Incentives likely to support LSM growth: SBP

Constraints in 1QFY17 are expected to dilute in future

KARACHI: The recently-announced incentives for export industries; improved energy supply, strong domestic consumer demand and an uptick in private sector credit for fixed investment purposes are likely to support Large Scale Manufacturing (LSM) growth in coming months, said the State Bank of Pakistan (SBP) in its second quarterly report.

The central bank said the constraints that inhibited the growth of some industries in the first quarter of 2016-17 are expected to dilute in the future.

The SBP’s confidence is also based on 5.8% growth in the LSM sector in the second quarter (Oct-Dec) of the current fiscal year 2016-17 compared to 4% in the same period of last year.

However despite this, overall LSM growth for the first half (Jul-Dec) of fiscal year 2016-17 remained 3.9% - the same growth as last year - due to negative growth in June and July 2016.

On the positive side, the manufacturing sector availed Rs82.7 billion in fixed investment loans during the first half of 2017 compared to just Rs21.8 billion in the same period last year.

The LSM, at 10.9% of the GDP, dominates the overall industrial sector, accounting for 80% of the sectoral share, according to the Economic Survey of Pakistan.

The LSM grew at a pace of 3.2% during July-June period of fiscal year 2015-16 against the government target of 4.61%. Last year, the International Monetary Fund also showed concerns on the slowdown of growth in LSM due to its important role in the GDP of the country.

The government recently announced an export stimulus package of Rs180 billion (for second half of fiscal year 2017 and fiscal year 2018). This package offers several incentives, including removal of duty and taxes on some raw material and machinery, and rebate on exports, etc. LNG imports increased to 1,004mt during the first half of fiscal year 2017 compared to 400mt during the same period last year.

Several indicators show rising consumer demand in the country like a rise in consumer financing, increase in the sale of consumer durables (automobiles, electronic goods), sharp growth in fuel consumption, etc.

Furthermore, the IBA-SBP Consumer Confidence Index (CCI) recorded its highest-ever level of 174.9 points in January 2017, showing an increase of 17 points from July 2016.

Challenges

The quarterly report said that the sharp revival in LSM might be constrained by a number of factors. Most of the industries that have shown steady growth over the past few years (eg; cement, autos, steel and pharmaceutical), have already achieved high levels of capacity utilisation, therefore these industries would require capacity expansions for further growth.

In the textile sector, the recovery in global commodity prices (particularly cotton) and the recently announced export package are positive developments. But fully capitalising on these favourable developments would require a well-thought out strategy and concerted efforts to resolve the endemic issues afflicting the sector.

Moreover, global prices of key raw materials are increasing.

Published in The Express Tribune, April 4^th, 2017.

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