NEWS | Wednesday, 30 January 2008

Are you using your deflators right?

Charlot Zahra

The report presented by the General Retailers and Traders Union (GRTU) about the deflators used by the National Statistics Office (NSO) in calculating the Gross Domestic Product (GDP) has opened a debate about how these statistics should be calculated.
When presenting the report by economist Joe Falzon (who is also a member of the Malta Statistics Authority board) GRTU Director-General Vince Farrugia said explained that the cause of the problem is the calculation of Final Household Consumption.
GRTU insisted in its study that the recognised deflator of consumption spending is the Retail Price Index, rather than the Harmonised Index of Consumer Prices (HICP) figures that the NSO uses.
According to the GRTU, Household Consumption in the third quarter of 2007 in real terms should have gone up by 3.64% and not by 6.96% if the Retail Price Index is used as a defaltor for Household Final Consumption expenditure.
In the third quarter 2007, the NSO has adjusted real Consumption at constant prices upwards using a negative deflator of -1.86%.
The NSO, insisted Farrugia, has not explained how Consumption in real terms has been declared higher than consumption in nominal terms, when everybody living in Malta knows that inflation during the third quarter of 2007 was not negative.
Falzon’s study shows that consumption in real terms, if the RPI is used as a deflator, went up by only 3.64% and not the 6.96% as stated by NSO.
Since final Household Consumption represents 86% of GDP, the GDP Growth for the third quarter of last yeat should have been 1.94% and not 4.14% as stated by the NSO.
Farrugia called for the publication of the deflators used by the NSO in order to ensure transparency in the workings made to calculated the GDP statistics. He also insisted that the NSO should have its own head and that the regulator should be a separate entity.
Following the resignation of incumbent Gordon Cordina in January last year amid a sea of controversy and harsh criticism by the Labour Party following a revision of statistics, Malta Statistics Authority (MSA) chairman Reno Camilleri is occupying the post of NSO director-general as well.
Asked whether he agreed with the GRTU’s request that the deflators used by the NSO in calculating GDP statistics should be published or not, and the reasons why, veteran economist Karmenu Farrugia told Business Today:
“Certainly. Nothing (except very sensitive figures which can directly point to one or two individual market operators) should be left out of publication. The more so, the deflators. Because these are very important for economic management decisions.
Questioned as to whether the NSO is using deflators correctly when making its GDP calculations or not, Farrugia said: “Oh yes, the NSO is certainly using the deflators correctly. But there is doubt about whether these deflators are the appropriate ones. Joe Falzon argues this point very cogently in his GRTU paper published earlier last week.
“His suggestion to have each sub-component of the Final Consumption Expenditure (both Household and Government) and of Gross Fixed Capital Formation accompanied by its own price deflator, and all published, makes good sense,” Farrugia told Business Today.
Asked whether he agreed with the GRTU’s request to have a separate head for the NSO and the MSA, the veteran economist said: “Of course I do. Even the government does in principle. Everyone does.
“I would even suggest that the NSO’s head be appointed by the House of Representatives, just like the Auditor General and the Ombudsman. There would then be no need for any regulatory authority: the NSO would itself be transformed into an authority.

