LSM growth contracts by 1.8%

The growth in major industries remains consistently negative, sinking 1.8% during the first seven months of the current fiscal year amid slim chances of an early recovery due to the central bank’s decision to keep interest rates unreasonably high and maintain tight control over imports.

According to the Pakistan Bureau of Statistics, the large-scale manufacturing (LSM) sector recorded negative growth of 1.8% during the July–January period of fiscal year 2024–25 compared to the same period last year.

The national data-collecting agency released the figures a week after the State Bank of Pakistan (SBP) decided to keep the interest rate unchanged at 12%, despite inflation slowing to a nearly decade-low level of 1.5%.

The central bank took this decision following discussions with the International Monetary Fund (IMF), which again pressed Pakistan to maintain a tight monetary policy.

The business community has plainly told Prime Minister Shehbaz Sharif in recent meetings that economic activity cannot pick up until interest rates are brought to single digits and electricity prices are substantially reduced.

Sectors suffering due to the overall negative economic environment include food, chemical production, non-metallic mineral products, iron and steel products, electrical equipment, machinery, and furniture.

 

The food sector has been heavily impacted by the government’s decision to impose an 18% sales tax on packaged milk, both liquid and powdered. This, in turn, has reduced packaged milk sales by 20% during the first half of this fiscal year, affecting both farmers and the milk processing industry.

During the recently ended, inconclusive round of talks for the completion of the $7 billion programme, the government projected that overall economic growth may remain at 3.1% this fiscal year. However, sources said the IMF did not accept the government’s forecast and projected the economic growth rate to be well below 3%. The Federal Board of Revenue (FBR) has assured the IMF that it will not suffer any further tax shortfall, hoping that economic activity will pick up from March onwards. Due to the overall slowdown in manufacturing, the FBR has estimated losses of Rs450 billion during the July–February period of this fiscal year.

Last week, the central bank stated that high-frequency indicators—including sales of automobiles, POL products, cement, import volumes, credit to the private sector, and the purchasing managers’ index—show that economic activity is gaining traction. Additionally, recent pulse surveys indicate improved consumer and business confidence.

However, the central bank admitted that the momentum reflected in these indicators has yet to fully materialise in large-scale manufacturing data. The drag in LSM growth is primarily due to a few low-weight sub-sectors, which have more than offset positive momentum in key sub-sectors such as textiles, pharmaceuticals, automobiles, and POL, according to the SBP. The central bank still expects economic growth to remain in the range of 2.5% to 3.5% and anticipates further momentum going forward.

The yearly trend mirrors the average output over the first seven months. Large-scale industries recorded a 1.2% contraction in January compared to the same month last year, according to the PBS.

Sugar production fell by 16% in January compared to the same month of the previous year, while iron and steel production declined by over 11.5%. However, the automobile sector saw an increase in production.

The government introduced a winter electricity tariff reduction package for both industrial and residential consumers. However, the package has not had a significant impact, as power generation decreased by 3% in February. This suggests that February’s LSM output may also follow a negative trajectory.

Industries that saw an increase in production include tobacco, textiles, clothing, automobiles, and transport equipment.

Pakistan’s industries are heavily dependent on imported raw materials to produce finished goods. The government had been strictly limiting imports, briefly relaxing restrictions for a couple of months. However, this trend was reversed in February, bringing imports down to $4.7 billion to offset external sector pressures. The external sector’s relative stability is primarily due to restricted imports, as it could not sustain two consecutive months of imports exceeding $5 billion.