According to State Bank of Pakistan (SBP), the increase in international commodity prices is also one of the factors that led to a contraction in the LSM growth in Q1-FY19. In the last few years, LSM had been on an upward path as international prices had remained calm. That, coupled with stable exchange rate spurred private sector investment, leading to an expansionary phase in many of the sectors. "Recent bout of exchange rate depreciations and increase in international commodity prices has changed the earlier situation," it added.
The report estimated that the cumulative effect of price movements may continue to leave its footprint on LSM over the forthcoming quarters as well and latest Consumer and Business Confidence Surveys conducted by SBP somewhat mimic these sentiments about the future state of the economic activity in general. Prices of raw materials in the international market had been increasing since January 2016, however the domestic economy was able to absorb some of the earlier effect, as stable exchange rate insulated the LSM sector from price volatility. No significant change in administered prices of the imported energy products also shielded the domestic producers to some extent.
However, as the twin deficits swelled, the exchange rate started to depreciate and protection afforded to the industry from external commodity shock started to erode. The transmission of the exchange rate to domestic prices became more apparent in Q1-FY19. WPI rose in double digits in three out of last four months and it was the highest quarterly growth in five and a half years and the resultant price shock hampered manufacturers'' production activities, the report said.
While the supply-side was affected by rising energy and raw material prices, the slowdown in demand stemmed from a decline in PSDP spending and the imposition of a ban on non-filers from purchasing vehicles. The underperformance of the commodity-producing sector, alongside a slowdown in import quantum, is expected to have a spillover impact on the services sector.
In particular, the wholesale and retail trade segment may experience a slowdown on the back of lackluster industrial activity and weakening imports. Similarly, transport activities may also be relatively subdued, as indicated by the declining sale of commercial vehicles and POL sales.
Going forward, the report said that it would not be easy for the producers to pass on all the increase in cost of production to the consumers easily, amid slowdown in aggregate demand. It is therefore likely that the performance of the LSM sector would face headwinds in the forthcoming quarters.