ISLAMABAD:
The growth in Pakistan’s major industries – the largest contributors to taxes and employment – shrank nearly 2% during the first half of the current fiscal year, indicating the adverse impact of high cost of doing business and economic stabilisation.
The large-scale manufacturing (LSM) sector registered a negative growth of 1.9% during the July-December period of fiscal year 2024-25 compared with the same period of last year, Pakistan Bureau of Statistics (PBS) reported on Thursday.
It is the third consecutive year when big industries are facing a contraction due to the policies implemented by the government to avoid sovereign default.
Interest rate has been reduced by 10 percentage points but it will take time before businesses start borrowing. The prevailing political, security and economic instability are also impacting the investment climate.
The 1.9% LSM contraction is also in line with the overall low economic growth. Pakistan’s gross domestic product (GDP) grew only 0.9% in the first quarter of FY25. The country has been in the economic stabilisation phase since June 2023, which has impacted almost every household and industry.
However, the government has not yet been able to bring fundamental changes to the structure of the economy and has not ended anti-export biases from its policies.
The last budget adversely impacted formal sectors of the economy, when the government put undue burden on those who were already paying more than their capacity. The high cost of electricity and gas are other impediments to the country’s economic growth.
Industries like food, petroleum products, chemicals, minerals, iron and steel, furniture and machinery faced negative growth during the first half of the current fiscal year.
The situation was also grim in December 2024 alone. Large-scale industries recorded a 3.7% contraction in the month over the same period of last year, according to the PBS. Sugar production was lower by 13% in December compared to the same month of the previous year. Iron and steel production dipped over 11% while cement output fell 5.5%.
The government had given a winter electricity tariff reduction package to both industrial and residential consumers. But the package has not helped much and power generation decreased 2% in January.
Production increased in H1 for industries such as tobacco, textile, clothing, automobile and transport equipment. But a major slump was seen in food, coke and petroleum products, chemical products, non-metallic mineral products, iron and steel products, electrical equipment, machinery and equipment, and furniture.
PBS has announced production numbers at a time when the government is facing pressure to abandon the path of economic stabilisation and let the economy grow. However, discussions are focused on areas such as real estate, which does not have any meaningful contribution to the economic growth.
The food sector is heavily impacted by the government’s decision to impose 18% sales tax on packaged milk, liquid and powder. This, in turn, has reduced packaged milk sales by 20% during the first half, impacting both farmers and the milk processing industry.
Pakistan’s industries are heavily dependent on imported raw material to produce finished goods. The government had been keeping a tight lid on imports, which it relaxed in December. The relaxation immediately resulted in a nearly $5.5 billion monthly import bill that has started impacting the external account position.
The rupee is also coming under pressure and members of the Economic Advisory Council on Wednesday urged Prime Minister Shehbaz Sharif to let the rupee gain its market value to keep exports competitive.
However, the industry’s dilemma is that it has very limited technological edge and exportable surplus and is mostly relying on a weak rupee to remain profitable.
