Fall in industrial production

The statistics on the Quantum Index of Manufacturing (QIM) has been released by the Pakistan Bureau of Statistics (PBS) for the month of October 2023. They are disappointing in nature.

Earlier, there was some evidence that a process of recovery had commenced in the large-scale manufacturing sector. From a big contraction in 2022-23 of 10% and as high a fall as 18% in June 2023, the sector showed a growth in the quantum index of 2.5% in August and 1.3% in September.

Consequently, the first quarter of 2023-24 saw a recovery in the quantum index of manufacturing, albeit of a small magnitude of 0.8%. Nevertheless, this represented a significant improvement from the big fall in 2022-23.

The month of October has seen an overall decline of over 4% in the QIM in relation to the level in the corresponding month of the previous year. This is a sizeable drop and consequently the growth rate of the QIM in the first four months is back to a negative magnitude of 0.4%. The optimism that the process of industrial recovery has commenced after the very difficult last year is unfortunately short-lived.

There is need to decompose the QIM and identify which industries have shown growth and which have exhibited declines during July to October 2023. This requires analysis thereof of factors contribution to a reduction in output of some industries. Further, there will be need also to assess if the industries which have shown positive growth will be able to maintain their performance in coming months.

The performance of the textile sector and the industry producing wearing apparel is of special importance. Combined these industries have a weight of 24% in the QIM and contribute 30% to the sectoral employment. The PBS estimates reveal that there was a big decline in the first four months of 2023-24 in the output of cotton yarn and cloth. This is confirmed by a corresponding fall in the volume of exports.

However, there is a problem with the estimated increase in production of garments. This is estimated at 26.5% in the QIM. There is a much less growth in the volume of exports of garments at 5.6%. The production and export figures are the same for July to November 2023-24, but differ for 2022-23.

It appears that the growth rate of output by the readymade garments industry has been substantially overstated and adjustment for this brings down the growth of the QIM from negative 0.4% to negative 1.7%. As such, the performance of the large-scale manufacturing sector is significantly worse than that reported by the PBS.

The other major industries, with individual weights in the QIM of more than 1%, that have shown declines are cigarettes, automobiles and electricity equipment. Their negative impact on the growth rate of QIM is 0.8%, 1.5% and 0.3% points, respectively.

The cigarettes industry has been subjected to a big increase in excise duty of 146% earlier this year. This has impacted on the consumption of cigarettes in the country. There is also the likelihood of increased tax evasion and under-declaration of output by the units in the industry.

The fall in output of the automobiles industry has been very large at almost 49%. Similarly, electricity equipment output is down significantly by 13%. Both supply and demand factors have probably been operative here. On the supply side, imports of transport equipment are down by 37% in the first four months of QIM, possibly due to import restrictions by the SBP (State Bank of Pakistan). On the demand side, prices have gone up substantially in relation even to the rise in the purchasing power of the upper income quintile of Pakistan.

Turning to the industries which have exhibited some dynamism, the list includes besides garments, petroleum refining, fertilizer, pharmaceuticals and cement, with growth rates of 8%, 9%, 37% and 7%, respectively. Their combined weight in the QIM is 21% and their growth has increased the growth rate of the QIM by 3% points.

There is a process of import substitution on-going in the case of petroleum products. While the domestic output has increased by 8%, there has been a fall in the imports of these products by 15%. This has been achieved with no increase in crude oil imports. Consequently, the sustainability of the increase in output is questionable. However, the recent significant drop in retail prices should sustain the demand, subject, of course, to a corresponding increase in crude oil imports.

The big increase in output by the pharmaceutical industry of 37% is partly the outcome of a 32% jump in imports of medical products, many of which are probably ingredients and inputs into domestic production. There are issues of sustainability also about the continued 7% increase in output by the cement industry, in the face of only a modest increase in construction activity in the country of under 2% in the first quarter of 2023-24.

There are factors which operate from the cost-push side that could also further dampen the prospects for significant industrial growth in the remaining months of 2023-24. The first negative impact is likely to be due to the extraordinary escalation in gas tariffs in 2023. The industrial tariff of gas has gone up recently by as much as 90% to 118%, while the electricity tariff had gone up earlier by 71% and future quarterly increases are likely.

Therefore, there is the likelihood of industry in Pakistan facing limited growth due on the one hand in limited demand due to little increase in real household incomes and on the other hand because of rising costs due particularly to the big escalation in energy costs.

Further, as highlighted above, continued growth of many industries will hinge on adequate level of imports of inputs, which will require a sufficiently high level of foreign exchange reserves, that may not be case in coming months.

Overall, the short-run outlook for the large-scale manufacturing sector remains uncertain. The target growth rate of 3.2% in this year’s Annual Plan for the sector will be difficult to achieve. This, in turn, will restrict the overall GDP growth rate in 2023-24.

Copyright Business Recorder, 2023