Govt has to ensure consistency of policies to drive growth

Contraction in manufacturing sector will lead to broad economic slowdown


Dr Fahd Rehman March 04, 2019
Representational image of a man signing a document. PHOTO: REUTERS

LAHORE: The economy has started to slow down since growth in the index of large-scale manufacturing (LSM) contracted to around 1.5% in the first six months of FY19.

Contrary to this, the private sector credit growth remained positive during the said period. These contrasting statistics show that the manufacturing sector has started to face input cost pressures. Even the State Bank of Pakistan (SBP) has expressed its apprehension about this.

The manufacturing sector has forward and backward linkages and a contraction in this sector will be reflected in a broad slowdown going forward. Even the current production of cotton is not encouraging. Apart from this, there is a marked slowdown in the construction sector.

The slowdown in the construction sector will affect particular industries such as steel, cement, glass and ceramics. However, sales of cement have not been affected, since the loss of domestic sales has been offset by exports to some extent.

Considering the enhancement in capacity in this industry over the last couple of years, it may face difficulties in terms of profitability.

Similarly, the steel sector has started to take input cost pressures. International coal prices have receded to some extent. On the other hand, international iron ore prices have increased and have almost nullified the impact.

However, the depreciation of the rupee has started to bite the profitability of this sector. In order to protect the nascent steel industry, the previous government slapped anti-dumping duties, which need to be carried on for a couple of years.

The government is contemplating withdrawing the anti-dumping duties in the next budget. This withdrawal may jostle the steel industry.

In order to promote sustainable economic growth, the role of government is the key, especially in a developing country. The previous government put in efforts to promote the construction industry, which benefitted from the China-Pakistan Economic Corridor (CPEC). By stepping up the development budget in the last two years, the government was also able to spend on the Public Sector Development Programme.

The current government is facing external constraints in the form of balance of payments. Roots of external constraints can be traced to the decade of 1980s when the government started to liberalise the economy. Since 1988, successive governments have taken more than a dozen programmes from the International Monetary Fund (IMF) to ease external constraints. These programmes started with an austerity drive where the axe fell on the development budget.

Under the current arrangement, the axe has already fallen on the development budget. Keeping in view the current defence situation, the government has to step up the budget, which is justifiable. Both defence and debt servicing will consume around two-thirds of the revenues and the fiscal deficit is bound to increase.

The government intends to reduce the fiscal deficit to 5% of gross domestic product (GDP), which would not happen in the current fiscal year.

In order to curtail expenditures, the government tried to follow an austerity drive. If history is any guide, the lesson is that such drives could not achieve the desired results. Even the balloon of austerity has started to lose its steam very quickly. The fact is that this austerity cannot change the expenditure mix since there is inertia as far as current expenditure is concerned.

In a nutshell, the successive governments should pursue the same set of objectives and try to maintain consistent policies.

The government should focus on the industrial sector in order to take the economy forward. Neglecting the industrial sector at this juncture will further aggravate the balance of payments situation.

The writer is an assistant professor of economics at SDSB, Lahore University of Management Sciences (LUMS)

 

Published in The Express Tribune, March 4th, 2019.

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