By W.A Wijewardena –
Governments Are Losing Monopoly Over Economic Statistics; It Means That Markets Are Better-Informed Now
Offering a yielding hand to politicians
Politicians love to show better economic performance pictures to their voters. The statistics-producing bodies of governments love to please politicians by generating exactly the reports which the latter would welcome. This joint manoeuvring should be checked by private sector institutions which have to act as a counter force. But in many countries, trade chambers love to endorse such massaged-up reports possibly they are more interested in winning favours from politicians than having credible economic numbers. Thus, the game ploy continues without interruption until things become totally unmanageable. At that stage, the systems do not answer to ordinary policies. If they are to be remedied, extraordinarily painful harsh policies have to be adopted.
Argentina: Massaging inflation and growth numbers
One such recent example has been Argentina. This country had been producing an inflation report and growth numbers for decades which had been far from reality. What were the reasons for it to do so? At least two: one was to retain the loyalty of the party faithfuls by showing them that the government was doing well with regard to its economic policy. It boosted the morale of the party men to support those in power. The other was to attract international investors and mobilise cheap funding for its massive expenditure programmes. IMF, the global disciplining agency responsible for promoting credible and accurate statistics compilation among government agencies too did not notice the game plan which Argentina had been playing secretly. Or it may be that it noticed the ploy but did not wish to embarrass the government by doubting the numbers produced by it. That is because IMF cannot run the risk of earning the wrath of Argentina which is one of its owners. But when it started to act in 2013, it was too late. At that time, Argentina had been on the verge of defaulting the servicing of the loans it had borrowed from international markets (available here ). In this press release, the IMF’s Executive Board had given Argentina the deadline of 29 September 2013 before which it had to correct both GDP and inflation numbers. Later in 2014, IMF had expressed its satisfaction about the progress made by Argentina in fulfilling its obligations (available here ). But the markets did not buy the assurance given by IMF about the good behaviour of Argentina and the Argentine economy continued a downward journey descending to a critical level. The Argentine President Christina Fernandez showed her desperation by resorting to a common tactic used by developing country political leaders on such occasions. That was to shoot a ‘conspiracy theory’ accusing international markets of being terrorists bent on destroying her country. Thus, in the eyes of Argentines, the markets have been portrayed as deadly as popular ‘economic hitmen’ (available here ).
The world is full of economic data manipulators
Governments get monopoly over economic data by default
How have the governments been able to practice this game plan? That was because the governments had the monopoly power in producing economic statistics at least at national levels. They had got this power not through any legislation. They had got it by default because no private sector entity had the resources or processing capability to estimate economic statistics at national levels.
The Herculean task of producing GDP numbers
Take for example the estimation of the total economic output of a country known as the Gross Domestic Product or GDP. That is a massive exercise involving different sets of data from thousands of agencies and sources. Since the total output cannot be exactly calculated, it has to be estimated. For the estimation of the total output, the estimating agency has to use a number of approximations which it has to develop by conducting different types of surveys. For instance, the total coconut output has to be estimated by taking into account the amount exported, changes in the stocks and an estimation of the domestic consumption. To generate these data, a statistical agency has to continuously conduct field surveys and update those field survey results from time to time. That involves money, labour and time. Hence, only a government agency with a sufficient budget could do the job. Since economic statistics are merit goods, governments can produce them by raising funds through taxation. Hence, historically, a private sector entity was unlikely to use its resources to produce the key economic statistics. As such, by default, the responsibility for producing economic statistics fell on governments assigning them monopoly power as well.
Essential attributes of good statistics producer
A government statistics agency is supposed to function as an impartial body when it does its job. Though it gets funding from allocations made by politicians, it is not supposed to favour them or even to work against them. Hence, a government statistics agency should always maintain an arms-length relationship with politicians. Responsible politicians respect that independence as was highlighted by Sri Lanka’s Finance Minister N M Perera in a speech delivered to central bank’s senior officers in 1971 (available here ). In many countries, this noble relationship has been broken and statistics agencies simply become mouthpieces of politicians in power.
The demand for correct economic data
But markets demand correct, credible and timely information. If the government agencies fail to supply the required information, markets as consumers of information cannot be prevented from taking action to produce such information. Previously, they could not do so because of the high costs involved and the constraints relating to information processing capabilities. Both these issues have now been reduced to a virtually zero level by the advancements in ICT and the facility to get a vast array of information from around the world thanks to the wiring of the globe through a common digital network. Accordingly, information processing and dissemination power available with private hands today is unparalleled. They also can hire better analysts than government agencies by paying them competitive salaries. Hence, they can successfully compete with the statistics-producing governmental bodies by producing alternative sets of economic statistics.
Alternative data producers in USA
Using the advanced ICT, two private entities in USA have ventured into producing alternative national statistics. One is the Shadow Government Statistics (available here ) which takes pride in presenting ‘analyses behind and beyond government economic reporting’. This agency produces shadow inflation, employment and GDP numbers for USA. The other agency is the State Street Associates which operates the PriceStats data dissemination service (available here ). It produces up to date inflation numbers for 18 countries which are demanded by global investors and lenders as a counter-check of the inflation numbers produced by official statistics agencies. The list is expanding and within a few years, it will cover almost the entire world.
