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EDITORIAL: The FY23 Large-Scale Manufacturing (LSM) is down 10.3 percent year-on-year. Barring the Covid year, this is the biggest decline in the history of its recording and depicts the sorry state of the manufacturing sector that is hit hardest by the ongoing balance of payment and energy crises.

The decline began last year in July when the then finance minister and State Bank of Pakistan Governor (SBP) decided to put curbs on the so-called ‘non-essential’ imports as the then government was not ready to adopt the much-needed austerity measures required to slow down the wider economy.

Initially, the decision was confined to restricting imports of inputs for automobile, mobile phones and other machinery. The objective was to reduce the quantum of imports to preserve the falling SBP forex reserves.

However, the reserves kept on falling, albeit at a slower pace. And, once these reached the critical level of around $4 billion, the curbs on imports widened across the manufacturing sectors. These unprecedented supply chain disruptions are reflected in the economic data with a 10 percent decline in the LSM.

However, no administrative measure or even a drastic step proved effective to keep the currency (rupee) in check. The depreciating rupee plus the ensuing widespread shortages have resulted in higher inflation.

The situation becomes worse with the imposition of extremely higher tax rates on the manufacturing sector and the producers have started passing on the impact of these abnormally high imposts, including super tax on selected categories of taxpayers, to the consumers that is fuelling inflation further.

This has suppressed the demand, and that has further impacted on the performance of the LSM. One of the biggest declines is in the auto sector, which is down by 50 percent, as the imports are restricted in this sector and then additional GST and duties have suppressed the demand.

The assemblers had to resort to increase the prices of their products to compensate for the escalation in their fixed costs as their plants were running sub-optimally.

The decline of 6-7 percent in food and beverages suggests demand suppression in view of the fact that import restrictions had least impact on these sectors. In the case of tobacco, the decline is 29 percent – which is due to lower demand and shifting of consumers to smuggled and informal local tobacco, as the FED (federal excise duty) on cigarettes doubled on the formal sector while the informal remained unchecked.

This kind of trend is visible in other items as well where input parts were harder to import through formal channels while informal sector kept on importing final goods, using informal means. That further hurt the formal manufacturing sector.

The trend of import curbs almost continued to date. However, as per the IMF condition, it is slowly easing. The question is whether this is enough to normalise the LSM. The short answer is no. During the chaos of last year or so, the energy prices have increased to a level, which is making manufacturing uncompetitive. High interest rates are making working capital prohibitively expensive.

This is not a good omen. The LSM may bounce back from the lows of FY23. However, FY24 is likely to be another bad year as higher inflation erodes demand further while a greater increase in energy pricing will keep manufacturing more uncompetitive and the increasing informal footprint will make life of the formal sector more miserable.

The outcome would be loss of hundreds of thousands of jobs – some have already lost employment and others may join amid closure of more manufacturing units.

Copyright Business Recorder, 2023

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