Dein­dus­tri­al­i­sa­tion at work

The Pak Banker - - 4editorial - Javed Ak­bar An­sari

Pak­istan is de-in­dus­tri­al­is­ing it­self be­cause in­dus­trial devel­op­ment has not been pri­ori­tised with pol­i­cy­mak­ers tak­ing it to be a nat­u­ral con­se­quence of macroe­co­nomic sta­bil­ity. This is demon­strated by a ma­jor study on the per­for­mance and prospects of the largescale man­u­fac­tur­ing sec­tor dur­ing 2010 by the In­sti­tute of Busi­ness Man­age­ment for the Fed­er­a­tion of Pak­istan Cham­ber of Com­merce and In­dus­try.

The study shows that in­dus­try in Pak­istan is a lead­ing growth sec­tor. Growth in in­dus­trial net out­put leads to growth in all other sec­tors-in­dus­trial growth Granger causes growth in agri­cul­ture, com­merce con­struc­tion, fi­nance and other ser­vice sub-sec­tors. The in­dus­trial sub-sec­tor has strong for­ward link­ages with all seg­ments of the na­tional econ­omy.

Pak­istan is de-in­dus­tri­al­is­ing. In­dus­trial devel­op­ment can­not be the un­in­ten­tional au­to­matic con­se­quence of achiev­ing macroe­co­nomic sta­bil­ity as the govern­ment has been pre­sum­ing since the sign­ing of the first ma­jor Struc­tural Ad­just­ment Agree­ment with the IMF in 1988. Pri­ori­tis­ing in­dus­trial devel­op­ment is es­sen­tial for stim­u­lat­ing growth through­out the econ­omy.

The large-scale man­u­fac­tur­ing sec­tor's share has re­mained stag­nant at about 12 per cent of GDP dur­ing the present decade. Its share of to­tal em­ploy­ment is less than 10 per cent.

Growth has fluc­tu­ated widely and has de­cel­er­ated for all ma­jor man­u­fac­tur­ing sub-sec­tors dur­ing 2008-2010. Out­put growth has ex­ceeded value added growth dur­ing this pe­riod-in­di­cat­ing a fail­ure to up­grade the qual­ity of man­u­fac­tur­ing pro­duc­tion.

The pat­tern of man­u­fac­tur­ing sec­tor growth has be­come dis­torted and there is lit­tle ev­i­dence of struc­tural trans­for­ma­tion and tech­no­log­i­cal up­grade. The share of cap­i­tal goods in man­u­fac­tur­ing value added has re­mained stag­nant at 10 per cent for over a decade with a slight de­clin­ing ten­dency. The coun­try mainly pro­duces cheap labour in­ten­sive con­sumer goods which have limited ca­pac­ity for tech­no­log­i­cal dif­fu­sion down the sup­ply chain.

Tech­no­log­i­cal back­ward­ness is in­di­cated by the low value of the cap­i­tal-out­put ra­tio and the slow growth in to­tal fac­tor pro­duc­tiv­ity in most branches. In­ter sec­toral terms of trade have de­te­ri­o­rated for man­u­fac­tur­ing dur­ing the past decade. Man­u­fac­tur­ing out­put prices have in­creased much more slowly than the man­u­fac­tur­ing sec­tor's in­put price in­dices (en­ergy, raw ma­te­rial, im­ported ma­chin­ery) and gen­eral price in­dices (WPI, CPI).

This has re­duced both profit rates and real wage growth within the LSM sec­tor. Raw ma­te­rial prices are likely to sky­rocket due to the im­pact of the floods and un­der re­lent­less IMF pres­sure, fuel and elec­tric­ity prices are also ex­pected to rise rapidly in FY11.

Bank credit to the LSM sec­tor has fallen cat­a­stroph­i­cally dur­ing 200810. Even in ear­lier years, the an­nual rate of growth of bank credit to the LSM sec­tor was not sig­nif­i­cantly higher than the rate of growth of nom­i­nal GDP. The LSM sec­tor's share of sched­uled bank ad­vances has been halved dur­ing 2005-2010.

Man­u­fac­tur­ing in­vest­ment has also fallen sharply. Pub­lic in­vest­ment in man­u­fac­tur­ing has been vir­tu­ally elim­i­nated and this has had a dras­tic neg­a­tive im­pact on the in­ter­me­di­ate and cap­i­tal goods branches (non metal­lic min­er­als, steel, metal prod­ucts). Cost of credit has shot up since 2007 and ev­ery year the weighted av­er­age lend­ing rate (WALR) in­creases by leaps and bounds as the SBP con­tin­ues its pol­icy of mer­ci­lessly jack­ing up the pol­icy rate.

Long term fi­nanc­ing has dis­ap­peared and the col­lapse of the DFIs has meant that there are vir­tu­ally no ma­jor lo­cally funded man­u­fac­tur­ing sec­tor projects.

In­deed all pub­lic sup­port for BMR in­vest­ment and for project rehabilitation has been phased out un­der pres­sure from the IMF and the World Bank and as a con­se­quence non-per­form­ing loans (NPL) have dou­bled dur­ing the last five years and will ex­ceed Rs500 bil­lion by the end of FY11.

The fi­nan­cial po­si­tion of the cor­po­rate man­u­fac­tur­ing sec­tor has weak­ened since 2007. Both sales rev­enue and net profit growth rates have fallen. Op­er­a­tional in­ef­fi­cien­cies have risen as have fi­nan­cial costs as a ra­tio of op­er­a­tional profit.

De­mand con­strain­ing macroe­co­nomic poli­cies, spe­cially the em­pha­sis on in­creas­ing the rate and widen­ing the scope of in­di­rect taxes have se­ri­ously hurt sales rev­enue growth. The im­po­si­tion of the re­formed GST is likely to ex­ac­er­bate tax ad­min­is­tra­tion costs of the cor­po­rate sec­tor and will have a strong neg­a­tive im­pact on the growth of sales rev­enue.

Man­u­fac­tur­ing ex­ports have been stag­nant. The share of both man­u­fac­tur­ing ex­ports and im­ports in na­tional ag­gre­gates has fallen dur­ing 20052010. We con­tinue to ex­port a small num­ber of low value added goods to a small num­ber of sat­u­rated mar­kets in which our mar­ket share is minis­cule - usu­ally less than one per cent.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.