For USA, ShadowStats uses the same methodology as the US Bureau of Economic Analysis or BEA to estimate its national level statistics but has found that BEA has constantly overestimated GDP and employment and underestimated inflation. PriceStats uses prices of products purchased by consumers in retail supermarkets, collected online simultaneously, to prepare instant inflation numbers for the eighteen countries it has covered at present. Both these series are available to interested market participants on payment of a fee. Accordingly, a merit good produced by the government has been converted to a private good in the market. Hence, the US government monopoly in producing national level statistics has been broken in USA today. It has forced the US BEA to be careful when publishing economics statistics.
Alternative NEER and REER estimation
A similar development has now taken place in Sri Lanka too. A private securities firm, JB Securities or JBS, has produced an up to date Nominal Effective Exchange Rate or NEER and Real Effective Exchange Rate or REER by using the same methodology as the Central Bank (available here). These two indices are necessary in order to assess the competitiveness of the Sri Lankan rupee. The Central Bank calculates both NEER and REER with respect to 24 trading partners by using the importance of each partner to Sri Lanka as measured by the share of the import and export trade which Sri Lanka has with each country. It releases these numbers to public domain through its website (www.cbsl.gov.lk ) and its Annual Report which is made public at the end of March of each year. The market demands a deeper analysis of these two numbers. The Central Bank web just publishes these numbers, while the Annual Report makes a routine description of the change in the indices.
JBS has gone three steps further than the Central Bank. Its numbers are available up to the latest month so that in October it publishes numbers relevant to September. The Central Bank is one month behind, but could catch up it easily. JBS has used January 2012, a more recent year, as the base year of the index as against the base year of 2010 used by the Central Bank. JBS has also disaggregated the change in REER into two useful components: the change due to exchange rate changes and the change due to Sri Lanka’s inflation being higher than its trading partners. These two components are necessary to decide on the status of the competitiveness of the Sri Lankan rupee as against the currencies of her trading partners. Sri Lanka loses its competitiveness if other currencies depreciate faster than the Sri Lankan rupee against the dollar and/or if Sri Lanka’s inflation rate is, on average, higher than the inflation rates of its trading partners. If Sri Lanka is to use the exchange rate as a barometer of competitiveness, both these factors have to be taken into account.
Losing competitiveness due to appreciation of a currency
The nominal effective exchange rate index is calculated to assess how the Sri Lankan rupee has fared on average against different currencies. This is because it may have appreciated against one currency and depreciated against another currency. Hence, in order to assess what has happened to the rupee on average, it is necessary to convert the changes in the rates into an index weighted by trade shares. REER is a derivation from NEER by taking into account the inflation difference between Sri Lanka and the particular trading partner under reference. Monetary theory suggests that in order to maintain the purchasing power of the rupee in a competitive world, the rupee has to be depreciated when Sri Lanka’s inflation is higher than other countries. In the reverse, the rupee has to be appreciated when Sri Lanka’s inflation is lower than other countries. When the nominal exchange rate does not sufficiently depreciate when Sri Lanka’s inflation is higher, REER value goes up indicating an appreciation of the rupee in real terms and thereby eroding the country’s global competitiveness. If this real appreciation accumulates over a period of time, the country’s loss of competitiveness becomes so severe that it becomes difficult to restore the competitiveness to previous level unless a massive depreciation of the rupee is made. Sri Lanka had to go for this in 2000, 2001, 2009 and 2012.
Reversing the competitiveness gains
JBS has found an interesting result in its calculation of NEER and REER. Due to the depreciation of the rupee against the US dollar in early 2012, in April, REER too depreciated to a level of 92.17 improving Sri Lanka’s competitiveness. However, since then, the rupee had been kept constant despite the fact that Sri Lanka’s inflation has been higher than most of the important trading partners. As a result, REER has continued to appreciate reaching a level of 103.27 in September 2014 recording an increase by 11.1 index units. The break-down of this change by JBS shows that 5.4 index units have been due to other currencies depreciating faster than the rupee and 5.7 index units due to Sri Lanka’s inflation being higher than that in other trading partners. Due to both these reasons, Sri Lanka has now completely lost the gain of competitiveness which it commanded for some time when the rupee was massively depreciated in early 2012.
Single digit inflation alone is not sufficient
The learning outcome out of this exercise is that the single digit inflation about which Sri Lanka has taken pride does not help the country when it comes to maintaining its external competitiveness. What matters is not whether the inflation is single-digit or not but whether the inflation in other countries is higher or lower than that single digit, on one hand, and whether other currencies have depreciated or appreciated against the US dollar, on the other. Both these factors have worked against Sri Lanka between April 2012 and September 2014.
Thus, the rupee has appreciated in real terms by 12% during this period eroding Sri Lanka’s competitiveness. If this is allowed to be accumulated as it has happened in the past, it is inevitable that the country will have to go for a massive depreciation in order to restore its competitiveness.
That is the source of the pressure being built for exchange rate to fall in the Spot Market today despite the assurances given to the contrary. When the Spot Rate is held tightly by authorities, the impact has been felt in the next available market Spot Next where the rupee has started to fall. Thus, when markets are better informed, the authorities get a reduced leeway in manipulating the markets as well.
*W.A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com
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