KARACHI: Provisional National Accounts data shows that industrial sector output declined by 2.6 percent in FY20, compared to a contraction of 2.3 percent in FY19, the SBP Annual Report said.
It was the first time that industrial activity contracted for two years in a row, the report said adding that the decline in FY20 was led mainly by the dip in manufacturing and mining activities.
In particular, the decline in large-scale manufacturing (LSM) activity was the largest ever registered, which in turn also weighed heavily on the overall performance due to its sizeable weight of more than 50 percent within the industrial sector.
In addition to the stabilisation program that had moderated domestic demand, the lockdowns following the pandemic also affected industrial sector activities.
The report said that the LSM sector also could not escape the adverse economic implications of the Covid-19 pandemic. Prior to FY19, LSM growth was positive; however, the subsequent fiscal consolidation, monetary tightening and exchange rate realignment dampened the growth starting in FY19. Finally, in the middle of FY20, signs of nascent recovery started to emerge, but this recovery was cut short by the Covid-19 pandemic, which resulted in a full year contraction in LSM of 10.0 percent.
From a policy perspective, high interest rates (prior to Covid-19) also played a role in subduing demand conditions. High interest rates largely prevailed throughout the year, but were eased substantially in the aftermath of Covid-19 (since March 2020), it added.
On the other hand, the increase in fiscal expenditure was not sufficient to arrest the overall decline in the industrial sector. That said, government spending played a positive role in the output of energy and construction sub-sectors.
In particular, electricity generation and distribution and gas distribution sub-sector posted an expansion of 17.7 percent in FY20, after growing 14.5 percent last year. The gross value addition of the electricity sector contributed significantly to the sub-sector’s performance, which can be attributed to higher output growth relative to intermediate consumption. It is important to recall here that the government had rolled out a comprehensive circular debt reduction program at the start of the year to improve viability of the power sector and arrest the accumulation of arrears.
Accordingly, power tariffs were increased in the initial months of FY20 to pass on the impact of rising capacity charges and fuel price adjustments. This had helped improve gross revenues in this sector.
In contrast, the growth in intermediate consumption was modest due to a shift in the fuel mix in favour of cheaper sources, such as hydel and coal.
The construction sector also benefited from public sector spending, registering a growth of 8.1 percent in FY20 compared to a contraction of 16.8 percent in FY19. Increase in current as well as PSDP expenditure aided growth in the construction sector. 30 large infrastructure projects, such as Diamer-Bhasha dam, Mohmand dam, highways (Sukkur-Multan motorway, Lahore Multan motorway etc.) and intra-city public transport network (BRT Peshawar) were fast-tracked during FY20.
Furthermore, in the midst of the pandemic, the construction sector, due to its wider employment generating potential, was given several incentives by the government.
The mining sector’s output fell largely on account of a decrease in the output of fossil fuels. Crude oil and natural gas production fell by 10.6 and 6.4 percent respectively. The production of these commodities fell due to lower exploration activities, slowdown in demand for energy products and regulatory restrictions on production of furnace oil in the upstream refineries. Meanwhile, amid special circumstances related to the Covid-19 pandemic, the typical fixed-growth calculation methodology for small scale industry was not used by the PBS in FY20. Instead, detailed sectoral analysis was employed, and it showed that the output for this sector decelerated to 1.5 percent. Last year, a fixed growth rate of around 8.2 percent was used to derive estimates of gross value addition at constant prices of this cottage industry, the SBP report said.
Copyright Business Recorder, 2020