June 3, 2002	Monday	Rabi-ul-Awwal 21,1423

Pakistan’s industrial growth indicates a declining trend for the current fiscal, amidst growing concern over the de-industrialization trap.

And the current declining trend or a flat rate of growth is the forecast for the next fiscal year.

Whereas businesses are being strengthened , targeting industrial efficiency to face global competition, analysts at a brokerage say”we do not hear of any of new industrial projects” except those few, with start- ups in late 1990s, that are now coming into production.

“There is not much demand from corporates for capital expenditure (capex) funding and the commercial banks are diverting their liquidity towards consumer banking particularly car leasing business,” says a leading automobile manufacturer.

PICIC managing director Mohammad Ali Khoja reportedly told businessmen at a FPCCI meeting on Thursday that the bankers were after industry to lend finance, but with the exception of textile firms, other sectors were not coming forward.

Optimists however see domestic sales picking up in closing month of current fiscal and the next year for items like cars and durable goods as a result of increased flow of home remittances and increased spending by families of overseas compatriots.

A stronger rupee, with unprecedented forex reserves, is renewing confidence of non-resident Pakistanis in the economy and is making capital spending on imported machinery and plants cheaper.

Good cotton, wheat and sugar crops would also strengthen the purchasing power of the majority of the people living in rural areas. Agriculture provides raw materials for industry and market for manufactured goods.

These positive factors, however, do not hold the promise of a turn around in industry, specially manufacturing.

So far, the manufacturing sector is not indicating a robust growth. Overall growth in large-scale manufacturing(LSM) sector increased marginally from two per cent during first half of FY01 to 2.9 in six months of current fiscal.

But, the State Bank cautions that it would be premature to interpret it as a sign of improvement.

Using alternate indicators that are more relevant for comparing half yearly LSM growth, the SBP says that they indicate “marked deceleration in manufacturing activities.”

According to SBP, the trimmed growth indicates a slowdown from 6.6 per cent to one per cent when the first half of the two fiscal years are compared.

Industries minister Razzak Dawood told a news conference last month that industrial output has increased by 5.23 per cent for seven months ending January 2002 as compared to 7-8 per cent in the corresponding period of last year.

That growth in manufacturing sector is flat is evident from the export earnings of below $9billion estimated for current year, marginally lower than $9.2 billion last year.

As cut throat competition increased owing to the slow down in the global economy, the gains in textile production were lost in unit prices of exports. Despite heavy odds, the industry has however been able to sustain its earnings almost at last year’s level.

In an update on large-scale manufacturing for July-January 2002,Taurus Securities says that” growth in textile sector was primarily on the back of cotton yarn (4.34 per cent) and cotton cloth(14.52 per cent) while the food industry was supported by sugar production that increased by 13.51 compared to a 22 per cent decline in the same period last year.”

The output of nitrogenous fertilizer, including urea, was up by 7.48 per cent while that of phosphatic(DAP) plummeted by 39 per cent. The farmers made more purchases in anticipation of GST levy in January and price increases.Consequently, the industry expects the sales to fall because of drought and lower demand in the second half.

According to FBS data, the highest growth of 26.9 per cent was recorded in the petroleum products. A few industries like as leather, automobiles, cement and glass showed decline in production.

The demand for cement picked up in April, pushing the industry capacity utilization to 70 per cent against 61 per cent for the first three quarters.

By end April, 53,000 tons of cement were exported to Afghanistan. It has raised hopes that the performance would improve for the rest of the fiscal year. Market analysts however do not see major exports to Afghanistan until the warlords are tamed and the donors start major construction works.

The long term outlook for cement which has survived on cartel arrangements, are expected to improve with the launching of projects like Gomal-Mirani, Great Thal Canal and Gwadur port.

Yet, the outlook for manufacturing sector is marred by a perceived process of de-industrialization, supported by figures showing decline in share of commodity producing sector in the GDP.

After remaining constant for fiscal years 1999 and 2000 at 52 per cent, the share of real economy in GDP has declined to 49.8 per cent in 2001, while the ratio of service sector has jumped from 48 to 50.2. The share of the manufacturing sector in the GDP stood at 17.3 per cent in fiscal 1999,slipped to 16.8 per cent in 2000 but recovered to 17.3 per cent in 2001.

Without expansion of the manufacturing sector, with its forward and backward linkages,the economic growth would suffer.

In her just published book “the Rise and Fall in Industrial Productivity in Pakistan” Dr. Shahida Wizarat says that “growth in the agriculture and service sectors cannot be sustained without a vibrant growing manufacturing sector.” Agriculture’s contribution to GDP declined from 25.9 per cent to 24.7 per cent.

Economists trace the de-industrialization process to late 1980s.

To quote from a recent Asian Development Bank report “there appears to be de-industrialization wherein the share of manufacturing in the total employment declined from 12.2 per cent in 1986-87 to 11. 2 per cent in 1996-97.” Capital- intensive investments, that improve productivity, also account for slow growth in employment. And the recent stagnation in the manufacturing sector is attributed by ADB to” the deflationary policies that the government has pursued as part of the agreement with the IMF.”

Dr. Wizarat says that the official policies towards industry have become very unfavourable with the liberalization era and stresses that research is needed to” capture the devastation these might have caused to the manufacturing sector in the post 1991 scenario.”

“These policies have to be evaluated and reversed if the manufacturing sector has to be revived,”she emphasises.

In its initial report, Pakistan-Britain Business Advisory Group, comprising representatives of leading industrial houses and multinationals says “ From the Pakistan government, we seek a consistent business friendly, policy line so sadly lacking in recent years.”

Chairman of Atlas Group of Companies, Mr Yusuf Shirazi offers a new approach to revive investment and industrial production:” IMF prescriptions have helped achieve stability. Now, it is the time to focus on growth-oriented budget. It can be done in two ways, public spending to generate business and domestic investment. You should forget foreign investment specially after the murder of Frenchmen and Indian troops at the border. Forex reserves should be built in the region of $10-12 billion to negotiate with IMF on a better footing.If Pakistan does not opt for a policy of growth, it may be hit by recession.”

Foreign investment in IT has come virtually to a halt after 9/11.

The government is consulting industry on how to improve things. Finance Minister Shaukat Aziz is expected to announce removal of what he calls” irritants” to stimulate investment. Yet another group is working on cost of current industrial production, how it can be reduced to achieve industrial efficiency to face global competition. Yet to quote a financial analyst, these are long term measures. There is a considerable time gap between recommendations, decisions and implementation.

While fresh and new investments in manufacturing are ruled out, the industry is likely to strengthen its business through some capital spending, like Engro, is doing for energy conservation. The fertilizer policy does not encourage investment in new plants of globally economical size, say the industry representatives.

With cotton crop of 10 million bales that puts Pakistan among the top five cotton growing countries, the textile industry is actively pursuing a BMR strategy, exploring new markets and customers to build a durable business relationship with foreign importers. The BMR investments are estimated at $1 billion.

Forecast of improved outlook for textiles for next year is based on EU grant of increased access to European and Turkish markets from January 2002 and expected US economic recovery. But there are also fears of a “ new outbreak of protectionism” after the US imposed 30 per cent duty on steel imports and enhanced subsidy on agricultural commodities, says Paris-based International Chamber of Commerce. Washington has disappointed both the government and industry by allowing extra but limited access to slow moving Pakistani textile goods worth a mere $142 million.

Unless the official policies become investment-friendly and growth-oriented, the best scenario for industry is: strengthening of existing businesses and consolidation.