THE pleasant phase of the relationship between the government and the private sector, spanning over a year-and-a-half, seems to be coming to an end, as the recently released official data has exposed the fragility of the industrial growth base in the country.

Business leaders express their frustration over what they see as poor handling of affairs by the PTI team, but they do prefer not to be openly critical.

The Pakistan Bureau of Statistics (PBS) reported 5.1 per cent growth in large-scale manufacturing (LSM) in the first quarter of FY22 (July-Sept 2021); a little higher compared to the corresponding period in the previous year when, in the thick of the pandemic, LSM posted 5pc growth riding on the back of the stimulus package.

In September industrial growth dipped to 1.1pc, which was in sharp contrast to a 16-year high of 14.8pc achieved during the last fiscal.

According to PBS: “The LSM output increased by 1.19pc for September 2021, compared to September 2020, and decreased by 0.72pc if compared to August 2021”.

Signs of deceleration noted in the first quarter of the current fiscal are disturbing as the economy has yet to absorb the brunt of monetary tightening and fiscal stabilisation measures.

Disregarding his earlier assurances to the private sector for a gradual and measured increase, the State Bank of Pakistan (SBP) abruptly raised the policy rate by 150 basis points to 8.5pc earlier this month.

All good things in life come to an end. The bonhomie between the govt and the private sector seems to be taking that road

The SBP maintained a low policy rate for 15 months after a sharp 625bps reduction in key rates during March-June 2020. From 13.25pc, the interest rate was revised down to 7pc in three months last year. The SBP also adopted several policy tools for economic revival, which, according to the central bank, “stood around five per cent of GDP by the end of FY21.”

Refinance and Rozgar schemes were launched, the policy of loan deferment and restructuring moderated the stress levels and created fiscal space for businesses, and the Temporary Economic Refinance Facility (TERF) shored up the productive capacity in the country.

The central bank also took multiple other supportive steps to boost digitalisation, easing credit requirements and promoting housing finance.

Citing economic compulsions, the federal government raised power and petrol prices multiple times and did not hide its intention of increasing them further. It also hinted at the reversal of subsidies, amnesty scheme and tax concessions that it had doled out in FY21 to stimulate economic activity in the wake of the Covid-19 shock.

The cost of production was moderated by curtailing duties on imported raw material and the elimination of peak-hour power rates. The government also disbursed long-stuck GST refunds and extended the amnesty scheme till June 2021. The generous stimulus package and business environment boosted confidence and energised the manufacturing sector.

However, in July/SEPT 2021 out of 15 industries monitored, 12 recorded a growth in output, while production in the remaining three sectors contracted (Table).

Khusro Bakhtiar, the Minister for Industries, was approached, but his response did not reach Dawn till the filing of this report. On his part, Jawwad Rafique Malik, the federal Secretary of Industries, did not seem too worried and shared his views in an email. If his opinion conflicts with the PBS report, that, for sure, is another matter.

In his mailed note, he said: “There are various segments of industry, and hike in input costs and taxes will not necessarily hurt the industrial growth. For example, the export industry is still doing very well due to the demand spike. As a result, ginning, spinning, weaving, dyeing, printing, knitwear, garments, leather and sports goods are showing very healthy growth.

“There is a slight dip in steel, cement and auto sectors, but they are likely to bounce back in the wake of huge domestic demand. Mobile phone manufacturing, urea, Diammonium phosphate and electronics production is good,” the email read.

Many business leaders were anxious over the policy shift but were not too keen to share their views on record. Some with a soft corner for the PTI sounded somewhat delusional.

Musadiq Zulqarnain of Interloop was in high spirits. He said the shift in policy will have an impact, but the growth will still be there. “In the textile sectors, the factories are running to capacity. Many are expanding. Some have become functional and others will be so in the next two quarters”.

He attributed the fresh investment to TERF. “A major part (over 60pc) of investment is in textiles and apparel. Within the textile group, the major part is in spinning and weaving.

“As such, theoretically, the exports will continue growing. The new challenge is now the availability of gas and the cost of energy.”

On LSM data, he said: “I am not sure. But there is a slight slowdown in construction and that might have depressed cement and steel. Also, high inflation and devaluation increased the prices of products and suppressed demand.”

Nassar Hayat Magoon, President of the Federation of Pakistan Chamber of Commerce and Industry, said growth in the manufacturing sector is contingent upon several factors. He was critical of the policy shift towards stabilisation that he thought will dissuade the investors.

Majyd Aziz, a renowned industrialist, sounded bitter. “It is not practical to keep on increasing production on a monthly basis when there are issues in the supply of raw material, infrastructure, working capital, etc. An uptick in interest rate, while discouraging, is not the only deterrent. Stable gas supply is a major concern that could reduce production and lead to missing shipment deadlines of exports.”

Ehsan Malik, the CEO of the Pakistan Business Council was rather soft. “The Monthly Quantum Index of Manufacturing for the first quarter of FY22 is above the same period for the last two years though it is lower than Jan 21 when it reached a peak as a result of various stimuli that were offered to revive demand and manufacturing.

“Looking ahead, inflation and devaluation are likely to curb domestic demand. The rising incidence of Covid-19 in Europe may also dampen demand for textiles. There are no quick fixes to revive the manufacturing sector. However, TERF-led capacity addition will help exports in particular, as substantial investment has gone into upgrading machinery to allow greater value addition,” he concluded.

Published in Dawn, The Business and Finance Weekly, November 29th, 2021