EDITORIAL: Pakistan Bureau of Statistics (PBS) released the Quantum Indices of Large Scale Manufacturing (LSM) which showed a negative growth of 1.78 percent July-January 2024-25 compared to the same period last year.
However, the month-on-month growth – January 2025 over December 2024 – registered a positive growth of 2.09, which indicates an upward trend that one would hope continues.
A historical perspective provides the necessary rationale for the continued negativity of LSM. In fiscal year 2018-19, the then newly-installed government inherited the largest-ever current account deficit of 20 billion dollars and was compelled to secure an International Monetary Fund (IMF) loan, as was the usual practice in previous administrations.
Reportedly, the selection of the economic team leaders, Dr Hafeez Sheikh as Finance Minister and Dr Reza Baqar as Governor State Bank of Pakistan, was partly due to their having worked in lender agencies, which it was thought would facilitate the loan approval process though disregarded at the time was the confluence of their views with that of the lenders.
This is not to argue that previous administrations had either challenged or vigorously proposed in-house policy reforms with lender agencies, given that Pakistan had by 2018 secured twenty-one programmes, but they tended to abandon programmes once the balance of payments position improved.
The luxury of abandoning programmes was not available to the then government, or has been since, as there was a steady erosion of economic fundamentals due to the sustained failure to implement reforms.
Sheikh and Baqar agreed to loan conditions that were not only very harsh but upfront, which essentially implied severely contractionary monetary and fiscal policies; however, the IMF stayed these conditions on all borrowing countries due to Covid 19, which led to a containment of LSM decline to negative 2.32 percent in 2018-19.
In the subsequent fiscal year, the onset of Covid 19 in March/April 2020 accounted for negative 9.8 percent LSM growth.
In the following two years after the lifting of restrictions on movement of as well as the uptick in aggregate demand that had been dampened due to restrictions on movement, LSM grew by 11.2 percent in 2020-21 and 11.7 percent in 2021-22. In the following year 2022-23, the first full year of Shahbaz Sharif-led government – LSM registered negative 10.3 percent, the highest negativity in recent years.
The reason: violation of IMF conditions in October that year, which led to not only suspension of the ongoing programme but also freezing of pledged support by the three friendly countries – China, Saudi Arabia and the United Arab Emirates – and their insistence that the flows will be restored only if Pakistan was on an active Fund programme.
In 2023-24, LSM registered positive 0.92 percent and the negativity this year must partly be sourced to contractionary fiscal and monetary policies under the ongoing Fund programme, inclusive of high utility tariffs, a major input in manufacturing, a source of very serious concern.
Government supporters cite the massive rise in credit to the private sector as indicative of an upswing in months to come – from 246.8 billion rupees July to 16 February 2023-24 to 742.1 billion rupees in July to 14 February 2025, yet reports backed by the performance of LSM indicate that the tripling of credit has been parked in the stock market.
LSM contributes 9.7 percent to GDP and dominates the overall manufacturing sector accounting for 76.1 percent of the sector’s share, with small and medium manufacturing accounting for only 2.12 percent of GDP and 16.6 percent of the sector share. In addition, it has considerable employment generation capacity. Pakistani governments have typically supported LSM through fiscal and monetary incentives, which are no longer possible under the current IMF programme.
The way forward lies in the Fund’s working paper dated 30 September 2022, which contends, among other things, that “potential externalities include coordination failures, stemming from the presence of specialized inputs or skills, or from knowledge spillovers; and informational externalities, arising because firms do not know ex ante which products are most likely to succeed.
The proposed intervention should represent the best feasible manner of tackling the externality. It must pass the appropriate cost-benefit test, which considers alternative uses for public funds, and any distributional and social implications.
Further, the risk of government failure must not undermine the case for the intervention. This risk may be mitigated through an emphasis on maintaining competition, including by supporting sectors rather than specific firms, and by emphasizing trade openness.“
Copyright Business Recorder, 2025
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