Large-Scale Manufacturing (LSM) has been a major recipient of subsidies - utilities (electricity tariff) including misuse of captive power plants, and fiscal and monetary incentives at the taxpayers’ expense and yet its performance has been poor.
Table 1 shows the growth of LSM, which was negative three years out of the past six years. Fiscal year 2020-21 (July-June) registered an impressive positive growth of 11.2 percent. Three reasons are cited for the rise in output: (i) it post-dated the onset of Covid-19 in the country, acknowledged by the then Prime Minister end February-early March 2020, which led to cessation of the severely contractionary monetary and fiscal policies under the then ongoing International Monetary Fund (IMF) programme; (ii) the low base of the previous year; and (iii) the promotion of manufacturing of Covid-19 related products, for example masks.
The Economic Survey for the year noted that “production significantly grew in pharmaceuticals, chemicals, non-metallic mineral products, textile, food, beverages and tobacco, automobiles, iron and steel products, coke and petroleum products, fertilizers and paper and board sectors in fiscal year 2020-21” but cautioned that “the increased industrial output was once again on the rise on the back of domestic consumption instead of export-led growth” – consumption led sectors like automobiles, food and construction items - cement, steel.
LSM rose by 11.7 percent, higher by 0.5 percent from the year before, in 2021-22 which Economic Survey argued was due to the fact that “accommodative fiscal and monetary measures continued in FY2022 provided incentives to the businesses to perform better” – accommodative policies allowed by the IMF globally to debtor nations with the objective of enabling them to withstand the severe challenges posed by Covid-19.
The Survey further contended that “The performance was broad based on the back of strong growth of high weighted sectors such as textile, food, wearing apparel, chemicals, automobile, tobacco, and iron & steel products. It is also pertinent to mention here that operationalization of special economic zones under CPEC in Nowshera, Pishin and Faisalabad further paved the way for fast tracked industrial development which is pivotal to achieve inclusive and sustainable economic growth.”
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Table 1
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July-June 2018-19 Negative 2.32
July-June 2019-20 Negative 9.8
July-June 2020-21 11.2
July-June 2021-22 11.7
July-June 2022-23 Negative 10.3
July-June 2023-24 0.92
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The LSM performance for which data is available for the current fiscal year is noted in Table 2.
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July 2.4
August Negative 2.65
September Negative 1.92
November Negative 3.81
July-November Negative 1.25
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The July figure of positive 2.4 percent appears to be an aberration and one wonders why with critics dismissing it as data manipulation. Pakistan Bureau of Statistics (PBS) uploaded Table 3 identifying the growth of specific manufacturing items/groups:
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Manufacturing weightage change (%) in
sector July 2024 over
July 2023
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Cotton yarn 8.88 8.79
Garments 6.08 0.59
Petroleum products 6.66 5.55
Fertilizers 3.93 1.55
Cement 4.65 Negative 6.63
Iron and Steel 3.45 Negative 12.70
Automobile 3.10 71.96
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The engine of industrial growth in July 2024 was yet again on the back of domestic consumption, particularly with respect to automobiles, petroleum products and cotton yarn (due to a bumper crop attributable to good weather conditions rather than to any appreciable increase in yield per hectare). The building sector (cement and iron and steel) suffered a massive decline, which may explain why the government is considering a special real estate fiscal package today.
IMF in its working paper titled Industrial policy for growth and diversification: A conceptual framework, a publication dated September 2022, notes that: “Arguments for industrial policy must establish both that some sector-specific externality exists and that the benefits of the proposed intervention will outweigh its costs and risks……Policy tools commonly employed to implement targeted sectoral interventions may focus on product markets, labour markets, capital markets, land markets, and/or technology.
Many such schemes have not been rigorously evaluated. Some policies, such as targeted infrastructure, R&D subsidies, and support for start-up incubators, appear in many cases to have proved effective. Other interventions, such as trade-related measures, strategic investments by SOEs, and direct lending, carry high risks, including of promoting rent-seeking. In general, all schemes must be carefully designed to prove cost-effective.
And they are more likely to succeed where governance and administrative capacity is strong, and when they are complemented by reforms to tackle underlying weaknesses.“
The IMF study is echoed in the 10 October 2024 Staff Level Agreement documents on the 7 billion-dollar Extended Fund Facility (EFF) programme as follows: “The state’s support of businesses through subsidies, favourable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outward oriented economy.
Subsidies have taken the form of low-cost financing and other concessions, which, although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors (text chart).
The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones (SEZs).
The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.“
LSM continues to stagnate in spite of the decline in the discount rate (from 22 percent April 2024 to the current 12 percent) largely because of the conditions agreed with the IMF (which if reneged upon would reignite the looming prospect of default) and the rise in income tax on the salaried individuals in the 2024-25 budget which accounts for a curtailment of consumption and the rise in utility tariffs. In other words, input costs have risen while incentives that sought to bridge the cost differential with regional competitors have been removed.
The IMF working paper dated 30 September 2022 contends that “potential externalities include coordination failures, stemming from the presence of specialized inputs or skills, or from knowledge spillovers; and informational externalities, arising because firms do not know ex ante which products are most likely to succeed.
The proposed intervention should represent the best feasible manner of tackling the externality. It must pass the appropriate cost-benefit test, which considers alternative uses for public funds, and any distributional and social implications. Further, the risk of government failure must not undermine the case for the intervention.
This risk may be mitigated through an emphasis on maintaining competition, including by supporting sectors rather than specific firms, and by emphasizing trade openness.“ Wise words indeed; however, the interim period wherein negative implications on the Pakistani general public struggling under 44 percent poverty levels today is ignored.
Recent statements by the federal and provincial cabinet ministers reveal that disturbingly the measures that the IMF warned against are being announced with much fanfare, an example being extending loans at zero interest rate, which raises serious concerns about the outcome of the first IMF review scheduled for March.
One can only hope that better sense will prevail and the centre and provinces acknowledge the need for implementing reforms, without which funds would dry up from multilateral as well as bilateral sources. To conclude, one can only hope that empirical studies backed by econometric models are undertaken by the IMF in debtor countries to evaluate the outcome of its specific prescriptions so that debtor countries do not revert to the policies that have clearly failed in the past.
Copyright Business Recorder, 2025
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