Facing massive economic headwinds, companies in Pakistan struggle to keep operations going

Facing energy shortages and an overall decline in demand, companies in Pakistan are either announcing shutdown of operations or scaling them back, leading to heightened risks of mass unemployment, dent in exports, and massively lower economic growth rate in fiscal year 2022-23.

Frontier Ceramics Limited (FRCL), the makers of ceramic tiles, sanitary wares and related ceramic products, announced in a notice to the Pakistan Stock Exchange (PSX) on Monday that it has shut down its floor tile production plant for an “uncertain period”.

“We are writing to communicate that Frontier Ceramics Limited has decided to shut down its floor tile production plant for an uncertain period due to gas supply shortage,” the company said in a statement.

The ceramic manufacturer added that the “unforeseen devaluation of rupee coupled with the government restrictions, including letter of credit (LC) approval constraints and general economic instability are also reasons behind the decision.”

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The company is essentially engaged in the manufacturing and selling of ceramic wall and floor tiles under the widely known brand name 'FORTE'.

The development comes as Pakistan’s economic situation remains vulnerable owing to an ongoing dollar shortage, low foreign exchange reserves, and energy crunch.

“A number of sectors are witnessing this situation owing to gas shortage due to winter months,” Fahad Rauf, Head of Research at Ismail Iqbal Securities Limited, told Business Recorder.

“However, this year, the shortage is a bit higher, as the country has so far remained unsuccessful to purchase gas at spot prices, leaving LNG terminals underutilised, whereas the domestic production of gas has also declined,” he said.

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Rauf added that the LCs are also hard to come by due to which imports of spare parts and raw materials remain halted. “Moreover, there is no demand in the market amid an economic slowdown, leading to a shutdown of production,” he said.

The situation is not limited to a particular sector. On Friday, the management of Baluchistan Wheels Limited (BWHL) informed PSX that it had decided to temporarily close or stop production activity due to depressed demand of autos in the market.

“The company is facing a drop in sales orders from the OEMs [Original Equipment Manufacturers],” said the company, which is engaged in manufacturing and marketing automotive wheel rims for trucks, buses, tractors, cars and mini commercial vehicles.

The board at BWHL decided to stop production from December 12, 2022, till December 23, 2022, it said.

“Auto prices are very high, which has crashed demand, so industries depending on auto sales such as part suppliers are under pressure,” said Rauf.

He said that until import restrictions are eased and energy shortages are dealt with, the situation would only deteriorate.

Motiwala links declining exports to gas shortage

“More companies would take this decision, as global orders are declining, which would dent the exports. Unemployment would also rise as workers are laid off,” he said.

Sana Tawfik, an analyst at Arif Habib Limited (AHL), echoed the view, saying that economic concerns especially pertaining to Pakistan are being felt across the board, which will sustain until clarity is achieved on the International Monetary Fund (IMF) review.

“Overall, each company is facing economic issues. The cost of doing business has increased amid a hike in the policy rate.

“We knew that economic growth will remain low in FY23, as Large Scale Manufacturing (LSM) numbers are declining on a month-on-month basis,” she said.

Moreover, macroeconomic policies are moving towards tightening, which has also led to a slowdown in business activities.

“This will lead to unemployment, and inflationary pressures are also hitting citizens.

“Growth in Pakistan will be slower in FY23. However, we're hopeful that the situation would be better in coming months as the current account deficit has come down, and oil prices are declining which goes in Pakistan's favour,” said Tawfik.