iba
Alumni Magazine
January - June 2021

ARTICLE BY SYED ALI KASHIF , MBA CLASS OF 1996,IBA,KARACHI
IBA REGISTRATION # IBA-EXEC-0129/94
Dated : 31ST JANUARY, 2021

A Phillips curve shows the tradeoff between unemployment and inflation in an economy.Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy that shifts the aggregate demand curve to the right.Contractionary fiscal policy consists of tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures. Expansionary fiscal policy consists of tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession.

In an ideal economy, real GDP would expand over time at a brisk and steady pace, the price level,as measured by the GDP deflator or Consumer Price Index, would remain constant or only rise slowly.The result would be neither high unemployment nor spiral inflation.Full employment is hard to define.Anybody could interpret that 100% labour force is employed.But such is not the case. Some unemployment is normal and warranted.Now coming to types of unemployment.There are three types of unemployment:Frictional,Structural & Cyclical.Frictional unemployment means search+wait unemployment,i.e the labour force is either searching or waiting to take up jobs and hence are frictional unemployed.Then, there is structural unemployment which is due to change in the structure of jobs.Lastly, there is Cyclical unemployment which is due to deficient demand or recessionary unemployment. We can interpret that full employment is achieved when cyclical unemployment is zero. From our perspective, for the most part we have Cyclical unemployment in Pakistan.So in our country full employment will be achieved when Cyclical unemployment is zero.

After the lapse of second year in the government, the PTI political setup is perceived to have brought the country on the cusp of economic meltdown that is marred with unemployment and price-hike. This price instability is by all means artificially created by disturbing the equilibrium between supply and demand of commodities.Though even in advance countries like United States, there is no smooth sailing for the government as such. It all add up to that we are the habit of critising the governments but it takes an incisive analyst to size-up the scenario behind all this. Moreover if there were no resurgence of problems in any country, then every country’s democratic setup would have been utopia-the perfect democracy.The same is the case with the PTI government, apparently.We have to give the present government the leeway to rise to the occasion. So that is it can deliver in reducing price-hike and unemployment.

Average inflation rate for the next fiscal year is projected at 6.5%, which is lower than the IMF forecast of 8%.Prospects for economic growth even before emergence of Covid-19 phenomenon were eclipsed by higher inflation and interest rates, negative LSM growth, weaker exports(expected growth rate 1.5%) and imports(expected growth rate 1.1%) & the trade deficit(expected 7.1% of GDP), sluggish resource mobilisation, uncertainty surrounding hot money inflows and above all tough IMF programme related conditionalities. The IMF programme brought stabilisation but at the cost of economic growth. High policy rate, which is at 7% and exchange rate and taxation reforms have increased cost of doing business and have hampered industrial growth.

Let us take a look at the wholesale prices in Pakistan which rose 3.3% year-on-year in August of 2020, up slightly from a 3.2% increase in July. It was the highest rate since April, mainly driven by prices of food, beverages & tobacco, textiles, apparel & leather products (10.9% vs 10.2%); agriculture, forestry & fishery products (10.1% vs 10.7%); metal products, machinery & equipment (13.4% vs 13.8%). In contrast, cost continued to plunge for other transportable goods except metal, machinery & equipment (-14.3% vs -13.4%). On a monthly basis, wholesale prices were up 1.3%, after jumping 5.4% in the previous month. .The GDP which is proposed to be at 2.3% in third year in power of the PTI government. The 2.3% Gross Domestic Product (GDP) growth target for next fiscal year is almost equal to population growth rate, which means that unemployment will increase in the next fiscal year too. It is,therefore, not surprising that economic growth in Pakistan contracted to -0.4% in 2019-20 when the country already had weak economic growth of just 1.9% in the previous year.

Coming next is the Unemployment rate. In Pakistan, the unemployment rate measures the number of people actively looking for a job as a percentage of the labour force. The same was at 5.8% in the end of PML-N government, which was swollen to 8.53% with more than one million people unemployed at the end of first year of the in power of the PTI government. As per planning commission reports this figure is to become yet even higher with proposed figure at 9.6%, making over 850,000 more people unemployed by the end of the coming fiscal year.The statsistics show that from 1985-2019, the historical lowest unemployment rates were 3.10% and highest in 2019-20 at 8.53%.

The situation in the job market is perceived to be very precarious and signs of improvements are yet to be seen in the imminent future coming one year.The projected economic variables such that GDP growth rate of 2.3%, Inflation 6.5%, Unemployment rate 9.6%, Current Account deficit 1.6%, Investment-to-GDP ratio of 15.8% are expected to translate into Agriculture growth rate of 2.9%, Industrial growth rate of 0.1%, Services sector growth rate of 2.8%, and Manufacturing sector growth rate of -0.7%. These variables are not in line with the economic objectives of generating employment oppurtunities and reasonable demand for economic commodities.Therefore the economic outlook is gloomy and merits serious considerations and paying heed on behalf of economic managers of PTI government. But in contrast, the GDP growth target is being set below 2% with the finance ministry projecting only 1.8% growth in the next fiscal year.

The import demand, despite fall in crude oil prices, is likely to increase marginally but the export pick-up will not be able to neutralise it.The economy is far from expected to generate adequate jobs in this scenario. When the economy fails to generate enough jobs for all those who are able and willing to work, potential production of goods and services is irretrievably lost.

The reduced economic demand, low FDI, widening trade and current account deficits and flight of capital will propel further unemployment. The economic objectives of meeting full employment level requires the orchestration of all the above variables in an upward and positive direction and the production factor should be driven up and cost of production should go down. These are what the imperitives of the current economic scenario in Pakistan.