Large-scale manufacturing (LSM) sector, as per data released by the Finance Division, registered negative 8.1 percent July-March 2023 and peaked at negative 25 percent in March 2023. By April this year LSM registered negative 21.1 percent, and in May, the last month for which LSM data is available, the negativity had declined to 14.4 percent.
The decline in May no doubt accounts for the assertion in the Monetary Policy Statement, dated 31 July 2023, that “improved business confidence and withdrawal of priority guidance on imports have improved the outlook for manufacturing, construction and allied services.
Notwithstanding this improvement, the unfolding impact of accumulated monetary tightening and expected fiscal consolidation would continue to keep growth range bound.” Disturbingly, this claim indicates that the Monetary Policy Committee willfully ignored, at best, or was unaware, at worst, of the following statement by the International Monetary Fund’s (IMF) Board member representing Pakistan on approval of the Stand By Arrangement (SBA): “the authorities have requested temporary approval of exchange restrictions considering the limitation of advance payments for imports against Letters of Credit.
Both exchange restriction and Multiple Currency Practices are non-discriminatory and are being maintained for balance of payments reasons, which we intend to remove by the end of the program.”
LSM began to inch towards the negative territory in July 2022 registering negative 1.4 percent – a decline no doubt due to the devastating floods that wreaked havoc on infrastructure, cash and food crops, with 33 million Pakistanis affected. In September 2022 the LSM registered at positive 0.01 percent.
In marked contrast the LSM growth rate was 26.6 percent in March 2022 and 14.9 percent in April 2022 – a time when political uncertainty was at its peak with the then prime minister losing the vote of no-confidence on 9 April.
The question is why was LSM growth faring better in these months relative to this year and whether the decline in negativity between April and May 2023 (21.1 minus 14.4 equal 6.7 percent) foretells that the negative trend is on the decline.
Two observations are in order. First from October 2022 till May 2023, LSM has been in the negative territory. In October it registered at negative 7.7 percent, by November negative 5.5 percent, and by December negative 3.5 percent.
In 2023 the negativity was in double digits raising concerns about the flawed policies that began to be implemented after Ishaq Dar took oath as the country’s finance minister on 27 September 2022 – policies that were not only violative of the August 2022 agreement with the Fund on the seventh/eighth review but were also in defiance of basic economic theories/principles.
Causing particular angst to multilaterals, including the IMF, was the policy to control the interbank rate without the foreign exchange reserves to intervene in the market. This led to the reemergence of the illegal hundi/hawala mechanism losing the country 4 billion dollars in official remittance inflows in comparison to the year before. And keeping the discount rate at a level that did not reflect a positive rate of return.
These two policies were in the domain of the State Bank of Pakistan (SBP) after the passage of the January 2022 State Bank amendment autonomy bill however there are few who regard these two policy measures as the outcome of an independent decision by the SBP and not the outcome of overwhelming coercion by the Ministry of Finance.
Thus no staff level agreement was reached on the ninth review and a breakthrough was effected only after Prime Minister Shahbaz Sharif directly interacted with the IMF Managing Director in June this year leading to a staff level agreement on the SBA on 29 June 2023.
Second, inflation in February 2022, prior to the announcement of the unfunded subsidy package, was 12 percent, one percent lower than in January 2022, and core inflation was 7.8 percent with little pressure on the State Bank of Pakistan (SBP) to raise the discount rate beyond 9.75 percent. Contrast this documented government data with 28.3 percent Consumer Price Index for July 2023, core inflation of 18.4 percent and a discount rate of 22 percent.
It is little wonder that LSM performance, a prime contributor to output, exports and jobs remains a source of concern today. However, there is a need to explore two worrisome elements of LSM as calculated in Pakistan.
First, what categorizes as a large scale manufacturing unit. In most countries including India large scale is defined as capital intensive, technologically advanced industry, with a corporate skilled management structure and a capability to enjoy economies of scale.
Sugar, bakery products and chocolate do not feature as large scale manufacturing items in India though in Pakistan the weightage of sugar was raised from 3.4 to 4.4 – a raise that no doubt is to the benefit of key players in the sugar industry, most of whom are in politics.
The same argument applies to wheat and rice millers whose weightage was raised from 3.7 to 4.7. Be that as it may, year on year growth of manufacturing of food registered negative 8.5 July-April 2023 against positive 10.6 in the comparable period of last year, a negativity that declined to 5.9 in April this year.
Second, unlike in other countries banking sector is not included in Pakistan’s LSM. However, textiles weightage has been raised from 18.2 to 23.2 though disturbingly this sector suffered the worst ever negative growth in April 2023 at 33.3 with the July-April average at negative 17.9.
A similar picture emerges for tobacco with weightage of 2.6 (against 2.1 previously) suffering negative growth of 61.6 in April against negative 27.5 July April 2023), for chemicals (weightage upgraded to 8.3 from 6.5), pharmaceuticals (weightage upped to 6.6 from 5.2), nonmetallic mineral products (6.4 from the earlier 5) with the April negative figure much higher than the average July-April 2023 figure raising question about why the April negativity declined.
To conclude, there is a need to revisit the definition of what should be included in the manufacturing sector and qualified and experienced statisticians with experience in international data collection need to be inducted in the department as accurate data strengthens the policy-makers’ decision making process rather than data manipulation giving them merely a short-lived face-saving from their cabinet colleagues.
Copyright Business Recorder, 2023
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