Large Scale Manufacturing (LSM) output shrinks 16.5% in July 2022

This is biggest fall in LSM output since October 2020 

According to the data released by Pakistan Bureau of Statistic (PBS), Large-Scale Manufacturing (LSM) output shrinks 16.5 percent in July 2022 over June month –on-month.  On annual basis, the LSM output contracted 1.4 percent over July 2021.  The weak Rupee and economic challenges seems to be the main reasons of this big fall in LSM output.

This is the first contraction in LSM in last 21 months. The last time LSM contracted was in October 2020.  The LSM growth remained negative from September 2019 to October 2020, mostly hampered by COVID-19.

The high energy costs, rupee devaluation, tightening of monetary and fiscal policies, and the global recession-like situation globally are major factors that largely contributed in the decline of industrial production. This will have direct consequences for the GDP growth rate in financial year 2022-23.   

The Asian Development Bank in its recent report has pointed out that the GDP growth in Pakistan in financial year 2022 was led by higher private consumption and growth in agriculture, services, and industry, particularly LSM.

“A contraction in demand, together with capacity and input constraints created by higher import prices from the rupee’s depreciation, will reduce industry output,” The ADB said.

According to the Pakistan Bureau of Statistics (PBS), the majority of sectors witnessed negative growth in outputs. The output of the major sectors that have high weightage in Quantum Index Number of LSM contracted. These sectors include textile, food, petroleum products, chemicals, automobile, pharmaceuticals, cement, and non-metallic mineral products. However, a few showed expansions i.e. garments, beverages, and leather products.

In financial year2022, LSM grew by 11.7 percent over financial year2021, mainly on the back of increasing global demand and favorable government policies to jack up the GDP growth as big industries contribute a tenth to the economy.

As the State Bank of Pakistan started tightening the monetary policy, especially when it entered into a double-digit, the LSM output also started declining each month over the preceding one. Since July 2021, the central bank has hiked the discount rate by 800 basis points from 7 percent to 15 percent now.

The statistics bureau further reported that on a year-on-year basis, in July 2022, food output was down by a negative 9.3 percent, tobacco 75.5 percent, textiles 2.2 percent, coke and petroleum products 5.2 percent, chemicals 1.3 percent (of which chemical products output was up 17.9 percent, while fertiliser was down 13.6 percent). Cement output also declined 41.9 percent over the same month a year ago.

Likewise, Pharmaceuticals output growth was also negative 35.2 percent, rubber products 2.1 percent, non-metallic mineral products 33.9 percent, fabricated metal 18.1 percent, computer, electronics, and optical products 2.1 percent, electrical equipment 1.6 percent, machinery and equipment 48.4 percent, Automobile 7.4 percent and other transport equipment output down by 25.9 percent over July 2021.

Only  a few sectors showed a positive growth including beverages 0.3 percent, garments 48.5 percent, leather products 16.5 percent, wood products 2.9 percent, paper and board 26.8 percent, iron and steel products 13.2 percent, furniture 246 percent and other manufacturing (football) output increased 40.3 percent over the same month of last year.

Pakistan’s manufacturing sector has three heads including LSM, small-scale manufacturing, and slaughtering. The LSM contributes 9.2 percent to GDP. It dominates the overall manufacturing sector, accounting for 74.3 percent of the sectoral share followed by small-scale manufacturing, which accounts for 2.0 percent of total GDP and 15.9 percent sectoral share. The third component, slaughtering, accounts for 1.2 percent of GDP with a 9.7 percent sectoral share. The manufacturing sector contributed 12.4 percent to the country’s GDP.

                                                                       Khalid Bhatti

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