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Wednesday September 28, 2022

LSM output shrinks 16.5 percent in July 2022

This 1.4 percent year-on-year contraction is the first in the last 21 months, as this level was last seen in October 2020

September 23, 2022

ISLAMABAD: Large-Scale Manufacturing (LSM) output contracted by a sizeable 16.5 percent in July 2022 over June same year, while it weakened 1.4 percent over July 2021, the latest data revealed on Thursday, owing to mounting cost pressures and an anaemic local currency.

This 1.4 percent year-on-year contraction is the first in the last 21 months, as this level was last seen in October 2020, the Pakistan Bureau of Statistics (PBS) reported. The LSM growth remained negative from September 2019 to October 2020, mostly hampered by COVID-19.

Domestically, the high energy costs, rupee devaluation, tightening of monetary and fiscal policies, and the global recession-like situation were major instrumentals for sending the industrial output underwater which may also affect GDP growth in FY23.

The Asian Development Bank (ADB) in its latest Asian Development Outlook (ADO) 2022 update has forecast Pakistan’s GDP growth to remain at 3.5 percent in FY23 because of challenges posed to the economy, with the latest as devastating floods and quantitative tightening including limiting fiscal spending to control fiscal and external imbalances.

The lender in its report said the GDP growth in Pakistan in FY2022 was led by higher private consumption and growth in agriculture, services, and industry, particularly LSM.

“A contraction in demand, together with capacity and input constraints created by higher import prices from the rupee’s depreciation, will reduce industry output,” The ADB said.

According to the Pakistan Bureau of Statistics (PBS), the majority of sectors witnessed negative growth in outputs. The output of the major sectors that have high weightage in Quantum Index Number of LSM contracted. These sectors include textile, food, coke and petroleum products, chemicals, automobile, pharmaceuticals, cement, and non-metallic mineral products. However, a few showed expansions i.e. garments, beverages, and leather products.

In FY2022, LSM grew by 11.7 percent over FY2021, mainly on the back of increasing global demand and favorable government policies to jack up the GDP growth as big industries contribute a tenth to the economy.

As the State Bank of Pakistan started tightening the monetary policy, especially when it entered into a double-digit, the LSM output also started declining each month over the preceding one. Since July 2021, the central bank has hiked the discount rate by 800 basis points from 7 percent to 15 percent now.

In June 2022, the LSM was up 11.5 percent over a year ago, while it showed a 0.2 percent expansion over the previous month (May 2022).

The statistics bureau further reported that on a year-on-year basis, in July 2022, food output was down by a negative 9.3 percent, tobacco 75.5 percent, textiles 2.2 percent, coke and petroleum products 5.2 percent, chemicals 1.3 percent (of which chemical products output was up 17.9 percent, while fertiliser was down 13.6 percent). Cement output also declined 41.9 percent over the same month a year ago.

Likewise, Pharmaceuticals output growth was also negative 35.2 percent, rubber products 2.1 percent, non-metallic mineral products 33.9 percent, fabricated metal 18.1 percent, computer, electronics, and optical products 2.1 percent, electrical equipment 1.6 percent, machinery and equipment 48.4 percent, Automobile 7.4 percent and other transport equipment output down by 25.9 percent over July 2021.

However, a few sectors showed a positive growth including beverages 0.3 percent, garments 48.5 percent, leather products 16.5 percent, wood products 2.9 percent, paper and board 26.8 percent, iron and steel products 13.2 percent, furniture 246 percent and other manufacturing (football) output increased 40.3 percent over the same month of last year.

Pakistan’s manufacturing sector has three heads including LSM, small-scale manufacturing, and slaughtering. The LSM contributes 9.2 percent to GDP. It dominates the overall manufacturing sector, accounting for 74.3 percent of the sectoral share followed by small-scale manufacturing, which accounts for 2.0 percent of total GDP and 15.9 percent sectoral share. The third component, slaughtering, accounts for 1.2 percent of GDP with a 9.7 percent sectoral share. The manufacturing sector contributed 12.4 percent to the country’s GDP.

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