LSM: Exports remain the saving grace

Pakistan’s goods’ exports may have only risen 2.6 percent year-on-year in 1QFY23, but there is enough in it to arrest the slide in Large Scale Manufacturing. As strange as it sounds, the jump in export quantities in readymade garments, footballs and furniture continues to carry the LSM. While the overall growth for 2MFY23 remains in negative territory, having entered there last month for the first time since peak Covid, it could have been a lot worse had it not been for the revised methodology for LSM computation.

The heavyweight wearing apparel segment which is essentially the export quantities of readymade garment had the single largest positive impact with a little over 6 percent weight in the QIM, as the quantities grew 61 percent year-on-year. Export numbers for September are out too, with the growth in quantity exported moderating to 40 percent year-on-year for 1QFY23. Export in the segment has grown only by 5.8 percent in dollar terms, as the unit value has been taken for a ride. In all likelihood, wearing apparel will continue to lead the way for LSM growth contribution for September as well.

The second biggest positive impact comes from furniture segment (read quantities of furniture exported). The 2MFY23 growth at 174 percent was enough to contribute big, despite a paltry 0.5 percent weight in the LSM index. With a little over $1.2 in monthly value, the contribution to LSM seems out of place. September export numbers show the growth having slowed down to 98 percent year-on-year for 1QFY23.

Save for the newly included items computed on export quantity basis, negative growth has been witnessed across all sectors, with few exceptions. The heavyweight food, textile, fertilizers, cement, automobile, and tobacco – have all undergone moderate to significant decline in production. High frequency data on petroleum, vehicles, fertilizer, electricity, and cement all indicate – the downward trend is here to stay.

With interest rates likely to stay high, inflation in double-digits, negative real incomes, and global economic meltdown likely to hit exports – will all test LSM going forward. So far, the slide has been arrested by export-oriented sectors, but the party may well be short-lived there, as early signs of exports to the developed world slowing down have emerged. The relatively high base of last year is likely to yield at least two quarters of negative LSM growth, if not more.