Quagmire or adjustment?

05 Sep 2019


The writer is a member of staff.
The writer is a member of staff.

A SERIES of articles in this newspaper have highlighted the state of affairs in different sectors of industry, mostly manufacturing, and the picture that is emerging is not a pretty one. Here is a snapshot of what people in industry are telling us.

Sales were dropping all last fiscal year, in some cases by almost 50 per cent. All manufacturers reported booming sales in the few years preceding FY2018, then a sudden drop in FY2019 that ended in June. In the first two months of the current fiscal year, since the new budget went into effect, they report further contractions of around 30pc.

How large is 30pc? Consider this: if a manufacturer finds a sales slump by 30pc in a given month, he or she has to slow down production or allow inventory to pile up. If the latter course is taken, and the next month also sees a continuing sales slump of equal magnitude, the size of the inventory will pile up. In three months the manufacturer may well be sitting on inventory levels close to one month worth of production. At this point a decision will have to be taken: should the firm continue producing or shut down and focus on moving its inventory out?

This is what is happening in autos, to take one example. Notice the ads appearing in the papers promising instant delivery of your car upon payment. Even six months ago, you would have had to wait many months to get delivery of your car. Today they’re practically standing outside the showroom dangling the car keys at passersby, saying “it’s yours, take it against payment”.

Three months of sustained 30pc declines will get you to a point where large-scale shutdowns could become imminent. And with those shutdowns come large-scale layoffs.

They also announced curtailment of production, shutting down their assembly lines for 10 to 12 days out of a month. This is because inventories are piling up as customers disappear. It’s the same in cement, though perhaps not as severe yet, as well as in steel, tiles and ceramics. Other manufacturers have more resilient demand for their products, like edible oil as one example. Here they are finding out that the consumer is increasingly buying smaller packets of cheaper brands, so those serving the upper ends of the market are seeing demand shift away from their products towards those on the cheaper side, who are seeing a smaller slowdown but much of the demand coming for smaller packets.

Tractors and trucks are in the same position, seeing something like a 30pc drop in sales in the opening months of this fiscal year after having suffered a near 50pc drop in the last fiscal year. What appeared to be a near catastrophic collapse in demand last year is now intensifying across the board.

Different sectors and firms give different reasons for why they are facing these difficulties. Some point to high interest rates and exchange rate depreciation. Others say purchasing power in the markets they serve has collapsed so rapidly that demand has practically dried up. Yet others say their vendor and distributor networks have been disrupted by the government’s documentation drive. Others point to the near halt in government development spending which was a major source of demand for them, such as cement and steel.

For the economist, it is of course a combination of these. All of the elements that business leaders are pointing to as the source of their ailment are part of a package of policies that economists call macroeconomic adjustment.

But all the business leaders agree on one thing: the brunt of the ‘adjustment’ is being borne by the daily wage earners. Thus far, they tell us, they are not laying people off (though I take this with a pinch of salt; there are surely layoffs happening but the pace has not yet reached its peak), but what they are doing to cut costs is not hiring as many daily wage earners as they used to. A quick stop at a couple of locations where daily wage earners wait for work will reveal sheer desperation. If you’re in the mood for a real education on what is happening, go to one of these locations and ask the daily wagers who will crowd around you what they think of ‘naya Pakistan’. And listen carefully to what they say.

Large-scale industry shutdowns have not yet happened, even though those who have the option to shut down their production line in parts are certainly slowing their output. But three months of sustained 30pc declines will get you to a point where large-scale shutdowns could become imminent. And with those shutdowns come large-scale layoffs. We are already two months into the adjustment, with September being the third, so unless something changes drastically, things are going to become more difficult by October, and even more so going forward.

The picture is one of the toughest I have seen in a decade. The only other time I can recall something like this was in the aftermath of the great crash of 2008. Many businessmen were opting to set fire to their factories and take what they could get from insurance rather than continue ploughing ahead and handing over most of what they earned to their creditors. There was a spiral in the portfolio of non-performing loans held by the banks in those days as one after another enterprise opted for default. And then came the factory fires.

We are not there yet, far from it. And it is worth reminding everyone that the situation was inevitable given the scale of the imbalances inherited by the government. But did it need to be as bad as it is? Given that large jolts will have to be administered to the economy, was it necessary to aggravate the situation with confrontations, runaway ‘accountability’ that has stalled all decision making (even the government’s own, it would appear, going by the unseemly flip flop we’ve just seen on the GIDC ordinance), and the rewarding of incompetence? The country does not deserve this.

The writer is a member of staff.


Twitter: @khurramhusain

Published in Dawn, September 5th, 2019