EDITORIAL: Large Scale Manufacturing (LSM) registered negative 0.51 percent growth July-February 2024 against the comparable period of the year before, however, it increased by 0.06 percent in February this year when compared to February 2023 and decreased by 4.14 percent when compared to January 2024.
It is relevant to note that any comparison to the previous year may not be appropriate as at the time the country was embarked on policies that not only could not be supported from an economic point of view but were also violative of the seven/eighth Extended Fund Facility review agreement with the International Monetary Fund (IMF).
The key macroeconomic variables in February 2023 were a complete cessation of all pledged multilateral and bilateral loans, foreign exchange reserves of 3.8 billion dollars on 24 February 2023 and an artificially controlled rupee-dollar parity that led to multiple exchange rates that, in turn, led to a restoration of the hundi/hawala system and a plummeting of remittance inflows through official channels.
Three observations are critical with respect to the LSM components that must be worrisome for the government. First, a distinction is critical between the monthly data and the cumulative data with the trend indicated in the latter data. For example, textiles with the highest weightage, 18.16 percent, cumulatively registered negative 1.75 percent year on year in the current year against negative 0.75 percent in February but the base was negative 19.81 percent in the comparable period of the year before.
In the event that positive growth is achieved it is on the back of the negative growth in the comparable period of the year before – automobiles with a weightage of 3.10 percent registered negative 38.34 percent July-February 2022-23 while cumulatively it was calculated at negative 1.14 percent in the same period this year.
Secondly, the uptick in food, with a weightage of 10.69 percent, from negative 2.19 percent July-February last year to positive 0.46 percent can be attributed to the massive floods last year and the natural rise in farm output this year that, as per agriculture sector experts, may be compromised due to the current rainy spell in the country.
And finally, it is relevant to note that some items that previously received government subsidies (or other monetary or fiscal incentives) which are no longer being supported due to IMF conditionalities are witnessing a dramatic fall in output.
Cement, the recipient of major incentives as it was considered the engine of growth by the Pakistan Tehreek-e-Insaf (PTI) administration, has witnessed a dramatic decline of negative 27.61 percent in February this year against the cumulative July-February 2023-24 metric of negative 3.83 percent.
The reasons for the decline in LSM, largely related to the rise in input costs, however, they need to be addressed and they remain relevant to this day.
As part of the ongoing IMF programme there has been a steady rise in electricity and gas tariffs that have rendered the country’s exports uncompetitive that is negatively impacting on LSM items particularly textiles, while the rising cost of living is dampening the capacity of the general public to purchase items like automobile which accounts for the negative 40.74 percent in July February 2023-24 and the February 2024 positive 24.85 change may well indicate higher sales that are in all probability on the back of purchases that could be from existing inventory rather than new output.
Credit is another major input for the LSM sector plummeted by 54.1 percent in the current year July-March against the comparable period of the year before due to a very high policy rate of 22 percent as well as the massive rise in government borrowing from the domestic commercial sector by the Shehbaz Sharif-led previous government as well as the Caretakers (due to cessation of foreign loans).
It is important to note that a bullish stock market may not be the best indicator of an improved investment climate and to ensure a positive outcome on the LSM sector the government needs to make appropriate adjustments to policies to enable this sector to become the engine of growth.
Copyright Business Recorder, 2024