EDITORIAL: The economic activities are slowing down. Both monetary and fiscal policies are working by design under the International Monetary Fund (IMF) programme to curtail economic demand with a view to managing the twin deficits — current account and fiscal. That would help in curbing the falling trend in the currency; it would also help to contain skyrocketing inflation.
However, such policies have an adverse side-effect — decline in employment. Pakistan has one of the highest birth rates of 22 births per 1,000 people with a huge youth bulge. The country is required to grow by 6-7 percent annually to absorb the youth attaining the employment age every year.
However, the problem is whenever the country started to grow at close to the required pace, the balance of payment (BoP) worries started growing. That is happening now as well. After the growth of 5-6 percent for the last two years, efforts are being made to slow down the economy to avert another crisis.
Due to high growth over the past two years, the official unemployment rate declined from 6.9 percent in 2018-19 to 6.3 percent in 2020-21. The growth in the textile industry, which is export-related, and the boost in housing and construction sector are the main contributors to the growing employment opportunities along with growth in every sector due to a booming economy. Now things have had to be significantly slowed down. There are a host of reasons for this predicament.
The prime reason is the growing economic worries with dwindling foreign exchange reserves. The culprit is growth in imports. The exchange rate and monetary policies are being tightened to slow down the economy. But the impact of it will be adverse on overall employment.
The global economic slowdown has a role to play as well, especially within the textile sector. The world over, commodities are in a supercycle that is generating global inflation, and to counter that, economies are raising interest rates. There are fears that this would lead to a global recession. Global demand is dipping due to high inflation and a fear of recession.
Meanwhile, the spending on energy and food is growing as inflation for these essential commodities is higher. This is reducing the buying power in other goods — like clothing. Pakistan’s main exports are in textile. Many players in the West are either cancelling (or postponing) existing orders or have stopped (or slowed down) new orders. That is putting pressure on the manufacturers in Pakistan.
Inventories are piling and textile players are finding it hard to finance working capital. Some of them have shutdown their units while some others have reduced production. This is all translating into growing unemployment.
Energy pricing and shortage of imported gas (LNG) have reduced the supply of gas to many players and some in Punjab are relying on power from the national grid, which is not reliable because of frequent outages. That is resulting in reduction in production by 10 to 20 percent. As a result, these factories are operating on reduced employment.
One of the highest growth in employment took place in the housing and construction sector where the share of employment increased from 8 to 9.5 percent in the last three years. That is bound to slow down due to imposition of new taxes on the real estate and overall exorbitant increase in the prices of construction industry inputs.
The SBP expects economic growth to slow down from 6 percent last year to 3-4 percent in the current fiscal year. The actual number could be even lower, given the fiscal contractionary policies in place. That will increase unemployment across the board in virtually all the sectors.
There is not much the incumbent government can do as any policy to generate higher employment will have to come from greater economic activities which could trigger the twin deficits through growth in imports and keeping energy prices lower than the cost. The country and the government have to live with higher unemployment for a year or two. The key is to look for a sustainable economic growth path with a focus on exports to generate the much-needed growth in employment.
Copyright Business Recorder, 2022