The National Accounts Committee recently said it expected the large-scale manufacturing (LSM) index to grow 6.13 percent for the full year FY18. There is a possibility that like last year; this time around the full year LSM growth may also have been underestimated, given that this year the estimate is based on eight-month numbers rather than the usual nine-month figures. However, even going by these numbers, the LSM index is on its way to post its highest growth since FY07. That’s quite a feat; and expects it to be touted about when PML-N gets into the full elections swing.
Recall that in FY17, the LSM index grew by 5.6 percent, much higher than National Economic Council’s forecast of 4.93 percent at the time of release of last year’s Economic Survey, and much closer to BR Research’s lower forecast range of 5.7 percent. (See BR Research column “Is 10-year LSM growth high a moment of hurrah?” published on August 23, 2017). This year’s provisional growth number (6.13%) does not seem underestimated; it is in line with BR Research’s mid-range estimates of 6.1 percent. However, it’s too soon to say anything with conviction at this point.
Take sugar for example. The delay in sugarcane crushing – despite a record harvest – had overshadowed an otherwise broad-based growth in manufacturing. But since then, sugar production has picked up sharply. By the end of February 2018, officially recorded sugar production was just 7.7 percent lower over last year, whereas back in November 2017, it was 81 percent lower. This recovery has come about despite the high base of 1.5 million tons in February 2017; despite that high base the fall in sugar production in February 2017 was only 4.9 percent. March 2018 will also have a high base of 2 million tons (March 2017 production), which means 9M sugar production might also remain less than last year’s. However, if sugar continues to surprise at this pace, it may even offset the usual easing of the production cycle in the last quarter of each fiscal year. Considering that sugar has a big weight in the index, it could lift the index upward.
Likewise, production of petroleum items has galloped further December 2017. By the end of the first half, growth in POL products was 8.1 percent; that number stood at 10 percent as refineries started producing furnace oil December onward while production of petrol and diesel continues to grow on account of growing economy, higher auto sales and (relatively) low fuel prices at home. A hot summer, and the lifting of the ban over furnace oil can kick off further growth in this sector, and that in turn can be expected to fuel LSM growth beyond 6.13 by the end of June 2018.
The third reason why growth could end up higher (or perhaps even lower) than currently estimated is improved (poorer) data collection. Consider the following example. According to the Pakistan Bureau of Statistics (PBS), the production of electric motors rose 142 percent in 8MFY18. But that does not mean that electric motor is a fast growing industry. In the recently release State of Economy report, the central bank reports that elector motors segment benefited “mainly” from improved reporting measures put in place by the data-collecting agency.
This reminds one of an oft cited story by Dr. Kaiser Bengali, the first economist to have estimated regional GDP in the country. Some years ago, Dr. Bengali was analyzing LSM data and he realized that production of steel items had shot up significantly that year. He kept on looking for economic reasons behind the rise in production, only to find out that that year’s growth was effectively because the PBS could not obtain the data from Pakistan Steel Mills the previous year, leading to growth by low base affect. If the PBS is trying to improve its monthly data collection, as is the case with electric motors, then it should at least give a note that X percent growth of a sector Y is because of improved data collection. Otherwise as Dr. Bengali says, it would mislead business decision makers, and researchers alike.
The rest of the LSM story is much the same. On the construction side, steel and cement sector are growing thanks to progress on infrastructure projects (under both CPEC and PSDP). Keeping in view the demand-supply gap, the large-scale producers are in fact investing further in capacity expansions, and according to the central bank’s analysis, steel players have started integrating their operations vertically to benefit from economies of scale and lower tax levies. Meanwhile, cigarette production is rising as ever in the wake of gradual thinning of illicit cigarettes from the market. The full year cigarette production is expected to grow 68 percent, according to BR Research’s analysis published earlier this month. (See ‘Cigarettes: on a roll’, published March 5, 2018).
In line with its year-to-date trend, yarn and cloth production remained flat in 8MFY18. The export package has neither kicked off production growth in LSM’s textile basket nor in leather basket. In fact, in light of the historical trends, and the fall in both cotton production and spinning capacity, growth in the textile sub-index of LSM cannot be expected for FY18. (See Will textile output post zero growth in FY18? March 8, 2018). Leather manufacturing, according to the central bank, continues on its declining trend due to pressure from regional competitors, who are focusing on high value-added products. More on leather later!
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