Tuesday, December 30, 2008
KARACHI: Industrial production, especially large-scale manufacturing (LSM), continued to decline during the first quarter of fiscal year 2008-09, registering a negative growth of 6.2 per cent against growth of 7.3 per cent in the same period last year, the State Bank said in its first quarter report on Monday.
Severe energy shortages, deterioration in law & order situation, high international oil prices and rupee depreciation were major impediments for all kinds of manufacturing. Power shortages have been haunting all manufacturing sub-groups in FY08-09.
The decline in LSM production has been broad-based. Seven sub-sectors (having 72.4 per cent weightage) out of 15, registered a decline in production, while three (having 15.3 per cent weightage) grew less than one per cent.
Textile sector, in particular, was jolted by other multiple shocks firstly because it is an export-driven sector and impact of weak external demand fell disproportionately on it. Secondly, poor law and order situation diverted importers of Pakistani products to search for new suppliers. Thirdly, rising cost of raw materials, and fourthly as imported inputs go into textile production process, a high degree of volatility in domestic currency value created problems of costing and pricing.
Classification of data according to dependence of LSM sub-sectors on agriculture sector reveals that while both agro-based and other industries registered a decline in production, the fall in production in the latter was more pronounced during Q1 FY08-09.
This classification also highlights the fact that LSM sector has been unable to achieve significant growth without good performance of these two sections of industry, even with high growth in the recent past.
Within the non-agri based industries section, consumer durables (cars & jeeps, motorcycles, refrigerators, deep freezers, TV sets, air conditioners, etc) registered a decline of 31.2 per cent in production during Q1 FY08-09. But when the decline in consumer durables is excluded, the negative growth in LSM production reduces to only 0.8 per cent. Not only has the increase in interest rate on consumer financing hit the production of consumer durables, but a sharp rise in their prices has also led to a drop in the demand.
Growth in electronics, in particular, suffered due to increased electricity tariff and power shortages in the country.
In addition, demand for consumer durables eased as increase in international prices of steel products and rupee depreciation compelled manufacturers to increase the prices of durables, while the surge in inflation eroded the purchasing power of middle class consumers (major market segment of durables).
The impact of easing demand for durables is most evident in the sale of local brands of cars and jeeps. This sector registered the highest decline in LSM growth.
It is important to note that impact of an ease in international commodity prices such as of oil and metals was overshadowed by exchange rate depreciation. Nonetheless, delivery lags and existence of premium on immediate delivery indicate that the domestic car sales can be improved by reduction in prices and eliminating delivery lags.
A slowdown in the food, beverages and tobacco sub-sector (agri-based) contributed to the LSM decline. The inability of vegetable ghee and oil industry in the formal sector to adjust prices in competition with the informal players of the industry, and resulting substitution and income effects on consumers, resulted in substantial decline in production.
In addition to this, beverages industry which has performed exceptionally well since FY05 (recording production growth of more than 20 per cent) registered a decline of 17.8 per cent. Wheat and grain milling also registered a decline of double digits (10.4 per cent).
The fall in production in this sub-sector is largely attributed to a substantial increase in the prices of food items in the country.
Another sub-sector that remained a source of decline in LSM production is metal. This sub-sector registered a production decline of 16.6 per cent during Q1-FY08-09.
Higher international prices coupled with slowdown in construction activity owing to reduction in Public Sector Development Programme (PSDP) and unattractive prospects in real estate for private sector were the principal causes of decline in metal production.
A substantial decline in construction activities is also evident from a sharp slump in local cement dispatches, which dropped by 16 per cent YoY in Q1 FY08-09. This sharp decline in local cement demand offset the impact of strong increase of 71 per cent in export demand during this period, as cement production dropped to a mere 0.7 per cent in Q1 FY08-09 as against a healthy growth of 23 per cent in the same period last year.
It is pertinent to note that a part of sluggishness in private construction activities is also attributed to substantially high domestic cement prices, besides the rise in prices of other construction materials.
On the contrary, fertilisers, engineering, wood and chemicals sub-sectors registered positive growth in their production. Production of fertilisers, both Nitrogenous and Phosphoric fertilisers, increased, principally reflecting an improvement in capacity after BMR in the preceding year.
Engineering sub-sector registered considerable growth on the basis of higher production in safety razor blades, diesel engines (multiple uses of diesel engines in agri sector) and wheat threshers (thresher demand rose expecting bumper wheat crop).
