LSM down 6.48 percent: there's something wrong

According to the latest provisional quantum index numbers of large-scale manufacturing (LSM) sector released by the Pakistan Bureau of Statistics (PBS), the country witnessed a four-month decline (July-October) of 6.48 percent compared to the comparable period of the year before, while in October 2019, the decline was 7.97 percent compared to October 2018. And month-on-month decline - from September 2019 to October 2019 - the decline was 4.01 percent. This data should be a cause of serious concern for the Khan administration as it indicates the continuation of serious issues facing the industrial sector.

Hammad Azhar, Minister of State for Economic Affairs claimed a few months ago that LSM may be declining but output of small and medium enterprises (SMEs) is rising. He rejected the findings of the anecdotal survey carried out by this newspaper, which concluded that due to high inflation, demand for SME services/products has declined significantly (for example, car service centres/air conditioning service providers), leading to across-the-board reduction in staff strength, but did not provide any corroborating data. Additionally, he failed to take account of the fact that LSM units have a substantial number of downstream small or medium-sized units contributing to output and employment which effectively means that any reduction in LSM would have an impact on SME growth as well.

The State Bank of Pakistan (SBP) has been working to increase SME share in total credit (to 17 percent by 2020 from the 8 percent calculated for May 2019) but it is relevant to note two facts: (i) banks were providing credit to SMEs at 6 percent at a time when the discount rate was close to 10 percent; and (ii) previous administrations, particularly PML-N administration had also supported a policy of easy credit to SMEs but the major lacunae according to Shaukat Zaman, Group Head, Forex and Development SBP were: (i) lack of financial literacy; (ii) lack of collateral and documentation; and (iii) complicated loan procedures. Zaman emphasized that high risk perception, high administrative cost, and lack of collateral, were the reasons for the small number of loans extended to the SME sector accounting for only 6 percent of SMEs availing loans despite the fact that around 40 percent of them had a banking relationship.

Zaman made these comments almost a month before the firming up of the IMF programme that required raising the discount rate to at least 12.25 percent which the SBP did and then in July, it further raised the rate to 13.25 percent that had further repercussions on the decline in LSM, downstream industry operating in the SME sector as well as the rest of the SME sector. Full cost recovery on utilities, a standard normal IMF condition, has raised tariffs to a prohibitively high level which has disabled all productive sectors from operating even in the domestic market. It appears that the government despite its best intentions has not been able to sort out the mess that the utilities are in and is resorting to raising the price for the consumers. There is a limit to which tariffs can be increased and the people asked to pay for the system inefficiencies and waste. The economic policies currently being implemented require an urgent revisit because things are certainly unsatisfactory; there is something wrong.