Rebasing GDP: The Bossano Example

In the 2019 budget announced by the Hon Mwanakatwe, she announced that Government will rebase the GDP in 2019. Now I could explain rebasing relates to the nominal and real GDP of a country which would honestly be unnecessary fancy English so let me just use a normal example.

Imagine a household far away in a land called Chambia (I know, I couldn’t resist) lives a man called Bossano, who has a very big house and in this house he has family, extended family and some foreign tenants who stay with him. Most of tenants and extended family do some work of some sort and earn a living except the young ones not yet of age. But when they do become of age and begin working, he taxes them a ration for part of the money spent on taking them to school, hope you get the drift. Now everyone in this house has to pay Bossano a ration, which he uses to take some children to school, keeps the lights on (Zesco),water, food, plus he has to pay some workers who grow crops for him and his household (FISP/FRA) and other expenses .etc.

Now Bossano has a lot of pressure so he borrows heavily from two guys Euro Banda (Euro Bond) and Choncholi getting into major debt. He uses this debt for many things like building a house for rent and other investments that take time to give a return. Bossano's total ration collection can be considered Government tax collection and the total money his household makes including extended family and tenants can be considered as GDP (gross product...everything put together).

Here is the catch, Bossano needs some loan support and some guy by the name “IMFwiti” is a major don in this imaginary land and he gives loans to people on certain conditions. Everyone respects IMFwiti, and the standard way that he measures someone’s ability to sustainably pay debt. The International standard (Threshold) for measuring debt according to IMFwiti is to calculate the debt and divide it by the total amount his HOUSEHOLD makes, NOT his rations, please note the difference. Now IMFwiti and Choncholi don’t really vibe together and he and Bossano have an argument (That is story we won’t get into here) but they still trying to work things out after all IMFwiti is still a Global don.

Now let’s get back to Bossano and explain this rebasing. Over time the money that Bossano’s household makes is adjusted for prices or in Bossano's case this means to include extended family members who never made any money some time back but are making some now. This recalculation is given a fancy term in economics and is called rebasing. Basically it means Bossano after sometime usually calculates how much his extended family make because he doesn't really count how much they make properly often. You might rightly ask why Bossano doesn’t calculate how much his household makes properly. The answer to this is because some of his extended family are in formal employment with salaries (formal sector) which is easy to count whilst others (Most of them in fact) are tamanga guys (informal sector) who hustle on the street, they make money too it just doesn’t appear on a pay slip if you know what I mean, which makes it difficult to estimate how much they make. Plus over time the things his household produces (especially the informal guys) change so he has to take this into consideration.

So when the Zambian Government rebases GDP in 2019 it will be the same as Bossano recalculating how much the earnings of this total household have changed with time (Properly estimating how much informal guys are making), taking into account the prices of the things his household makes. The base in “rebase” refers to a year when changes in household earnings are being calculated. So basically rebasing is changing or updating the year from which Bossano calculates total household earnings.

You probably wondering if developed countries rebase their GDP, the answer is basically, no. It is what you would call mainly an Africa Problem. Ghana did it, Nigeria did it and now Zambia is doing it for the second time having done it in 2014. The economic size of the country is not fully reflected in nominal GDP. Two arguments to support that GDP is understated. One is that informality in the economy is high and part of the economy is not documented, hence that pie is missing from officially reported GDP. The other argument is that there are new services coming into the urban centers and old computation techniques based on existing GDP base are not fully reflecting the modernization of economy; hence urban contribution to GDP is undervalued.

Now if you remember, I explained that everyone respects IMFwiti (who is obviously IMF), and the standard way that IMF measures a country’s ability to sustainably pay debt. The International standard (Threshold) for measuring debt according to IMF is to calculate the debt and divide it by the GDP (Gross Domestic Product), NOT tax collections (rations), please note the difference. Hence when a country rebases its GDP it technically reduces the debt to GDP ratio (in a math fraction if you increase the denominator, the total number reduces .e.g. 3/7 is greater than 3/20). Rebasing GDP is the same as inflating GDP for accuracy. Its normal in African Countries, the only strange thing is Zambia will be rebasing after just five years i.e. last rebase was 2014. This means Bossano is either not measuring the informal sector well or he may have an incentive to inflate the GDP numbers to understate debt, current account and fiscal deficits.

Either way I think it’s the smart move, but you can make your own conclusions. I’m just a guy with round glasses, you don’t have to take my word for it.