LARGE-SCALE MANUFACTURING

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
July 4 - 10, 2011

Pakistan's macroeconomic outlook remains fragile and exposed to various risks on account of rising inflation, increasing fiscal slippages and possible pressure on balance of payments. Meanwhile, the uncertainties attached with global economic outlook, sensitive security situation in the country and severe power shortage would continue to act as impediments for the overall recovery.

Manufacturing is the third largest sector of the economy, accounting for 18.5 per cent of gross domestic product (GDP), and 13 per cent of total employment.  Large scale manufacturing (LSM), at 12.2 per cent of GDP, dominates the overall sector, accounting for 66 per cent of the sectoral share, followed by small scale manufacturing, which accounts for 4.9 per cent of total GDP.  While manufacturing's share in overall GDP increased since 2000, its share in the economy declined since 2005 in terms of all three indicators: share in GDP, employment, and new fixed investment.

As a consequence, the absorption of employment in manufacturing also remained fairly stable at around 13 per cent during 2009-10. More worrying for the future prospects of the sector was that the share of manufacturing in new fixed investment declined sharply, from 22 per cent to 16.2 per cent.

However, this sector has been a major contributor towards promoting economic growth, employment generation, competiveness, and trade development in the globe. The LSM remained victim of power outages and lower domestic demand for last few years. Slow in LSM inhabits the impact of severity of energy shortages and electricity tariff hike leading to cost escalation. The positive terms of trade shock helped improved competitiveness for textile sector in particular and other conventional exports based small and medium manufacturing sector. The international experience suggests that lack of growth momentum in this sector can be attributed to the number of obstacles such as low quality of products, lack of research and development, inadequate investment, minimal exposure to the international market, inadequate infrastructure, and unskilled labour.

This contrasts with the experience of most better performing countries in the region such as Bangladesh, Sri Lanka, Vietnam, and Cambodia, where the manufacturing sector has expanded fairly rapidly despite the presence of other fast-growing dynamic sectors in the economy.

The free trade agreement (FTA) with China since 2007 is unlikely to have helped the domestic manufacturing sector, given China's global dominance of manufactured products, especially in the low value added segment.

Not surprisingly, Pakistan's formal imports from China shot up from US$2,011 million in 2006 to US$3,030 million in 2008.

Set in this difficult medium term context, the manufacturing sector performed well in the year 2009-10, with overall value addition rising 5.2 per cent in the first nine months of the same year. Production in LSM rose 4.4 per cent during July to March 2009-10, against the full year target of 1.8 per cent. Output growth in LSM contracted 8.2 per cent for the whole of 2008-09. A large depreciation in the value of the Rupee against the US dollar, which increased raw material costs and the impact on external demand for Pakistan's exports caused by one of the deepest contractions in global output and trade in the past 70 years, all contributed to the slowdown in manufacturing. More than half of the sub-groups within LSM depicted improvement from the FY 2008-09, with industries producing consumer and intermediate goods being the main beneficiaries.

Presently, the performance of the manufacturing sector during July-march 2010-11 has been a boom bust phenomenon. Some months showed growth while the rest depicted the negative growth. The growth in LSM was peaked at 12 per cent in March 2010 on the back of rising demand of automobile sector and improvement in the textile and other engineering products.

But since then, the growth rate started deceleration due to reduction in cement and steel production.  The abysmal performance was witnessed in the month of November 2010 with LSM growth dropping to 4.6 per cent from large scale sector on the back of addition to capacity in fertilizer, steel and increased demand of durables. Despite prevailing energy crisis and weak textile performance, LSM posted growth in December 2010 onwards.

The government of Pakistan has estimated growth rate at 3.7 per cent for the manufacturing sector as a whole for the next financial year 2011-12, while two per cent and 7.5 per cent growth rates have been fixed for large-scale and small-scale manufacturing sectors, respectively.

During the year 2011-12, the main growing industries would be chemicals, automobile, pharmaceutical, electronics, leather products, paper and boards, and non-metallic minerals. In order to see textile growing, support industries like textile machinery manufacturing, textile dyes and chemical and accessory industries are to be developed as most of the demand is currently met through imports. Rs2.030 billion have been earmarked in the year 2011-12 for the ministry of industries and production for about 43 development projects.

CONCLUSION

No doubt, the last three-year average economic growth was the lowest in the country's history, while the signs of hope for next year are not bright. The business community has been critical of high interest rate, which makes cost of capital highly prohibitive thus increasing cost of industrial production. Government should strive to whip better performance in the manufacturing sector and increase its export shares.