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Improving LSM sector sees strong future

After registering a 10-year high growth of 5.7 percent last year, large scale manufacturing (LSM) has taken an even better start in the first two months of this fiscal year. In July-August this year, annualized increase in LSM output heighten to 11.3 percent. The LSM growth in the last fiscal was basically driven by domestic demand, this year’s growth momentum is also likely to come from export-led requirements.

Exports have showed improvement. In July-September fiscal year 2018 exports rose around 10.84 percent over the same period of fiscal year. Export-led demand is there. It is going to increase by inculcating more life in LSM segments like coke and petroleum, pharmaceuticals, chemicals, leather and engineering products etc. This confidence is prohibitory that no political disturbance takes place; law and order situation does not worsened, gas and electricity supply to the industry remains satisfactory and low-cost, big bank loans continue to flow freely. Local demand is high. Prospects of export-led demand have brightened. Industries have also invested in capacity building.

LSM growth target of 6.3 percent for fiscal year 2018 looks quite possible, more so because ongoing CPEC-related projects and higher FDI inflows will have a positive impact on LSM, according to a State Bank of Pakistan (SBP) assessment revealed in its fiscal year 2017.

In the last fiscal year, LSM growth came on the heels of higher public sector spending on construction and infrastructure.

This was also due to improved security situation, generous bank lending to private sector at low interest rates, better access of industries to gas and electricity supplies and a 3.5 percent expansion in agriculture output.

Companies also saw their profits growing which led to capacity enhancement in some sectors and higher economic growth translated into increased purchasing capacity of consumers. All these supporting factors are still present in this fiscal year. Further exports, too, are moving northwards.

In fiscal year 2017 LSM growth was wide-ranging. Twelve out of total 15 broad categories of it industries had recorded higher outputs. Only three had shown a declining trend. Only one segment of LSM i.e. fertilizer has recorded a fall in output. All others have shown a rising trend in output.

Industrialists say this year expansion in LSM output can be driven more by textiles than in the last year. This forecast can have a key impact on overall LSM growth as textiles account for about 21 percent of LSM-100 index.

In fiscal year 2017 textile exports remained slack at $12.452 billion against fiscal year 2016’s $12.447 billion.

In the first quarter of fiscal year 2018, textile exports have grown about eight percent to $3.257 billion. One element of this increase is raw cotton exports and the other is larger shipments of a variety of textile products, trade data reveals. Both increased activity of ginning mills and larger output of textile manufacturing is accounted for in LSM growth.

Food, beverages and tobacco, too, is expected to grow further this year after posting a double-digit growth last year. Wheat output is projected to remain high and even if water woes take their toll, there is a huge carryover stock of 5.7 million tons; rice and maize crops are also likely to remain as strong as in fiscal year 2017.

E-hailing cab services Uber and Careem have opened large demand for locally assembled cars and agricultural growth is sure to boost demand for fertilizers.

The industrialists believe the year 2017 was a mixture of successes and challenges in terms of economic activities. Some economic targets were hit and some missed, while trade and investment also continued to seesaw during the year. The first quarter of the outgoing year was stable. The government gave its full attention to the pursuance of key energy and infrastructure projects under the CPEC.

 

The government had announced it would overcome the energy shortages by 2018. Some of the energy projects were completed and load-shedding was reduced from 16 hours to 4 hours only,

The developments like import of liquefied natural gas (LNG) to improve the shortage of gas for industrial sector and the addition of a second LNG terminal at Port Qasim would go a long way in boosting the economy. The gap between imports ($52 billion) and exports ($21 billion) was a matter of great concern.

The weak state of external inflows was offset by foreign remittances as overseas Pakistani workers had sent $19 billion to improve the foreign exchange situation.

The traders expressed concerns over falling foreign exchange reserves during the outgoing year. The foreign exchange reserves, which crossed $23 billion in first half of 2017, gradually declined to $18.77 billion in December 2017.

The high price of electricity and gas remained the biggest challenge to the economy in the year. Traders criticized the government for measures taken during the outgoing year and termed those as counterproductive for the economy.

The government imposed regulatory duty with the aim of discouraging luxury and non-essential items to bridge trade deficit gap. The disbursement under government’s Rs180 billion textile policies was yet to materialize, adding though some refunds were issued with the start of current fiscal year a huge amount was still stuck with the government.

The government during the outgoing year announced industrial package but it was not implemented. Pakistani products had lost competitiveness in the regional markets due to high cost of production. The government has not announced any investment policy for industrial growth, which is hampering the sector’s growth.

According to the FPCCI, construction industry across Pakistan will boom in 2018, creating a lot of jobs. A new industrial policy is required so that people can freely invest for which announcements are necessary before the elections. The apex trade body expected Pakistani investors would be given equal opportunities in the special economic zones of the CPEC.

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