Nothing less than a miracle would dramatically change the manufacturing sector’s fortunes in the current election year after the challenging 2022 that saw temporary closures, deferments of expansion plans and scaling down of production by multiple businesses.
Risks are higher for energy-intensive, import-reliant units, but prospects are relatively brighter for fast-moving consumer goods providers and high-tech manufacturers. The situation may aggravate further for cement, fertiliser, textile, chemicals, steel, petroleum refining, auto and pharma industries, at least in the first half of 2023.
The high-tech goods manufacturers (defence equipment, electronic goods, mobile phones), FMCGs and labour-intensive consumer goods manufacturers may bode better next year. Some companies may benefit from rising prices, but generally, profitability might be squeezed over the year for the industry. Big businesses with captive power plants and greener energy solutions are expected to fare better. The business-to-business demand would be weaker than the business-to-consumer demand.
Internal economic challenges (high inflation, debt liabilities, twin deficits, diving public/private investment) and external risks (Ukraine war, Covid resurgence in China, volatility in the energy and commodity markets, donor conditions) pose severe constraints. Political manoeuvres in an election year portend risks of more pain for the manufacturing sector in Pakistan.
Veiling their disgust towards policymakers, top business leaders plead for supportive interventions by the government and flexibility by International Monetary Fund (IMF) to steer the economy towards sustainability and growth. They are not expecting a turnaround but foresee conditions improving in the second half of the year.
“The country can be developed, but the four-year cycle of instability rooted in the struggle between martial and civilian elite for supremacy comes in the way of realising its potential. Once the parliament is fully empowered, everything else will gradually fall in place, and Pakistan will embark on a natural growth path on the strength of its youthful adaptive population with a great thirst to improve their lives,” commented a politically inclined businessman.
Muhammad Ali Tabba, CEO, Lucky Cement, who leads the business community from many forums, probably agrees but adopts a milder tone. “It all depends on the political situation. Overall, it will be a rough ride due to uncertain economic conditions.”
Another long-time champion of the industry, CEO, the Pakistan Business Council, Ehsan Malik, shared his views in detail. He expressed frustration with politicians and feared the dangerous fallouts of the repetition of flawed, tried, tested and failed policies.
“None of the political parties have credible plans to restore economic stability or solvency. They seem to be obsessed with retaining or regaining power. Pakistan needs the painful but essential adjustments prescribed by the IMF.
“Irrespective of the party in power, Pakistan would see hours of planned power shutdowns to limit fuel imports. The global economy will remain in a contractionary state leading to export contraction. The benefits of declining commodity prices may translate into consumption spike.”
He does not expect the government to broaden the tax net to bring in wholesale, retail and real estate under the fold. Nor does he expect the restructuring and privatisation of state-owned enterprises and reforms of the energy sector.
Renegotiation of the National Finance Award to press provinces to raise revenues from property taxes and devolution of power to local levels are also topics that he feels the government will not address.
According to Mr Malik, the government will choose easy over the right way. It will further tax the already taxed, push up energy tariffs, keep the policy rate high and continue import curbs. He foresaw PDM component parties going their own way before elections adding to turmoil and confusion and none gaining a decisive majority in elections.
He projects the formation of yet another weak coalition government post-elections, incapable of setting things right. He noted declining commodity costs, the push towards forgiveness of sovereign debt with China leading and higher Saudi investment in Pakistan as some positives on the horizon.
M Abdul Aleem, Secretary General of the Overseas Investors Chamber of Commerce and Industry, was sceptical. “Many manufacturing units are struggling to work at normal capacity due to demand slump and non-availability of imported spare parts and raw material. The foreign investment in the last five months is barely $49 million, the lowest in the past ten years. Next year’s growth is projected to be lower than the current year’s 2pc.
“Despite dark cloud on the horizon, there is hope that the dismal economic landscape may change in 2023 with political stability post-elections followed by an all-inclusive comprehensive and mid-term economic recovery plan, duly supported by internal stakeholders and external agencies like IMF.”
Dr Usama Ehsan Khan, an economist at the Federation of Pakistan Chamber of Commerce and Industry’s Policy Advisory Board, predicts further manufacturing shrinkage in 2023. “The Quantum Index of Manufacturing (QIM) of the Pakistan Bureau of Statistics (PBS) has posted a declining trend since March 2022.
“Recently, the non-issuance of the letters of credit has been impeding the industrial sector as, on average, almost 50-60pc of the inputs are being imported. In addition, persistent gas shortages and multiple rounds of increases in energy tariffs hit export competitiveness hard.”
An executive of a major mining company saw the settlement of the Reko Diq case and re-emphasis on Thar coal, perhaps among the few positives as we enter 2023. Talking about prospects ahead, he sounded depressed. “Business confidence and reserves are low, interest rates high at the top of rising terrorism amidst political turmoil. There is a massive brain drain, and many areas continue to be inundated four months after the floods. One has to struggle to find anything positive.”
Farooq Bukhari, President of the Pakistan Pharmaceutical Manufacturers Association, was brief and direct. “Well, given the uncertainty, I don’t see big growth in pharma. Year-on-year growth will stagnate till June 2023. But let’s hope for the best”.
Mashood Ali khan, an automotive expert and former president of the Pakistan association of automotive parts and accessories manufacturers, was not hopeful. “Honestly, the next year will not be favourable for the auto sector. Prices will increase steeply along with the policy rate, and government policies may get more stringent. Political instability will dissuade new investment”. He urged policymakers to engage automakers to formulate a revival plan for the next three years.
Majyd Aziz, former president of the Employers Association of Pakistan, shared discomfort in the business community over the economy and where it seems to be heading. “Pakistan is losing the ability to procure cheaper grains, edible oil, industrial raw material, and capital goods even though it is a buyer’s market currently. Global experts are ringing alarm bells on possible fallouts of the Ukraine war and climate change in the second half of 2023 translating into food shortages.
Moin Fudda, the chairman board of directors of the Central Depository Company, predicted a further slowdown in the manufacturing sector during the year. “In the first half of 2023, large-scale manufacturing numbers will be low month by month. However, in the second half, when the gas supply gets better, there may be some stability, but overall, growth is expected to be under 3pc. Nasser Hayat Magoon, former president of the Federation of Pakistan Chambers of Commerce & Industry, blamed the global recession and local challenges for the gloomy outlook.
Published in Dawn, The Business and Finance Weekly, January 2nd, 2023