LSM sector

Pakistan Bureau of Statistics (PBS) released provisional quantum indices of Large Scale Manufacturing Industries (QIM) for July-June 2025-26, indicating a healthy growth of 4.98 percent against negative 0.69 percent in 2024-25 while LSM growth plummeted in June 2026 against May 2026 by negative 0.68 percent and by negative 3.48 percent when compared to June 2025.

The reasons behind negative LSM growth dating back to 2019 are largely, if not entirely, associated with external factors (COVID-19 and the post US/Israel attack on Iran on 28 February this year) and upfront harsh monetary and fiscal conditions agreed with the International Monetary Fund (IMF), starting in (i) 2019 under the Extended Fund Facility programme suspended in 2022 due to violations of two critical conditions by the then Finance Minister, Ishaq Dar; (ii) carried on during a nine-month-long Stand By Arrangement approved in July 2022; and (iii) continuing in the 37-month-long ongoing Extended Fund Facility programme approved in September 2024.

A very tight monetary policy with a policy rate more than double the regional average has been an IMF condition since 2019.

The objective: to mop up excess liquidity in the formal sector to contain inflation though, as expected, it had a negative impact on LSM growth. By July 2024 the policy rate had come down to 19.5 percent, from a high of 22 percent, and by January 2025 the rate was 12 percent, declining to 11 percent in May 2025 and then again to 10.5 percent in December 2025. It was raised to 11.5 percent in April 2026 (attributable to the Middle East conflict) and has so far held steady since.

The major borrower from commercial banks is the government with the private sector accounting for less than a quarter of total credit secured in any given year. This explains why debt service payments are rising each year in percentage terms and account for an untenable 43 percent of total budgeted outlay for the current year.

Credit to the private sector as per the Finance Division in its monthly economic outlook and update publication was 676.6 billion rupees in 2024-25 and 873.3 billion rupees in 2025-26 or, in other words, it is unlikely that a rise of 196.7 billion credit by the private sector in total accounted for a healthy LSM growth of 4.98 percent last fiscal year.

True that the base in 2024-25 was very low, at negative 0.69 percent, yet it seriously challenges one’s interpretative ability to claim that this increase in credit accounted for a 4.98 percent rise in LSM last year. It is relevant to note that this rise in credit goes hand in hand with administrative measures that the government agreed with the IMF to undertake notably ensuring full cost recovery of utilities that has translated into passing on sectoral inefficiencies as well as interest on borrowings (the interest payable on the 1.23 trillion loan by the power sector last year is part of the tariff today) onto consumers in the form of higher tariffs. Constant laments by the private sector after many an anecdotal survey carried out by Business Recorder reveal complaints of very high input costs that continue to rise and disable the private sector from effectively competing regionally.

And yet, as Mark Antony said about Brutus being an honourable man, the PBS is an entity whose intent in data collection may be honourable. So how did the LSM growth rise to 4.98 percent last fiscal year? Is it because the major contributors to this growth are those industries that are heavily reliant on imports for example petroleum products and automobiles that are largely only assembled in this country as the percentage of indigenization as agreed with these companies remains unmet? The weightage given to petroleum products in the QIM accounts for 6.66 percent and the positive percentage change July-June 2025-26 as estimated by PBS compared to the year before was 9.70 percent – a rise that is baffling unless the rise in price due to the Middle East conflict is taken into account as actual demand in the country has declined as prices have risen.

Automobiles account for 3.10 percent weightage and the QIM rise July-June 2025-26 was estimated at 57.77 percent compared to the year before with the June 2026 rise showing a 50.53 percent increase – two major contributors to the rise in the QIM for 2025-26 index.

Crops which are a major input for industry and therefore contributed to LSM growth last year include: (i) tobacco with a weightage of 2.07 percent and growth estimated at 16.33 percent by the PBS in 2025-26; (ii) fertilizer weightage is 3.93 and it grew by 0.83 percent in June 2026 (though for the year it registered negative 1.99 percent growth that accounts for the import of around 50,000 tons from Morocco as Saudi fertilizers are no longer available due to the Middle East conflict; (iii) sugar constitutes 3.43 percent of the 10.69 percent weightage given to food (with an estimated growth of 7.03 percent July-June 2025-26 compared to 12.83 percent in the same period the year before). However, the administration’s decision to allow export of sugar on the flawed assurance that there was excess supply in the domestic market, as has been the case in previous administrations, backfired as domestic prices rose; and (iv) cotton crop, a major input for domestic industry, is also exported (with sub-sectors ranging from raw cotton, ginning, yarn, cloth, garments, bedsheets etc.). Those engaged in the manufacture of these items exert their influence on the executive and legislative branches of government to seek export ban on the subsector operating at a lower value addition while the lower value-added producer seeks to earn foreign exchange especially when the international price is higher than what domestic industry is offering.

The PBS showed a growth of 1 percent for cotton yarn, 0.17 percent for cloth and 5.49 percent for garments July-June 2025-26.

Be that as it may, crop output in Pakistan remains hostage to weather conditions and a bad monsoon year (floods or drought) can have severe repercussions on output.

And finally, it is relevant to note that the overarching reliance on generating more revenue by the Federal Board of Revenue as pledged to the Fund is from what is being termed as enforcement of sales tax measures that are at the level of the factory and have so far focused on sugar, cement, and fertilizers. Sales tax is then passed onto the consumers contributing to higher inflation as well as a rise in the poverty levels that have already reached 42.4 percent in Pakistan.

To conclude, the government’s claim of an uptick in production may therefore require a revisit and coordination with stakeholders, particularly major industries claiming that they are facing extremely challenging conditions that have forced many units to shut down in recent years.

Copyright Business Recorder, 2026