LSM continues to decline ahead weak demand, heavy load-shedding

LSM continues to decline ahead weak demand, heavy load-shedding

Azhar Bukhari

The Large Scale Manufacturing (LSM) has recorded negative growth throughout fiscal year 2008-09, which is the longest period in production fall continuously.
Moreover, 21.2 percent (YoY) decline in the month of May 2009 is the highest ever fall in LSM production.
Weakness in domestic demand, worsening power shortages, structural problems and deterioration in law & order situation are some important factors responsible for the decline in LSM production.
According to the data released by the State Bank of Pakistan Large Scale Manufacturing registered negative growth of 7.7 percent during Jul-May FY09 compared with a 5.0 percent rise in the corresponding period of FY08. The persistent disappointing performance is a reflection of various adverse domestic and external developments.
However, this continuous fall in manufacturing sector has more domestic factors than the affects of global recession.
In particular, automobiles industry witnessed sharp slide mainly due to high cost of consumer financing continued upward prices of cars, tight liquidity position of the banks as well as risk averse behaviour after facing substantial Non Performing Loans (NPLs) in consumer finance.
Further, slow income growth and high inflation impaired consumers’ ability to spare funds for purchasing durables. While higher cost of consumer financing was an important reason for softer demand for household electronics, weaker demand for transformers and electric meters by the power distribution companies resulted in a poor performance by this industry.
Growth in cement production though helped contain free fall of LSM growth, weakened in recent months. Cement production rose by 4.8 percent during Jul- May FY09, the lowest growth in the last six years. A sustained double-digit growth in cement production was achieved by addition in production capacity and exploitation of export markets.
The impact of global recession on domestic LSM is most visible in the textile industry. Growth in textile industry fell by 0.1 percent over the same period last year. Textile sector was badly hit by power shortages and weak external demand. Both cotton yarn and cloth industries, which have the largest shares in the textile sector, posted negative growth of 0.27 percent and 0.33 percent respectively during Jul-Mar FY09.
With respect to exports promotion measures All Pakistan Textile Mills Association has proposed the federal government to make duty and tax remission schemes workable, easy to operate and manageable. It has also stressed on industry friendly anti-dumping laws with raw material relating provisions i.e. competing interests should be balanced.
On market access, the APTMA has stressed on trade diplomacy, image building of the country and compensation to the industry for losses being made out of present distort image.
Consequently, Pakistan Industrial and Traders Associations Front (PIAF) has also decried the six to eight hours suspension of electricity supply to Independent Feeders of Large Scale Manufacturing Units saying that it would hit the exports hard.
Talking to The Post, Chairman PIAF, Irfan Qaiser Sheikh said that the duration of suspension of electricity should be minimized to help Large Scale Manufacturing units that are major foreign exchange earners for the country.
The PIAF chairman maintained that there is a dire need to implement innovative ideas for the economic revival of the country at this point in time when the economic activity is already at its lowest ebb. He said that the government should intervene to avoid prolonged economic slow down that is bound to give birth ills like poverty and unemployment.
Sheikh said that the Large Scale Manufacturing units need facilitation as they are supplementing the government efforts aimed at economic prosperity but it seems that some circles are hell-bent to defame the government. He said that the electricity is one of the basic raw materials for the industry and the repeated increases in its prices even without proper consultation of business doing people are badly affecting the over all production.
Similarly, electronics sector is not only going through weak demand created by financing gap and increased prices of products, but also due to frequent power outages.
People are forced to spend on alternate power supply equipment (UPS and generators) to streamline electricity supply, which do not support a number of household electronic appliances.
As global textile demand declined, quantum of yarn exports shrank by 7.8 percent over the same period last year, and the average export unit value of yarn fell by 8.7 percent. Similarly, export unit value of cotton fabric dropped by 1.0 percent in this period. The combined impact of domestic and external factors has resulted in closure of about 20 percent spinning mills in the country.
In contrast to a declining trend in overall manufacturing activity, fertilizer production posted a significant growth of 20.7 percent in last 12 months after a dismal performance during the preceding two years.
In addition, a slower pace of decline in international prices of phosphatic rock (major input for DAP) squeezed the margins of the firm. While, current production of both phosphatic and nitrogenous fertilizer are insufficient to meet local demand, with the completion of plants by Fatima Fertilizer and Engro, shortage of urea is expected to turn into a surplus during FY11.
However, DAP shortage will continue due to lack of raw material in the country and large investment required to setup a new plant.
Similarly automobiles industry is facing significant contraction in demand (except for tractors where domestic production is low). In particular, jeeps & cars subsector is the worst hit by the sluggish demand due to three factors: continued increase in prices, (2) rise in cost of financing, as well as (3) lower availability of institutional financing given risk averse policy of banking sector amid increasing NPLs and liquidity problems with the banks.