Pakistan is experiencing a manufacturing recession. Nearly all growth figures are in red, as indicated by the Pakistan Bureau of Statistics (PBS) Quantum index numbers for Large Scale Manufacturing (LSM) industries. In FY19, production for cement dropped by 0.13 percent (the drop cushioned by an increase in exports), while steel billet production (which is used to make long steel products like rebars used primarily in construction) dropped by 31 percent. In the July-Aug period, cement and billets dropped by 5 percent and 33 percent respectively. Demand for construction and building materials has visibly shrunk. The bells, however, had been tolled in advance—there was prior notice.
It was forewarned long before the PTI government took office that it would be facing a debilitating macroeconomic challenge. Demand compression became inevitable the moment the incoming new government realized the need to reach out to the IMF for a bailout package. The previous governments, triggered by signing of the mammoth CPEC agreement, were big on spending on brick and mortar of the country—building infrastructure and transport networks. The massive project now, however, seems less effective than it did when it was first announced. Many new projects are still not being signed on. Public Sector Development Projects (PSDP) expenditures have been subject to deep cuts.
Though existing projects in the pipeline are still on track, the economy had to shift gears into reverse. Nevertheless, when the economy is subject to austerity, purchasing power declines. People spend less and save money for the future. Hence, it is not just the reduced demand from public sector projects hitting the construction industry, but also the reduced private sector investments in new commercial and housing construction. Investor’s confidence has been found taking a sharp dive south.
While the economy has been trying to get out of the shackles of its twin deficits, another important development, the government’s effort to document the undocumented properties, is taking place. This has added another challenge to the sector. There is an additional pressure on traders, wholesalers and retailers in the market, that function almost entirely informally, to meet certain regulatory requirements—such as showing their CNICs for substantial transactions. This is likely to hold back many traders from participating in the housing market unless they move to formalization.
It was hoped that the launch of Naya Pakistan Housing Program during FY20 would provide a much-needed impetus to the construction sector as the government moves toward building some, if not all, of the targeted 5 million houses across Pakistan. However, the massive plan has not come to fruition yet as it has been delayed. Demand and capacity utilization are both in an abysmal state as new expected projects, including the NPHP, have taken a backseat.
In FY16, both major construction sub-sectors cement and steel had embarked on capacity enhancements in anticipation of massive CPEC-led growth, not taking into consideration Pakistan’s boom-bust cycles that happen ever so frequently, but almost always predictably. One can assume the same to happen again as capacity utilization particularly will fall through the demand slide that comes with increased capacity in anticipation of this project.
The government is contemplating a shake-up in the real estate sector which may document the sector and encourage productive investments into it. If effectively done, this may no doubt pick up demand for construction led by the private sector. Needless to say, this may take another nine months to actually translate into any substantial activity. Until then, construction sector must hold on tight.
For more analysis on housing and construction in Pakistan, please read: Housing Shortage in Pakistan: Crisis or an Opportunity?
