Provincial figures of the PBS till May-19 show large scale manufacturing (LSM) had a negative growth of 2.1 percent in FY19, against a 5.1 percent during the period last year (5% is also the average growth in the past five years), against a target of 8.1 percent. How the mighty have fallen! The economic austerity measures and ensuing slowdown was necessary to rein in the twin deficits. As the SBP third quarterly report argues: "the industrial sector, particularly manufacturing activities, bore the brunt of these measures".
The report further contends: "It is important to note here that businesses have been navigating through challenging times from the start of this fiscal year, as sharp depreciation of the rupee, rising input costs, flagging domestic demand, PSDP cutbacks, regulatory tightening, and unintended inventory accumulation, were all taking toll on industrial volumes". While monetary policy was tightened, rising costs also pushed businesses to raise working capital based lending that further escalated costs. Evidently, the resultant manufacturing stalled while cost of doing business grew. Nearly all segments under the Large Scale Manufacturing Index (LSM) computed by the Pakistan Bureau of Statistics (PBS) have contracted. High weightage groups such as textile and food saw manufacturing drop 0.3 and 5 percent respectively. Meanwhile, steel, cement and automotive sectors also witnessed substantial production slowdown between 5 and 11 percent.
Bank credit is a reliable barometer for the performance of the formal sector, but its composition matters too. High input costs and cash flow constraints led to increased appetite for short term borrowing (working capital had 70 percent share in total lending to businesses) while long term borrowing in the form of fixed investment loans declined. Overall increase in firm credit did not coincide with increased production. According to the Pakistan Economic Survey for the period Jul-Mar, fixed investment's share in total credit fell from 37 percent to a mere 15 percent year on year. Any CAPEX is noticeable in the energy sector, power transmission in particular. Businesses in general are not taking a long term view on the economy. Rising interest rates has also made it difficult for firms to "roll over their bank debt". Demand on the other hand is not on their side, and as the economy trudges forward, credit off-take will decline as production takes considerable backseat.
Cumulative exports fell by 1 percent during FY19 in which the decline is most pronounced in the SME segments. These numbers can be used as proxy for SME production as those figures are not readily available. Textile exports still reign supreme with big ticket items such as cotton cloth, cotton yarn, knitwear and bed wear reflecting growth as other manufacturing segments reclined (see table). The depreciated rupee should have made exports more competitive in the foreign markets but clearly didn't make a dent.
All of this is also manifesting in business confidence. Immediately after Imran Khan came into power, business confidence soared, only to plunge in a few months. Since then, businesses have complained not only about rising costs, but also of uncertainty in policy. According to the survey conducted by the Central Bank in collaboration with the Institute of Business Administration (IBA), the growing sentiment amidst the business community is that of despair (see graph). Businesses are not optimistic about production or employment. Though with the IMF program penned, and the painful budget now out, the private sector should be relatively more certain about the future. Ironically, that certainty is not helping, and certainly pointing toward a somber next year, particularly in the industrial sector of the country. According to the latest survey conducted in Jun-19, "firms in the industry sector are expecting to decrease their employment in the next six months".
Businesses-industrial sector in particular-are bracing themselves, and for good reason. The next year will not be easy. However, this also presents to them an opportunity to change the lens. They need to prepare better for the worst to come and produce smarter for the best they could achieve. They also need to really think about what it means to "make in Pakistan". In a world that is fast automatizing and transforming production, is "make in Pakistan" just an ability to merely substitute imports or is it to create world class competitive products that they can put brand Pakistan's name on? The PTI is a new government which while inexperienced is more open to new policy ideas. Businesses need to ask themselves if business-as-usual is what they aspire to.
So here's the silver lining for the eternal optimist: if everything that could go wrong actually did in this past year, surely the only way is up.