KARACHI, Dec 6: The State Bank of Pakistan has sighted political turmoil as one of the major reasons for slowing down the industrial sector, which grew just at the half rate what it had achieved in the last fiscal year.

“The domestic industrial sector muddled through a mix of major economic, political and structural setbacks throughout 2007-08,” said the SBP report released on Saturday.

The heightened political uncertainty and law and order issues during the year also took their toll and as a result, the provisional estimates place the FY08 industrial growth at a slackening 4.6 per cent compared with 8 per cent in 2006-07.

The rising macroeconomic imbalances as well as political uncertainty have lowered the investors’ confidence, which resulted in a four-year low growth in investment in industrial sector, said the report.

While the aggregate demand had already seen some relative moderation in the preceding year, rising fuel and commodity prices and intensifying energy shortages further obstructed the industrial activities in the year under review, said the report.

The sharpest weakening was seen in electricity and gas distribution activities. This sub-sector registered a decline during the year mainly on account of losses incurred by the power companies.

“However, major blow to industrial activities came from a six-year low growth in manufacturing sector given its largest share in the industry,” said the report.

Construction sector growth, though moderated, remained strong; whereas a high growth was seen in mining and quarrying sub-sector during the year.

A detailed analysis of the industrial sector data provides useful insights. Other than construction sub-sector, all the industrial sub-sectors performed below their long-term trend in FY08. Though moderating demand played its part in slowing down the industrial activities; supply shocks also took their toll.

Except for mining and quarrying, all sub-sectors witnessed a relative slowdown. The current trend in manufacturing and construction sector has become the largest boom in the history. Not only is it the largest in terms of magnitude, but also the longest in terms of duration. Still at the end of FY08, it did not suggest peaking out of the cycle though some moderation could be seen.

The current boom in mining and quarrying, however, appears to have peaked out in FY08 as the long-term growth flattens. This peak, however, was visibly lower than the high level observed in late 1980s. Although, the sector promises huge potential for growth; the deteriorating law and order situation in Balochistan avoids a positive assessment of the sector’s outlook.

The report said the power sector with a negative value-addition during the year grabbed the major chunk of industrial investment. However, given the weak relationship between investment and value-addition in power sector (in contrast with other sectors), a rebound in power sector could not be assured in subsequent years.

Manufacturing sector growth continued to decline for the third consecutive year and posted a six-year low output during the FY08. Most of the slowdown was seen in large-scale manufacturing (LSM) as small-scale manufacturing (SSM) decelerated only slightly. Similar to FY07, the deceleration in LSM reflects a relative moderation in domestic demand, power and gas outages as well as capacity and input constraints in certain industries.

However, unlike FY07, the external demand for domestic manufactured goods increased in FY08. In particular, intermediate goods accounted for most of the slowdown in LSM, given their largest weight in the index. The slowdown was mainly evident in cotton ginning, yarn manufacturing, metal sector and fertilisers production.