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October 24, 2019

LSM decelerates six percent in July-August


October 24, 2019

ISLAMABAD: Large scale manufacturing (LSM) sector decelerated six percent year-on-year in the first two months of the current fiscal year, official data showed on Wednesday, as regulatory snags and liquidity constrains hampered all the key production.

In August, LSM sharply dropped 7.1 percent compared with the corresponding month a year earlier and fell 4.1 percent compared with July 2019, the Pakistan Bureau of Statistics (PBS) data showed. This was the five-month record decline. In April 2019, LSM declined 7.76 percent year-on-year.

LSM had also posted a negative growth of 2.2 percent in July-August period of the last fiscal year.

Analysts termed the continuous decline in large scale manufacturing, which accounts for 80 percent of the manufacturing sector, to subdued demand in the economy, imperiled by high interest rate and regulatory measures of the new government to raise revenue.

“CNIC (computerised national identity card) conditions dented sentiments of businessmen who curtailed their orders in supply chain,” Adnan Sheikh, a research analyst at Pak Kuwait Investment said. “High interest is putting investments on hold.”

The government is restricting suppliers to ask for CNIC of buyers in order to document their particulars. This is one of the various measures of the government to expand tax base with number of tax return filers standing below 2.5 million.

In July-December, all the state manufacturing data gathering agencies recorded drop in production.

Oil Companies Advisory Council, logging outputs of 11 oil and petroleum products, measured decline of 1.2 percent year-over-year in outputs during the two months. Ministry of industries, measuring output trend of 36 items, recorded a 3.9 percent decline in production. Provincial bureau of statistics, counting production of 65 products, logged 0.98 percent negative growth.

The deceleration was a perpetuating trend of the last fiscal year of 2018/19 when growth contracted 3.64 percent – the first annual contraction in a decade.

Contraction in LSM growth reflected in fall in overall economic growth at 3.3 percent during the last fiscal year compared with a decade high of 5.5 percent in the preceding fiscal year. Growth is expected to be in the range of 2.5 to 3 percent during the current fiscal year.

While the central bank kept its key benchmark interest rate unchanged in monetary policies, the interest rate of 13.25 percent is still the highest in a decade, discouraging private sector to take credit from banks to meet their financial requirements. This fact has also been recognised by the central bank that anticipated further slowdown in private sector credit offtake.

High borrowing cost is compounded by the regulatory measures adopted by the government to meet its ambitious tax revenue target of over Rs5.5 trillion for the current fiscal year.

While big manufacturers are documented, most of the small and medium sized businesses are undocumented. Businessmen slammed the government’s decision in haste to start economic documentation from their level.

Waves of price hikes, following rupee devaluation and import duties, fuelled price hikes that affected the buying power of consumers and manufacturers who cut their production. Indus Motors decided to shut its production down for half a month to tide over faltering consumer demand.