Output in Pakistan’s major industries fell 7.9% year-on-year as the country’s manufacturing sector faced one of its worst periods due to raw material shortages, high credit and an unfavorable business climate.
The Pakistan Bureau of Statistics (PBS) on Tuesday released figures for large scale manufacturing (LSM) industries, showing how badly Pakistan’s industrial sector – a major tax contributor – is faring in the prevailing economic conditions.
According to published data, the growth rate in LSM industries slowed to 7.9% in January from a year ago. The sector is suffering from import restrictions that have caused a shortage of imported raw materials. A sharp currency devaluation also made raw materials more expensive and made business models unviable.
The International Monetary Fund (IMF) estimated that the negative growth rate in major industries could have been slower if the government had not imposed import restrictions. The central bank has issued instructions to commercial banks on allocation of foreign currency for import purposes. The IMF is currently trying to waive these guidelines, but the central bank has yet to return its December 2022 circular.
Meanwhile, the government is waiting for the IMF agreement to be implemented before starting to normalize imports. State Bank of Pakistan (SBP) Governor Jameel Ahmad said import restrictions will be eased following the Staff Level Agreement (SLA) with the IMF. However, neither the governor nor Finance Minister Ishaq Dar has given a date for closing the agreement with the IMF.
Earlier this month, the central bank raised its interest rates to 20%, the highest rate in Pakistan’s history, hoping to break the SLA. Sources say the IMF is pushing for further interest rate hikes aimed at containing inflation, which is currently at a 50-year high.
The LSM trend indicates that gross domestic product (GDP) growth this year is likely to remain at around 1% due to shutdown of industries and adverse impact of devastating floods on agriculture sector. The government has targeted economic growth of 5.1% in the current fiscal year, but the latest estimates by the IMF and the federal government suggest growth will be slightly in positive territory.
Overall, LSM production fell by 4.4% in the July-January period of the 2022-23 fiscal year, PBS said.
As major industries contribute heavily to revenue generation and job creation, any change in their growth will affect government and business sentiment. Businesses also face Federal Board of Revenue (FBR) demand for advance income tax and slow release of genuine refunds (from non-export sectors).
The LSM sector contributes about one-tenth of the gross national product, however, the constant decline and rise in the share of LSM can create many problems for the government that it is already trying to create.
The main contributors to the overall negative growth of 4.4% were the food sector, which shrank slightly, as well as the tobacco industry, which shrank by less than 1%, textile production, which shrank by 2.7%, and petroleum products and cement production, both of which fell by less than 1%. and pharmaceuticals and automobiles, the two industries hit hardest by the import ban, also shrank in the first seven months of the current fiscal year.
In the period July-January 2022-23, production in the clothing, furniture and football sectors increased compared to July-January 2021-22.
Although the textile sector, the largest sector in the LSM index, has dropped from 21% to 18.2% in the LSM index, any movement in the segment still has a significant impact on the growth of the overall sector.
Published in The Express Tribune on March 15th2023.
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