Tuesday, September 23, 2014

State of manufacturing establishments in Nepal

This blog post is adapted from Macroeconomic Update, August 2014, Vol.2, No.2.

The Central Bureau of Statistics (CBS) released the findings of National Census of Manufacturing Establishments (NCME) 2011/12 in June 2014. The census is carried out every five years and it covers all manufacturing firms engaging 10 or more persons.

The manufacturing census shows an increase in the number of light manufacture activities, but a decline in the number of slightly heavier manufacturing activities, indicating the impact of load-shedding in scaling-up and sustaining higher valued-added industrial activities. Between 2006/07 and 2011/12, the number of operating manufacturing establishments increased by 18.3%, mostly contributed by the growth of food and beverages; tobacco products; apparel; leather; leather products and footwear; wood products; chemical and chemical products; rubber and plastic products; non-metallic mineral products; fabricated metal products; machinery and equipment; and furniture manufacturing. Meanwhile, textiles; printing and publishing; basic metal; and transport equipment saw a decline in the number of manufacturing establishments.

The increase in the number of light manufacturing establishments has also increased the number of employees by 14.8%, reaching 194,989 employees in 2011/12. However, the average number of employees per manufacturing establishment has declined to 48 in 2011/2 from 57 in 2001/02.

Compared to the last NCME, wages and salaries nearly doubled, reaching NRs16.4 billion. With value of inputs totaling NRs241.8 billion and value of outputs totaling NRs322.6 billion, the total value addition reached NRs80.0 billion— a 97% growth between 2006/07 and 2011/12.

The efficiency of manufacturing establishments in the use of inputs seems to be eroding as evidenced from the increase in inputs as a percentage of output, and a decline in output input ratio. Input as a percentage of output stood at 75 in 2011/12, one percentage point higher than in 2006/07. Similarly, output input ratio was 1.33 in 2011/12, lower than 1.36 in 2006/07. A better measure of the efficiency of the use of inputs is value-added output ratio, which discounts the effect of inflation. Value-added output ratio is consistently decreasing, reaching 0.25 in 2011/12 from 0.37 in 1991/92— indicating that the manufacturing firms are using inputs more inefficiently and are incurring increasing cost of inputs as well.

Labor productivity (value added per employee) increased to NRs414,000 in 2011/12 from NRs241,000 in 2006/07. However, labor productivity growth was 71.8%, lower than wages and salaries growth of 104.4% (or growth of wages and salaries per employee of 78.1%) over the same period. At an annualized average rate, while labor productivity grew by 11.4% over 2007-2012, wages and salaries increased by 12.2%.

The number of districts with manufacturing establishments has dropped to 64 in 2011/12 from 67 in 2006/07. About 88% of the manufacturing firms are located in 23 districts, with the top five being Rupendehi, Kathmandu, Morang, Sunsari, and Parsa.

About 40.7% of total manufacturing firms reported that they have not been able to fulfill market demand, primarily due to the underutilization of capital arising from load-shedding, lack of raw materials, labor shortages, lack of finance and lack of skilled manpower. Furthermore, about 84.7% of firms reported that the lack of electricity was having impact on their operations. 

Overall, manufacturing sector has been weakening over the past several years. Its share of GDP declined to an estimated 5.6% in FY2014 from 8.2% of GDP in FY2002. The average growth rate has been a mere 3.2% in the last five years.