Tough times ahead for the industrial sector

May 22, 2022

Export industries are worried about their ability to meet shipping deadlines

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espite the recession in the international markets and energy and fuel crises, the country’s large-scale manufacturing (LSM) sector has performed well, beyond expectations in fact. According to official statistics, its growth during the first nine months of the current fiscal year (July 2021 to March 2022) remained the highest in 17 years at 10.4 per cent.

Large-scale manufacturing covers the industries registered under the Factories Act, 1934, or qualifying for such registration (having 10 or more employees), including repair and service industries. The LSM includes textiles, garments, food, beverages and tobacco, automobile, chemicals, apparel, iron and steel, leather and paper and paperboard.

The growth is reflective of the progress in export of these products. Pakistan’s overall exports grew by 25.55 percent to $26.247 billion in the first ten months of the current financial year (July-April) compared to $20.905 billion in the corresponding period of the last fiscal year.

The impressive growth in exports was offset by increased imports, causing a surge in the trade deficit. According to official figures, Pakistan’s trade deficit has increased as imports during July–April totalled $65.537 billion (provisional) as against $44.731 billion during the corresponding period last year, showing an increase of 46.51 percent.

The steep rise in petroleum prices due to the Russia-Ukraine war has inflated the import bill. Besides petroleum products, the major import items are liquefied natural gas (LNG), palm oil, plastic materials, mobile phones, raw cotton, iron and steel, electrical machinery and apparatus.

Pakistan’s industry survived the international depression due to Covid-19 pandemic in 2020 and 2021 due to less virus impact in the country. Pakistan was able to resume trade and industry activities ahead of most of the world.

As a result, Pakistani industries snatched customers from traditional rivals like China, India and Bangladesh.

According to industry sources, Pakistan benefitted from closure of industries in India and Bangladesh during the Delta-variant prevalence in India in early 2021. Many Pakistani industries got bigger orders from the West as Pakistan had already resumed industrial production by early 2021.

In South Asia, Sri Lanka and Pakistan are current beneficiaries of the incentive scheme of general scheme of preferences plus (GSP Plus) of the European Union. These countries can export their products to the European market without paying any duties. Due to the economic meltdown in Sri Lanka, some of the Western buyers have stopped buying from the country and Pakistani industries are expecting to receive some of the residue orders from the European buyers.

However, Pakistan is fast losing its foreign exchange reserves due to economic uncertainty. According to the State Bank of Pakistan, the country’s foreign exchange reserves have dropped to $16.375 billion. Out of this the SBP’s own reserves are only $10.308 billion (on May 6). Some analysts estimate that the SBP reserves can cover only about six weeks’ imports. Most of the SBPs reserves are parked dollars that Pakistan received as a loan from friendly countries like Saudi Arabia, the UAE and China and cannot be spent.

Pakistan is facing an energy crisis because fuel is not available for powerhouses to produce electricity. The crisis might result in increased load shedding that would hamper industrial production.

The sharp depreciation of the Pakistani rupee against the US dollar has resulted in an increased import bill, which is already on the high side.

The US dollar touched the Rs 200 psychological barrier on May 18. The country is facing political and economic uncertainty. The revival of the IMF programme has been delayed further. The government led by Prime Minister Shahbaz Sharif has been unable so far to attract financial support from friendly countries.

Pakistan is scheduled to hold talks with the IMF in Doha from the current week in a renewed effort to strike a staff-level deal for the immediate release of at least $1 billion under the delayed Extended Fund Facility (EFF).

The government has indicated that it is ready to fulfil the IMF conditionalities, including the end of subsidy on petroleum products. The government has also decided to increase the regulatory duty on imports of luxury items including cars and mobile sets.

Exporters are hopeful that the depreciation of the rupee will provide them some immediate relief as they would be able to sell more products in the international market. However, they also worry about the increased cost of production due to costly imported raw materials and machinery.

There is little hope of a revival of the economy in the near future. The country is facing the worst balance of trade and balance of payment crises. Enough foreign exchange is not available to import food and machinery for the industries. Due to the energy crisis the industries are worried that they might not be able to deliver on their foreign orders. The cost of labour has also increased as the government has raised the minimum wages to Rs 25,000 and a further raise is expected in the forthcoming budget.

The industries need foreign exchange to import new machinery under the Temporary Economic Refinance Facility (TERF). The long-term credit facility through the State Bank of Pakistan is aimed at encouraging import of industrial machinery and raw material. The SBP facility will provide concessionary refinance for the setting up of new industrial units. Refinance under the facility will be available through banks/ DFIs to all except the power sector.

An upwelling was also noted in recent months in the import of vehicles, machinery and vaccines. Pakistan is also importing wheat, sugar and palm oil. Last year’s sugar and wheat crises have pushed the import bill higher.

According to Majyd Aziz, a former president of the Karachi Chamber of Commerce and Industry, the country is facing a shortage of dollars. He says the industry, currently in the overhauling phase, has to bear the burden. “We need more dollars over the coming months. The imports are becoming costlier due to an increase in the petroleum prices.” He notes that Indonesia has stopped selling palm oil so that we have to buy vegetable oil from other countries, probably at a higher price.

Wheat and sugar prices in the international market are already high. The Ukraine crisis will push the wheat prices still higher. Hajj pilgrims are also likely to start buying dollars from the open market. This factor too will increase pressure on exchange rates.

He says that given the energy crisis there is likely to be more load shedding and that will hamper industrial production. Petroleum prices are expected to rise further and the government is preparing to withdraw the subsidy under IMF pressure.

The writer is a freelancer based in Karachi

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