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Declining manufacturing growth

August 27, 2007

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In the last fiscal year, the production of large-scale manufacturing grew 8.4 against 10.7 per cent a year ago—and far below the target of 13 per cent. This year, the growth target is 12.5 per cent but industrialists say it is too ambitious.

The growth in LSM peaked at 15.6 per cent in FY05 before it fell to 10.7 in FY06 and to 8.4 per cent in FY07. So, whereas a lower growth in FY06 can be attributed, at least partially, to a high-base effect, a further slump in it in FY07 was a real slippage.

Businessmen cite rising interest rates, declining demand, increased labour cost, erratic supply of electricity, high utility prices and poor infrastructure as key factors that might depress LSM growth in FY08. They fear that an anticipated fall in cotton output after the floods, worsening law and order situation and political uncertainty ahead of elections may also dampen LSM production.

“There seems to be little or no basis for being so much optimistic about LSM growth,” says Mr Mushtaq A. Vohra, ex-chairman of All Pakistan Textile Mills Association. He sees growth in textiles stagnating for many reasons including those listed above.

Mr Vohra laments that the government has ignored the textile sector while India, China and Bangladesh are providing many incentives. This, he fears, coupled with the lack of large-scale investment financing would dampen LSM growth. In the last fiscal year, the production of cotton yarn grew about 12 per cent but the production of cotton cloth rose just seven per cent.

Textile mill owners say this year production of cotton yarn too might not grow as fast because of inadequate supply of high-grade cotton. And production of cotton cloth and other value-added textile products might show only a nominal growth.

Mr Majyd Aziz, president of Karachi Chamber of Commerce & Industry also believes that meeting the LSM growth target of 12.5 per cent would be too difficult. “Infrastructure bottlenecks, power shortages and a slowdown in demand are key constraints,” he says.

Mr Aziz points out that the large-scale manufacturing is faced with the challenges of low productivity, lack of skilled labour, unreliable power supply and saturation of capacity in most of industries.

He fears that textiles production which accounts for about one –fourth of LSM’s output may post a low growth in FY08 due to rising cost of production and an anticipated decline in cotton output after the floods. Farmers Association of Pakistan reckons that mealy bug and leaf curl virus have so far ravaged 25 per cent of cotton crop.

As for automobiles businessmen opine that high imports of used cars and increase in car-financing rates may lower domestic production of cars and jeeps.

In the last fiscal year the production of cars and jeeps grew at a negligible rate of 0.42 per cent—the lowest in the last five years. The number of cars/jeeps that rolled out in FY07 stood at 163,794 marginally up from 163,114 in FY06. “This was due to capacity constraints, lower demand growth, and increased imports of used vehicles,” said a senior executive at a car manufacturing plant.

Other major industries like sugar, cement, fertilizer, petroleum, cooking oil, paper and board, chemicals and basic metals showed a mixed trend.

In the last fiscal year, sugar production rose more than 19 per cent to 3.52 million tonnes on the back of increased sugar cane production. Its production grew about 23 per cent. Sugar millers say that sugar production is expected to show a decent growth also in this fiscal year as sugar cane production is likely to remain strong. “But this growth in sugar industry is very temporary,” warns Mr Zaka Ashraf, Chairman Punjab Zone, Pakistan Sugar Mills Association.

“Sugar mill owners have long stopped any investment in their plant and machinery and subsidised imports of sugar have forced them to sell sugar at very low prices thus incurring huge loss.”

“After a year or two, you won’t see any decent growth in local sugar production,” he predicts.

In the last fiscal year, paper and board, fertiliser and petroleum industries showed a fall in production mainly due to weakness in demand and temporary shut down for maintenance or expansion.

Cement industry grew 22.5 percent mainly due to enhancement in the installed capacity during the last five years on increased local and international demand. Cement exports increased by 35 per cent to over 2.6 million tonnes.

On the other hand, petroleum production declined by 1.8 per cent. The slowdown was caused mainly by a mismatch in production mix and the demand growth pattern. That was why production of some petroleum products like jet fuel oil, kerosene oil and furnace oil declined but the production of other items like motor spirit and liquefied petroleum gas or LPG went up.

Iron and steel sector showed a very strong growth and the production of all items like steel, pig iron, billets and iron sheets recorded an increase ranging between 5.5-79 per cent.

Higher capacity utilisation and a robust demand for these products on the back of increased construction activity made the steel industry grow in FY07.

Steel dealers say that the production of almost all items of this sector would show a modest growth in this fiscal year mainly because of high base effect. “Besides, after an impressive increase in capacity utilisation by Pakistan Steel in FY07, one should not expect equally promising performance this year,” said a steel dealer who sells Pakistan Steel products. Pakistan Steel is currently utilising 85-90 per cent of its installed capacity. Since large-scale manufacturing accounts for roughly 13 per cent gross domestic product, the LSM growth target is very vital to ensure achievement of the GDP growth target.

This summer all industrial estates in Karachi including SITE and Korangi complained of up to 33 per cent production loss due to frequent and prolonged power outages. In Lahore, Faisalabad and other industrial hubs, the situation was not very different though the percentage of production loss was not as high as in Karachi.

Given the fact that no major improvement has taken place in regard to power supply, this would continue to have a dampening impact on LSM growth during this fiscal year.

As for the rising interest rates, these are the by-product of a tight monetary policy which the SBP is pursuing to contain inflation. In the first month of this fiscal year, CPI inflation stood at 6.4 per cent- against the annual target of 6.5 per cent- chiefly because of a high base effect.The SBP has further tightened its monetary policy stance from August 1.

But in this process , interest rates are sure to rise further. At the end of June, the average lending rate of banks stood at 11.33 per cent, which top bankers say might rise by 0.5-1.0 percentage points during the course of this fiscal year. Executives of large business groups say that instead of complaining of rising interest rates, businesses need to increase their credit worthiness with the banks.

“We still get bank finances at nine per cent,” said head of a large business group. He said that high level of liquidity and growing competition in the banking system would help businesses get loans at cheaper rates—provided they follow best business practices.

Items Growth in

FY07

Kerosene Oil (-5.41%)

High Speed Diesel (-1.97%)

Furnace Oil (-4.72)

LPG 3.70%

Cotton yarn, 11.75%

Cotton cloth 6.75%

Sugar 19.13%

Nitrogenous Fertilizer (-2.03%)

Phosphatic Fertilizer (-10.06%)

Soap and detergents 2.2%

Vegetable ghee 2.26%

Cooking oil 7.04%

Cement 22.49%

Cigarettes 2.87%

Jeeps and cars 0.42%

Tractors 10.46%

Bicycles (-17.51%)

Paper &paper board (-2.21%)

TV Sets (-35.85%)

Motor tyres 18.27%

Steel Products 10.69%

Refrigerators 7.25%

Deep Freezers 4.34

Caustic soda 10.45%

Source: Federal Bureau of Statistics