Technical misconceptions
A senior economist told Business Today that at face value, the GRTU report appeared to be based on a number of “technical misconceptions”.
“Firstly, consumption expenditure should not be deflated by the RPI, but by an appropriate deflator which takes into account issues such as expenditure by Maltese people abroad.
“Changing the deflator need not necessarily alter real consumption, because it could well require a re-estimation of data in nominal terms, or changes in other deflators, as well as revisions in data back in time, possibly keeping the data at constant prices and its growth rates unchanged.
“These are issues of a highly technical nature which are not easy to explain and which may be also not apparent even to economists who are not specialised in statistics.
“It is important for the NSO to issue clear explanations on these issues and for analysts to be aware of practical statistical compilation methods which may be quite different from economic theory approaches,” the economist told BusinessToday.
The senior economist added that “given the highly technical nature of the issues involved, a press conference is not the ideal place where to discuss them, little knowledge being such a dangerous thing. This risks causing unnecessary harm to the NSO and to the country’s credibility.
“A debate within the MSA, eventually widened to Eurostat and to other expert opinion would have been more productive. After exhausting these avenues, a Press Conference could have been resorted to in order to divulge wrongdoings, if any,” he explained.
Moreover, he said, “the fact that a member of the MSA made such a press conference shows either a blatant lack of professional ethics or a breakdown of communication within the MSA.”
The senior economist explained that “statutorily, the Director General of the NSO should be separate from the MSA. But this is not a question of appointing any one economist or technical person to the post. The qualifications and experience necessary are hard to find in Malta.”
He said the request to publish further information about deflators “is useful only if there is a technically-proficient public which can make an objective use of the information. Otherwise, it may risk simply fuelling further controversy,” he told Business Today.
Asked for his reaction, acting NSO head Reno Camilleri told Business Today: “In principle we do not have any objection to the publication of the deflators, together with the technical explanation of how the deflation is carried out or how to convert Gross Domestic Product from Nominal Terms to Real Terms.
“We have published a booklet called ‘Sources and Methods’ about the matter. The only difficulty I foresee if one expects the deflators to be published every three months is that we have at the end of the period, we have a 70-day deadline to send all the results to Eurostat.
“The results do not consist of a couple of tables but 50 in all, therefore to produce the deflators within this timeframe it would be rather difficult. However we do not have an objection to this. If there is a request for these deflators, we will seriously consider it, even on an annual basis.
“At present the GDP press release has 21 pages. We were considering reducing the number of pages in the release since the reaction we had from the media was that it has too much infomation. Imagine adding another two to three pages of deflators. There are 70 deflators in total which differ from one period to the other,” he said.
Asked whether he beleived that the NSO was using deflators correctly or not, Camilleri said: “We think we are making use of deflators correctly.
“The main difference between the NSO statistics and the GRTU report is that the latter takes deflators which were derived from the Retail Price Index while according to our methodology, the deflators should be derived from the Harmonised Index of Consumer Prices. Therefore the results of the two reports cannot match,” he insisted.

No substitute yet
Asked to comment about the GRTU’s request to have different people at the heading the NSO and the MSA, Reno Camilleri told BusinessToday: “The GRTU does not need to make any requests in this regard as the law itself requires a Chief Executive for the NSO and a Chairman for the MSA. This is the law and this is how things should be.
“Following the resignation of the incumbent, we did not have a substitute to appoint, therefore with the consent of the MSA board and in consultation with the Minister, I had to take over the NSO chief executive post as well.
“The plan was that I would stay at the NSO for a few weeks or months. In the past few months, I have made my utmost to satisfy the board’s request to idenfity, with the asssistance of the Board, an acceptable person having all the necessary qualifications required by the law as well as a certain level of maturity and management capabilities to take over the job of chief executive or Director-General at the NSO,” he told BusinessToday. “I am more anxious than anybody else to see these two posts separate,” Camilleri insisted.
Asked by BusinessToday whether the NSO would consider appointing a director-general from abroad, Camilleri said: “We are exploring all the options. We prefer in the first instance to identify a suitable person without a call for applications. If a person is not identified, then a call for applications will be considered.”
“I will be proposing to the MSA board the possibilty of issuing a call for applications, even in view of the fact that an election will be called in a few months time.”
“My personal wish is to get out of this dual role as soon as possible,” he told BusinessToday.
This newspaper has learnt that at least six people were contacted – three heads of Goverment departments and three people who work in managerial posts of financial institutions.
A financial package had been agreed with one of the shortlisted people, howver at the beginning of this month, the person changed her mind about the post. The package agreed was more attractive than those of the previous Director-General or Chief Executive.

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