Q2 of FY24: Industrial production records contraction for 4th consecutive quarter

KARACHI: The industrial production recorded contraction for the fourth consecutive quarter in the second quarter of FY24, the State of Pakistan’s Economy Report for the first half of FY24 released on Tuesday by the State Bank of Pakistan (SBP) said.

Subdued domestic demand and decline in Pakistan’s traditional textile exports along with costlier energy were the major factors constraining industrial activity during the first half of FY24, it added.

Nonetheless, LSM output recovered in the second quarter of FY24, rising by 0.5 percent after showing declines in the previous five quarters, since the first quarter of FY23. This substantially reduced contraction in LSM during the first half of FY24 compared to previous year. Improved availability of imported raw materials and rebound in production of cotton and rice were the key supporting factors, the report said.

Large-Scale Manufacturing (LSM):

LSM recorded a lower contraction of 0.4 percent during the first half of FY24 compared to a decline of 2.1 percent in the corresponding period of last year. Monthly data shows LSM grew on both YoY and MoM basis in November and December 2023. Also, the contraction was relatively less broad-based, as 12 out of 22 sectors registered positive growth in the first half of FY24 compared to only 4 sectors in the corresponding period of last year.

According to the report, the major drag to LSM growth came from textile, automobile, and furniture; whereas cumulative LSM growth excluding furniture. Specifically, after excluding furniture, the LSM shows 0.4 percent growth during the first half of FY24 compared to 1.5 percent decline in the same period last year.

Food, beverages, petroleum, pharmaceuticals and wearing apparel contributed positively. The output of these sectors collectively rose by 11.4 percent during the first half of FY24 compared to a 7.6 percent fall in the same period last year. Excluding these sectors, the contraction in LSM increases to 10.0 percent during the first half of FY24 compared to 8.8 percent decline in the same period last year.

This indication of bottoming out of LSM output largely reflects improved availability of raw materials for domestic and imported inputs, the report said.

On the other hand, higher interest rates amid inflationary pressures kept the domestic demand subdued, it added. Similarly, adjustments in domestic energy prices have partly offset the impact of ease in global commodity prices on cost of production.

Textile: Output of textiles, the largest component of LSM, declined by 11.0 percent during the first half of FY24, compared to 13.1 percent contraction in the corresponding period last year. The decline was led by yarn and cloth sub-sectors that mainly remained suppressed due to rising input costs.

The pace of increase in production of wearing apparel slowed to 15.1 percent during the first half of FY24 compared to 67.9 percent in the same period last year. This deceleration may be attributed to decrease in export volume of readymade garments by 6.8 percent during the first half of FY24, against 89.7 percent increase in the same period last year.

Food: Food, the second largest LSM group, witnessed 5.1 percent increase in output during the first half of FY24 against 2.9 percent decline in the corresponding period last year. The growth in this period was primarily driven by 25.5 percent increase in cooking oil production, supported by lower international palm oil prices.

Coke and Petroleum: Petroleum refining picked up despite a decline in domestic sales. The production of petroleum products increased by 8.4 percent during the first half of FY24, against a reduction of 11.1 percent in the same period last year. Production of POL products except for jet fuel and lubricating oil, increased compared to last year.

This increase, notwithstanding a decline in sales, is mainly attributed to a significant decrease in import volumes of POL products, as also reflected in higher volume of crude imports. In addition, rise in export volume of finished products, especially to UAE, also supported increase in production of petroleum products, the report said.

Pharmaceuticals: Produc-tion of pharmaceuticals increased by 31.8 percent during the first half of FY24, against a reduction of 21.6 percent in the corresponding period of last year.

The upturn in pharmaceutical production mainly owes to increased availability of imported medicinal raw materials amid relative exchange rate stability, especially in the second quarter of FY24. In addition, Drug Regulation Authority of Pakistan (DRAP) allowed upward adjustment in retail prices of both general and essential medicines, contributing to surge in pharmaceutical production.

Automobile: Continuing the declining trend, the automobile production plummeted further by 52.9 percent during the first half of FY24, after declining by 28.8 percent in the same period last year. The decline was also broad-based. The automobile industry has been grappling with multiple challenges. Slow economic activity, increased borrowing cost, and higher prices are some of the factors restraining automobile demand.

As per data released by Pakistan Automobile Manufacturing Association (PAMA), the auto sales slumped by 35.6 percent in the current review period compared with 40.4 percent decrease in the same period last year. Sector-specific import constraints leading to reduction in imports of Completely Knocked Down (CKD) and Semi Knocked Down (SKD) automobile kits, also exacerbated the drop in automobiles production during the review period.

Construction - Allied Industries: The construction registered higher contraction in the first half of FY24 relative to the same period in FY23.

The higher financial cost, reduced real incomes and decrease in federal Public Sector Development Programme (PSDP) continued to weigh on construction activities. In addition, tight monetary conditions and political uncertainty also affected construction activities and house building finance during the first half of FY24.

Cement: Cement production rose slightly by 1.9 percent during the first half of FY24, mainly ascribed to higher export volume followed by uptick in domestic sales in latter months.

Cement demand in the country’s export destinations, mainly Afghanistan, Bangladesh, Hong Kong, Germany and Ghana, almost doubled to 3.7 MMT during the first half of FY24.

Also, domestic dispatches slightly increased by 1.7 percent in current period. However, subdued domestic demand and rise in coal prices somewhat dented cement production.

Steel: Steel production contracted by 1.4 percent in the first half of FY24, compared to a contraction of 2.1 percent in the corresponding period last year. Production of Flat and long steel declined by 1.8 and 0.8 percent, respectively, during the first half of FY24. The sluggish demand from complementary industries including automobile, electrical equipment, heavy machineries and equipment, sewing and sugarcane machines led to subdued utilization of flat steel during the first half of FY24.

Similarly, the decline in production of long steel industry was due to noticeable expansion in imports of finished steel products besides muted growth in import of scrap. Also, transportation difficulties after implementation of axle load limits may have negatively impacted the sector by raising cost of transportation.

Copyright Business Recorder, 2024