam” as described, with the “Re-basing of GDP” exercise in July 2015. Thereafter, they have continued the series of Scams to routinely adjust the GDP Growth figures in successive years, arbitrarily adjusting the Nominal GDP numbers and the GDP Deflator with utter contempt to the sanctity of these values.

Manipulations to 2014 figures

As could be seen from Tables 1 and 2, the Nominal GDP Growth and GDP Deflator for 2014 have been changed by wide margins, four times in three years!

(Please note that in the Tables that follow, “AR” refers to the “Central Bank Annual Report” for the relevant year).

Table 1: Nominal Growth, GDP Deflator and Average CCPI – 2014

Source: DCS and CBSL

Table 2: GDP Computation for 2014

Source: DCS and CBSL

As per Tables 1 and 2,the “Nominal GDP increase” for 2014 was first reported in April 2015as Rs.1,111 billion. Just 3 months later,in July 2015, with the “Re-basing” exercise, the “Nominal GDP increase” for 2014 was revised downwards by a massive 37%, showing the increase as only Rs.700 billion. These new figures were announced to the world by a Government Minister Harsha Silva, who created political history by being the first politician to announce the Department of Census and Statistics’ figures. While making this bit of dubious history,Silva also claimed that the GDP value for 2014 was previously “over-stated” by a value of Rs.411 billion, and that it has now been rectified. However, 9 months later, in April 2016, the authorities increased the “Nominal GDP increase” for 2014 by another 22%, and claimed that the increase was now Rs. 856 billion. Unashamedly, 12 months later, in April 2017, the authorities revised it once again, claiming that the “Nominal GDP increase” for 2014 was lower by 10% than the previously stated figure, and that it was Rs. 769 billion only.