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There has been a great deal of euphoria about the stabilisation of the economy of Pakistan. This is amply demonstrated by the quantum decline in the rate of inflation.

The year-to-year increase in December 2024 of the Consumer Price Index (CPI) was only 4.1 percent. This is in comparison to the rate of inflation in December 2023 of as high as 29.3 percent, and 24.5 percent in December 2022.

The previous week’s article by this writer on Stabilisation versus Growth highlighted the tradeoff between achieving the improvement in the current account of the balance of payments and reducing the rate of inflation with the resulting containment of growth of the economy.

The striking fact is that Pakistan has probably witnessed the lowest GDP growth rate in the period of any five years in the years, 2018-19 to 2023-24. The average growth rate recorded in these five years is only 2.6 percent.

This is only marginally above the annual growth rate of population. Therefore, the people of Pakistan have seen hardly any increase in the real per capita income over these five years.

Of course, there is need to recognize that this is not all due to the restrictive policy stance including very high interest rates to reduce private investment, physical containment of imports of inputs restricting domestic production, massive cutback in federal development spending and big increases in indirect taxes.

There have been two very large exogenous factors fundamentally limiting growth of the economy. The first was the mega pandemic, COVID-19. This led to large-scale shutdowns and interruptions in 2019-20.

The year, 2022-23, then witnessed the worst floods in Pakistan’s history. The total damage to the economy due to these floods is estimated to be as much as $30 billion. It is not surprising that the GDP growth rate was negative in both 2019-20 and 2022-23.

The fundamental question is what impact the five-year scaling down of the GDP growth rate to only 2.6 percent has had on labor market conditions in the country? What is the current unemployment rate in the country and what has happened to the level of real wages?

Answers to those questions will also highlight the impact of worsening economic conditions on the incidence of poverty in the country. Estimates place this at over 41 percent currently. Almost 100 million people of Pakistan are living below the poverty line.

A contemporary estimate of the unemployment rate in Pakistan is not available. The last nationwide Labor Force Survey of the Pakistan Bureau of Statistics was in 2020-21. Historically, this survey used to be carried out once every two to three years.

However, no survey was undertaken even in 2023-24, presumably because of the exceptional workload resulting from the Population and Housing Census in 2023.

The Labour Force Survey of 2020-21 revealed that the size of the labour force in the country was 71.8 million, implying thereby a labor force participation rate of almost 45 percent of the population aged 10 years and above. The number employed was 67.3 million.

Consequently, the number of unemployed workers was 4.5 million. This implied that the ‘open’ unemployment rate was 6.3 percent. If the number of workers with only part-time or casual low wage employment is included, the overall unemployment rate was 7.9 percent.

The corresponding ‘open’ unemployment rate according to the Labour Force Survey of 2017-18 was 5.8 percent. Therefore, already by 2020-21, an increase in the ‘open’ unemployment rate had become visible. Inclusive of ‘disguised’ unemployment, the overall unemployment rate in 2017-18 was 6.9 percent.

The annual growth rate of the labour force of Pakistan is 2.7 percent. As such, the size of the current labor force is almost 80 million. Annually, the increase in the number of workers is almost 2.2 million. Therefore, if the number of unemployed workers is to remain unchanged then over 2 million jobs have to be created in the process of economic growth in the economy.

An analysis of the historical relationship between GDP growth and employment reveals that a 1 percent GDP growth rate increases the number of jobs in the economy by 0.7 percent, equivalent to almost 470,000 jobs. As such, if the incremental labour force is to be fully absorbed the GDP growth must be at least 4.7 percent during a particular year.

However, as highlighted above, the average GDP growth rate over the last five years, from 2018-19 to 2023-24, has been only 2.6 percent. This clearly indicates that the ‘open’ unemployment rate in the country has increased in an exponential manner.

Based on the relationship between GDP and employment growth in the country, the estimated ‘open’ unemployment rate in the current year is as high as 9.4 percent.

If the underemployment is included, the overall unemployment rate rises to a double-digit rate of 10.8 percent. This is one of the highest unemployment rates ever observed in Pakistan.

There are likely to be even higher unemployment rates for different categories of workers. For example, it is likely to be above 13 percent for female workers and close to 15 percent for youth entering the labour force. It is estimated that the number of ‘idle youth’ in the country has now exceeded 20 million.

Turning to the trend in wages, the PBS includes in the CPI an Index of Construction Wage Rates. This includes the wages of both skilled workers, like plumbers and masons, and unskilled workers. The base year of the index is 2015-16.

The Construction Wage Index stands at 221.4 on December 2024 in the urban areas. However, the CPI is significantly higher at 261.7. Therefore, with the real wage index at 100 in 2015-16, it now stands at 84.6.

Historical analysis reveals that the real wage index had risen to 105.1 in December 2021. Therefore, there has been a big drop in real wages of almost 20 percent in the last three years. Clearly, nominal wages have not kept pace with the big increase in the price index at a time of worsening labour market conditions due to low GDP growth, especially in the industrial sector of the economy.

Therefore, we have a very adverse situation with a higher unemployment rate approaching 10.8 percent and with a fall in real wages of over 20 percent in the last three years in the case of construction workers. An analysis of corporate sector financial information generated by the SBP reveals that even in large companies, nominal wages have not kept pace with the rise in the consumer price index.

Overall, the time has come to review the options for changing the tradeoff between stabilization and growth. The first quarter has revealed less than 1 percent growth in the GDP and even negative growth in the large-scale sector.

The targeted growth rate agreed with the IMF for 2024-25 is 3.2 percent. Therefore, some space needs to be created for higher growth including further reduction in interest rates, rationalization of energy tariffs, some scaling down of the real effective exchange rate, higher rate of implementation of development projects and shifting of the extreme tax burden on the industrial sector to other sectors. There is a dire need to prevent more unemployment and a higher incidence of poverty in the country.

Copyright Business Recorder, 2025

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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