LSM performance

Pakistan Bureau of Statistics (PBS) recent data indicates that the large scale manufacturing sector (LSM) has grown by a whopping 8.16 percent (July-December 2020) against negative 2.82 in the comparable period of 2019 and negative 1.74 percent in July-December 2018-19.

Two factors need to be highlighted in this context. First, LSM data is collected from industry sources (Oil Companies Advisory Council) as well as data from the Ministry of Industries and the Provincial Board of Statistics (BoS). OCAC indices for July-December 2020-21 were 105.93 against 100.88 in 2019-20 and 112.5 in 2018-19. This indicates (i) the worst performing six months pre-Covid19 were in 2019-20 after the then new economic team leaders agreed to very harsh upfront conditions with the International Monetary Fund (IMF) – conditions which included a discount rate of 13.25 percent and a significant rupee depreciation. State Bank of Pakistan (SBP) has not yet released any research paper supporting this change of policy, i.e., to link the discount rate to the IMF projected consumer price index of 13 percent (though the actual rate was less than 12 percent) instead of on core inflation as was the previous practice (with a supporting 2006 research paper) or calculate whether the real effective exchange rate reflects an undervaluation of the rupee as projected by independent economists, including previous SBP Governors, due to depreciation; and (ii) while the indices rose July-December 2020 to 105.93 yet they did not surpass the 112.5 figure in the comparable period of 2018-19.

The largest increase in LSM indices as per the PBS during the first six months of the current year was in data provided by Ministry of Industries with skeptics challenging the integrity of the data on the grounds that the Ministry may have been tempted to present a better picture than was the case, as it reflected on its own performance, a not unusual practice in federal ministries. Be that as it may, the indices registered 126.57 in 2018-19 declining to 123.1 in 2019-20 and rising to 135.3 in 2020-21. Again the worst performing year was pre-Covid19 2019-20 though unlike the OCAC data the 2020 figure was 135.3 – higher than the 126.57 achieved in 2018-19. Provincial BOS registered the same trend with 175.24 in 2018-19, 172.96 in 2019-20 and 182.2 in 2020-21. Thus a question arises as to why the OCAC data indicates that 2018-19 was the best performing six months (prior to the installation of the new economic team) while government data indicates July-December 2020-21 as the best performing six months during the two and a half years of the Khan administration.

The 8.16 percent positive LSM growth July-December 2020-21 may be seen in the context of the low 2019-20 base and the significant scaling down of the contractionary monetary and fiscal policies post-April 2020 as a consequence of Covid-19; however with the second to fifth staff level agreement with the IMF recently concluded with the implementation of ongoing “prior” actions this growth may be reversed in months to come.

Secondly, the LSM sub sectors that showed improved performance July-December 2021 against the comparable period of the year before (cumulatively) are as follows: (i) food, beverages and tobacco by 3.41 percent; (ii) non metallic mineral products (cement, ceramics, glass and lime) by 2.54 percent, (iii) pharmaceuticals 1.02 percent; (iv) textile 0.74 percent; (v) automobiles 0.57 percent (vi) fertilizer 0.48 percent; (vii) paper and board 0.43 percent. Others were 0.29 percent or less. While the improvement reflects post-covid19 incentive packages, including construction specific sectors, yet higher output has not contained the price rise in products manufactured by these industries, implying that the benefit has not trickled down to consumers. The sectors that showed a decline included iron and steel products, electronics, leather products and engineering products.

A favourable forecast for the future is on the back of the Business Confidence Survey (BCS) carried out routinely by the SBP and IBA. The December 2020 survey noted that “business confidence index for industry increased by 5 points in December 2020 wave and reached highest level since its inception in 2018.”

The December 2019 BCS results were as per the SBP as follows: “The overall business confidence turned positive (after remaining in negative zone for the last four waves) from 48 in October 2019 to 52 in December 2019…. which shows that pessimistic views of business community about the economy have turned positive, resulting in an increase in the level of Business Confidence Index.” The LSM plummeted by negative 5.59 percent in January 2020 and negative 0.2 percent in February 2020. Thus the linkage between the BCS translating into improvement in the LSM is rather tenuous. Perhaps the SBP would be well advised to look at the World Bank’s decision to abandon calculating ease of doing business which showed tremendous improvement in Pakistan at a time when output declined massively.

LSM accounts for the bulk of credit used by the private sector. As per the SBP, credit to the private sector was 118.270 billion rupees during July 1 to December 25, 2020, up 0.17 percent from a year earlier against 118.069 billion rupees in 2019-20. This begs another question: the BCS optimism is not on the back of credit data and purely on sentiments expressed by an individual of the private entity surveyed who may have been influenced by what is referred to as an experimenter bias defined as when a researcher unconsciously affects results, data, or a participant in an experiment due to subjective influence.

There is no room for complacency for the government though its economic team successfully continues to focus the Prime Minister’s attention only on achievements, with critics maintaining that some of the achievements are on the back of data manipulation as well as ignoring the massive cost of those achievements on other sectors of the economy. This accounts for the general public paying an ever rising cost for these policies due to a reduction/freezing of salaries in the private sector for two years as well as the budgeted freezing of public sector salaries in the current year (though staff of some ministries/departments finagled a pay raise after going on strike) and a continuous price rise that is understated because of: (i) the Ministry of Finance raising taxes on the low hanging fruit for example taxes/surcharges on electricity (including approval by the standing committee allowing the government to impose a surcharge of up to 10 percent on electricity bills) as well as on petroleum and products – items that have a very low weightage in calculating inflation though these items account for a rising portion of a householder’s income; (ii) the ever-rising budget deficit due to a massive rise in borrowing domestically and externally to meet the primary surplus targets agreed with the IMF; and (iii) present inflation figures that are unrealistic and not rationalized for example the decline of CPI to 5.7 percent in January this year when the Sensitive Price Index showed a rise each week.

Copyright Business Recorder, 2021