ISLAMABAD: The growth in Pakistan’s large-scale manufacturing (LSM) sector has contracted by 1.8% during the first seven months of the current fiscal year, signaling continued challenges for the country’s industrial base. This contraction, reported by the Pakistan Bureau of Statistics (PBS), reflects a deepening negative trend in major industries, compounded by a high-interest-rate environment and strict import controls.
The LSM sector’s performance during the July-January period of fiscal year 2024-25 shows a decline compared to the same period last year. The negative growth continues despite the recent slowdown in inflation, which dropped to a nearly decade-low of 1.5%.
A key factor in this downturn is the decision by the State Bank of Pakistan (SBP) to keep the interest rate unchanged at 12%, in alignment with pressure from the International Monetary Fund (IMF) to maintain tight monetary policy. This decision has created an unfavorable environment for business investment and economic activity, leading many in the business community to express concerns over the lack of recovery. According to business leaders, a significant shift in policy, including a reduction in interest rates to single digits and a decrease in electricity prices, is essential for any meaningful economic recovery.
Several sectors are particularly struggling under the weight of the economic slowdown, including food, chemicals, non-metallic mineral products, iron and steel, electrical equipment, machinery, and furniture. The food sector, in particular, has been hit hard by the government’s imposition of an 18% sales tax on packaged milk, which has caused a 20% decline in sales during the first half of this fiscal year, severely affecting both farmers and the milk processing industry.
In the context of the broader economy, the government had projected overall economic growth at 3.1% for this fiscal year, but the IMF’s forecast remains more conservative, suggesting growth may fall below 3%. The Federal Board of Revenue (FBR) is also grappling with the effects of the slowdown, projecting a loss of Rs450 billion in tax revenue during the first eight months of the fiscal year.
Despite these challenges, the SBP remains cautiously optimistic. The central bank points to high-frequency indicators such as automobile sales, petroleum products, cement, and private sector credit, which suggest that some economic activity is picking up. However, these positive signals have yet to fully materialize in the LSM sector, where several sub-sectors, such as sugar and iron and steel, have dragged down overall performance.
In January, sugar production fell by 16%, and iron and steel output dropped by more than 11.5%. On the other hand, the automobile sector recorded positive growth, with increased production in tobacco, textiles, clothing, and transport equipment also contributing to some industry gains.
The government’s winter electricity tariff reduction package, aimed at easing the burden on both industrial and residential consumers, has had minimal impact so far. Power generation declined by 3% in February, suggesting that the LSM sector’s performance for the month will likely remain negative.
Pakistan’s heavy reliance on imported raw materials for industrial production continues to pose a significant challenge. While the government briefly relaxed import restrictions earlier this fiscal year, it reversed the trend in February to reduce imports to $4.7 billion, primarily to manage external sector pressures. This has helped stabilize the external sector to some extent, though it also limited the availability of materials needed for production.
Looking ahead, the SBP maintains a growth forecast of 2.5% to 3.5%, despite the current downturn in the LSM sector. The central bank hopes that momentum in key sub-sectors will gradually offset the negative impact of struggling industries, providing a foundation for recovery in the months ahead.
