ACUTE energy shortages, high costs of production, sluggish domestic economy and reduction in global demand are beginning to take their toll on the manufacturing sector.

The country’s industrial output, says the Federal Bureau of Statistics, fell by 6.2 per cent in the first quarter (July-September) of the current fiscal year. The numbers released for the first quarter of the year underscore that the large-scale manufacturing had under-performed, dampening hopes of meeting the annual target of 6.1 per cent growth in the large-scale industry.

The industrial growth has been declining for three years now. It dropped to just 5.4 per cent during the previous year from under 20 per cent in 2004-05 due to capacity constraints and high cost of doing business.

The FBS figures show that the production of cotton yarn declined by 0.55 per cent, cotton cloth 0.88 per cent and power- looms by 64.42 per cent.

In the electrical sector, production of refrigerators declined by 1.6 per cent, deep-freezers 29.22 per cent, air-conditioners 22.55 per cent and TV sets 10.83 per cent.

Iron and steel production declined by 1.5 per cent, pig iron 11 per cent, billets 39.26 per cent and HR sheets 22 per cent. Production of vegetable ghee dropped by 12.49 per cent and cooking oil 8.55 per cent.

Production of buses declined by 41.25 per cent, jeeps and cars 47.16 per cent and motorcycles 8.49 per cent.

“The slowdown in the industrial output was inevitable because of the cut in industrial productivity due to six to eight hours’ power shutdown a-day,” Abid Farooq, former chairman of the All Pakistan Textile Mills Association (Aptma), told Dawn last week.

Hours before the Sui Northern Gas Pipeline Company, the state-own utility, had cut off supply to 70 industrial units on Lahore-Faisalabad Road owing to what its officials said the growing demand of domestic consumers, adding to their concerns about timely shipments of their export orders.

“Most units deprived of gas supply are export-oriented textile mills. Now we hear that the utility is going to suspend supply to cement and other plants also,” he said.

“This is happening when winter has just set in. You can well imagine what treatment will be meted out to the industry in the next two months when winter will be at its peak,” he said.

Exports of manufactured goods have grown marginally in dollars value to $4.98 billion during the first four months of the current year to October from $4.52 billion last year. Textile and cotton exports have grown to $3.64 billion from $3.52 billion. Exports of other manufactured goods increased to $1.34 billion from just above $1 billion.

But the manufacturers and exporters warn that full impact of the energy shortages and other negative factors on the economy will be felt in the months to come.

“True, there’s a marginal rise in textile exports. But look at the industry’s potential. Energy problems and spiking cost of doing business are not letting us take advantage of our potential,” argued Mr Abid.

Energy shortages are affecting smaller manufacturers more than large-scale industries. “A number of small units have closed down in recent months because they did not have and could not arrange alternative power supply due to financial costs,” a Small and Medium Enterprise Development Authority official, who asked not to be named because he wasn’t authorised to speak publicly, said. He said everyone -- sanitaryware producers, fan manufacturers, sports goods exporters, auto vendors, and so on, were facing serious problems due to power cuts.

“Some have shut down their manufacturing and others laid their workers off,” he said. But he did not have the exact number of workers thrown out of job because there is no state or private institution to maintain such record in the formal or informal sectors.

“If energy shortages are causing reduction in output, the security situation is scaring foreign buyers away. The buyers are reluctant to visit us due to travel advisories. Our foreign buyers feel more comfortable in visiting and dealing with Indians, Bangladeshis and Vietnamese because of security concerns in Pakistan,” M.I. Khurram, leading knitwear exporter, contended.

On top of that, he argued, Pakistan had become unattractive for the buyers due to rising cost of business. “Pakistan is not a preferred destination for the American or European retail chains. We get only spillover orders,” said Khurram. “So the reduction in industrial output should not surprise anyone in the given circumstances,” he said. The productivity as well as exports of manufacturing sector would suffer in the months to come, he added.

The increasing prices of electricity and gas and spiking credit cost are blamed for the escalation in the cost of doing business and making the industry unviable.

“The growth in the cost of doing business has eroded the positive impact of currency devaluation. We are losing in the global markets despite the above 21 per cent currency depreciation,” he said.

Former Lahore Chamber of Commerce and Industry president Pervaiz Hanif says the persisting economic and exchange rate instability is keeping exporters from quoting prices for six-month orders. “It is a difficult situation. If we undercut prices offered by our regional competitor, energy problems, exchange rate volatility, escalating inflation, etc., make the entire economic situation and exports quite untenable,” he said.

Mr Khurram said the economic difficulties facing the manufacturing sector were exacerbated by the slowdown in the domestic and global sectors. “I fear massive job loss and drop in output in the next few months.”

The cost of production in the industrial sector has increased mainly because of the rising utility bills and interest rates.

The escalating cost of credit has caused fresh investment in industrial manufacturing to dry up in the last two years, increasing supply side constraints. “There has been no significant investment in the industrial sector in the last couple of years to increase productivity,” said Abid.

“People have invested only where it was necessary to keep operations going. It is not possible to set up new industry at 22 per cent interest rate,” he added.

As most medium to large scale manufacturers somehow managed to absorb the recent hike in energy price and financial charges, they are finding it difficult to cope with power and gas cuts.

“It is double whammy for the industry: on the one hand it raises our cost of production and on the other it results in sharp decline in our revenues,” Mr Abid said. “And this is happening for no fault of ours.” In the given situation, he said, it had become extremely difficult for entrepreneurs to service their debts.

“The government must intervene to save manufacturers from defaulting on their loans by instructing them to delay recovery of their loans till the energy crisis is taken care of and the industry is able to operate to its full capacity,” he demanded.