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Slump in industrial production

There is no end to the bad news on the on-going performance of the economy of Pakistan. Now we have been informed by the Pakistan Bureau of Statistics (PBS) that in the first nine months of the current financial year the Quantum Index of Manufacturing (QIM) has fallen by over 8 percent. In fact, the decline in the month of March is an unprecedented 25 percent.

This bad news of the slump in industrial production comes after the colossal losses to crops by the worst floods in Pakistan’s history. The loss of output was as much as 35 percent in the case of cotton and 41 percent in rice. Other depressing indicators are the fall in sales of HSD oil and Motor Spirit of 20 percent in the first nine months of 2022-23. The generation of electricity is down by 15 percent to 20 percent in recent months. Imports have fallen by 28 percent and exports by 12 percent. Overall, our earlier projection of a negative GDP growth rate of 1 to 2 percent in 2022-23 will now need to be revised to a negative growth rate of 3 percent or more. However, the PBS is unlikely to fully reflect this in its initial estimates of the National Income Accounts for this year.

Why has the production in the large-scale manufacturing sector fallen so much? The search for reasons requires first a profiling of the decline. This will enable identification of the varying reasons for the fall in different industries.

We focus first on the pattern of industrial growth on a quarterly basis over the nine-month period of July to March, 2022-23. There was only a marginal decline in the QIM of 1.7 percent in the first quarter of 2022-23. This has been followed by an acceleration in the rate of decline in subsequent quarters. The fall is 9.1 percent in the second quarter and now in the third quarter it is 14.7 percent. Cumulatively for the nine months, as highlighted above, it is close to 8 percent. Clearly, the role of factors impacting negatively on industrial production has become stronger and stronger especially after September 2022.

There is need also to highlight the pattern of industrial growth in the first nine months of 2022-23. The PBS has classified the large-scale manufacturing sector into 24 industry groups. As many as 20 have experienced negative growth from July to March, 2022-23. The growth rate has ranged from a high of 48 percent in the furniture industry to a low of negative 66 percent in the case of wood products.

Given the large number of industries showing a negative growth in output, there is a need to identify a wide variety of reasons for the decline. Both demand and supply factors have been operative.

The demand factors relate both to the external and domestic markets. The global economy is experiencing a slowdown in growth and this is impacting on the buoyancy of both quantity and prices in world trade. Domestic demand has floundered due to the fall in real per capita income and rising prices of products.

The supply factors are also both external and domestic in character. The new external factor is the constraint on availability of imported intermediate inputs or raw materials caused by the severe physical restrictions to limit the overall level of imports and substantially reduce the current account deficit in the presence of scanty foreign exchange reserves.

Domestic factors relate to supply shortages and cost-push factors caused by the floods, availability and rising prices of energy inputs, especially gas, and higher costs of raw materials and intermediate goods, both imported and domestic. In addition, there have been major indirect tax enhancements, which have tended to reduce production.

Some striking examples highlight the variation in the nature of negative factors impacting on different industries. The largest industry group is textiles, with a share in industrial value-added of over 20 percent. The first stage in the value-added chain is cotton yarn, production of which has fallen by almost 20 percent. The primary reason is the big shortfall in the availability of cotton which has not yet been made up by substantially larger imports. The constraints carry through to the next stage of value-added. Production of cotton cloth is down by 11 percent, not only due to the reduction in the availability of cotton yarn, but also due to the big decline in availability of imported inputs of 35 to 40 percent. Other industries affected by import restrictions include automobiles, iron and steel, machinery, chemicals, and pharmaceuticals.

Demand factors have been especially operative in the case of consumer goods and consumer durables. This is especially the case with industries in the food group. For example, it is a real surprise to see an over 14 percent decline in sugar output, despite no apparent shortage of sugarcane. The price of sugar has gone up by 40 percent.

Numerous other factors have affected production in various industries. The unbridled increase in excise duty on cigarettes has clearly restricted output. The phenomenal increase in the interest rates and decline is demand for housing credit along with a big fall in both public and private investment have exerted a strong negative impact on industries producing construction inputs like cement and iron and steel products.

The implications of the quantum decline in output by the large-scale manufacturing sector are also very worrying. The first is the impact on employment in the sector, which is estimated to have been providing employment to over 4.5 million workers in 2021-22, after a year of high growth. However, if the 25 percent decline in output persists in the sector in coming months, then over 1 million workers could lose their jobs, especially in labor-intensive industries like textiles.

The other major impact is on FBR revenues. Indirect tax revenues from the industrial sector have exhibited only 1 percent growth in the first nine months of 2022-23. The target growth in the federal budget of the current financial year is 15 percent. Therefore, if the low growth in revenues persists in the fourth quarter persists than the annual shortfall could be as much as Rs 540 billion. This alone will add 0.6 percent of the GDP to the budget deficit. In addition, corporate tax revenues will be smaller due to lower profitability.

The federal budget for 2023-24 is in the final stages of preparation. There is need to address the big problem of the huge slump in industrial production, which is likely to persist in 2023-24, especially with regard to the availability of imported inputs. There is need to move decisively towards a market-determined exchange rate policy, which will also provide a fillip to exports. Also, consideration may be given to rationalization of very high tax rates which are leading to severe contraction in the tax bases and thereby not contributing to higher revenues.

Overall, the year 2022-23 is likely to be one of the worst years for industry like 2019-20 after the COVID-19 attack. We hope that the performance of the sector will be better in 2023-24.

Dr Hafiz A Pasha, "Slump in industrial production," Business recorder. 2023-05-23.
Keywords: Economics , Economics growth , Energy prices , Tax revenues , Global economy , Growth rate , PBS , GDP

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