EDITORIAL: Large-scale manufacturing (LSM) growth declined by 4.08 percent in October compared to October 2022 and 2 percent compared to a month before.

However, LSM registered in the negative realm last fiscal year (negative 2.85 percent) but registered positive 1.01 percent in September 2023 and 0.68 percent in July-September this year as per data released by the Finance Division. In other words, the decline of 4.08 percent in October almost certainly pushed the LSM again into negative territory for July-October 2023, which must be a source of serious concern to the economic managers.

The decline in LSMI is at odds with the recent claims made by the caretakers that there has been an uptick in economic activity on the back of a better than targeted crop output. On 28 October 2023 Caretaker Finance Minister Dr Shamshad Akhtar publicly claimed that “local markets have rallied. There is a change.

We are getting positive economic data and positive economic sentiments are emerging as well. Agricultural production is gaining momentum. Industrial activity is responding a bit slowly…but if agricultural output remains like this our GDP growth is going to be within the range of 2 to 3 percent.” Two days later on 30 October Monetary Policy Statement (MPS) issued by the State Bank claimed that “LSM output has indicated a gradual improvement in the first two months of this year, with major contribution coming from domestic-oriented sectors.”

And the 12 December 2023 MPS claimed that “as per earlier expectation, recovery in the agriculture sector was the major driver of this growth. The manufacturing sector also recorded a moderate recovery, with growth in large-scale manufacturing becoming positive after contracting in the preceding four quarters.”

Given that farm output, particularly cotton, is a major contributor to textile value addition (LSM) as well as exports while surplus in other crops (surplus to domestic demand) including sugarcane (sugar is defined as an LSM item in Pakistan) not only reduces reliance on imports, thereby saving scarce foreign exchange reserves but has also been exported in past years therefore any rise in farm output has the potential of fueling the country’s growth rate and reducing the current account imbalance.

LSM significantly contributes to GDP growth, exports, tax revenue for the government and employment opportunities in the formal sector. Its key inputs include credit from the banking sector and as per data released by the Finance Division: (i) credit to private sector contracted by negative 94.3 percent in 2022-23 and shriveled by another negative 291.1 percent from 1 July to 5 October 2023 due not only to a prohibitively high discount rate (22 percent) but also due to the government’s reliance on domestic borrowing to contain its budget deficit that crowded out private sector borrowing; and (ii) the rise in cost of other inputs specifically electricity and gas with tariffs rising exponentially due to conditions agreed with the IMF.

There is no doubt that sentiments expressed by the two economic team leaders were viewed positively by the market – a sentiment that gathered momentum subsequent to the staff level agreement reached on the first review of the Stand By Arrangement with the International Monetary Fund on 15 November as well as recent reports that Memoranda of Understanding worth billions of dollars have been pledged by the Gulf Cooperation Council countries.

These elements no doubt buoyed up the stock market to reach levels never before reached yet one irritant with a direct bearing on the general public’s quality of life remains – head line inflation of 29.2 percent in November and sensitive price index for the week ending 7 December rising to 42.68 percent year-on-year reflecting a rise of 1.16 percent from the week before.

While there are some positive macroeconomic signals yet it is becoming increasingly compelling for the stakeholders to realise that they need to proactively deal with an inflation rate that is becoming more and more untenable for the general public with each passing week. Feel-good statements and reports will have limited success if the public is unable to even meet its kitchen budget.

Copyright Business Recorder, 2023