Unemployment — a hard nut to crack

If you think the budget for the upcoming fiscal year (FY25), beginning July 1, can help the economy create enough jobs for the millions of jobless people, you are too optimistic. And if you think that the budget can help reduce poverty, you need to differentiate between the ways in which people are lifted out of poverty for good and governmental cash transfers that mitigate their financial hardships temporarily.

Admitted that the increased size of the Benazir Income Support Programme (BISP) — Rs592 billion — would partly help poor households from starving. But that does not mean they would rise above the poverty line and would start making more than $3.65 per day per person. On the contrary, those receiving the cash transfers can be expected to remain dependent on them in the near future as well.

Only a fraction of BISP beneficiaries (9.4 million as of end of May 2024) get funding for their children’s education. When those children grow up, they can, however, be expected to earn more than their parents and get out of poverty. This may take several years.

A small number of men and women who are learning some skills under BISP joint ventures with local and global institutions can also be expected to come out of poverty if new job opportunities come up and if the environment for entrepreneurs becomes conducive. That said, enlargement of BISP, from Rs466bn to Rs592bn, is appreciable.

There is no targeted move aimed solely at creating jobs or reducing the incidence of poverty in the short term

Pakistan Economic Survey released ahead of the budget is silent on the current situation of the country’s labour force and unemployment rate. The authors of the survey wrote that Labour Force Survey for 2022-23 “could not be undertaken due to engagement of PBS (Pakistan Bureau of Statistics) with the 7th Population of Housing and Population census.” So, let’s turn to other authentic sources for some stats on this subject.

By the end of 2023, about 81m Pakistanis were eligible and willing to work. Of them, 5.7 per cent or 4.62m were jobless, according to the World Bank. This is the most conservative estimate of joblessness in Pakistan.

According to the International Monetary Fund estimates, the unemployment rate was 8.5pc in 2023. This means that about 6.9m Pakistanis were unemployed by the end of last year. So, a million-dollar question is whether and how the budget of FY25 is helpful in addressing the critical issue of unemployment.

Well, on the face of things there is no targeted move that is aimed solely at creating jobs or reducing the incidence of poverty in the short term. On the contrary, the private sector on whose shoulders lies the responsibility of job creation is wondering whether the post-budget environment would offer opportunities for even a modest growth.

After the wholesale withdrawal of tax exemptions in the budget (though not unjustifiably), the input cost of many raw materials for industries will become costlier. A very high rate of increase in civil servants’ salaries (up to 25pc) will force private-sector employers to increase their employees’ wages. And ongoing increases in prices of electricity and gas, mainly due to the inefficiencies of the power sector in the past, will continue to push the cost of production up for all productive sectors. So, how can industries even think of making net additions to their workforce?

Even when and where they need extra workers, they will naturally try to ensure that fresh hiring should not lead to overall expansion in the workforce. They will choose to replace less efficient workers with efficient ones to lower their business’s overall per-worker cost. This will be a more likely scenario for large-scale and export-oriented industries and sizable and well-capitalised businesses in the services sector, such as financial institutions, transport services, and top-tier wholesalers and retailers. So, will there be job creation in the agriculture sector then?

The proposed increase in the size of the National Public Sector Development Programme — from Rs2.39 trillion in FY24 to Rs3.79tr in FY25 — may theoretically help in creating more jobs. But there are two things worth considering. First, the planned spending on development projects by both the federal government (Rs1.4tr) and provincial governments (Rs2.095tr) partly reflect the higher cost of projects due to high inflation rates in FY24.

Secondly, historically, development spending is revised downwards during the year as the government fails to meet unrealistically high resource mobilisation targets. Besides, except for public-private partnership projects (for which the FY25 federal allocation is only Rs100bn), mainstream development spending by federal and provincial governments remains vulnerable to massive corruption. And that reduces actual spending on projects — and thus, eclipses prospects of large-scale job creation.

For FY25, the GDP growth target has been set at 3.5pc with a projected rate of average inflation of 12pc. But since the tax revenue target, set around Rs1.3tr, is more than 40pc of this year’s revenue target (with direct taxes projected to contribute Rs5.51tr) and non-tax revenue target at Rs4.85tr, slippage in tax and non-tax revenue collection is bound to occur. In that case, development spending will be the first line of fire.

The indirect tax collection target of Rs7.46tr could be met with some efforts — thanks to higher tax rates imposed on both salaried and non-salaried classes and planned withdrawal of tax exemptions from most products and services, including food products.

This measure may, however, make it difficult to keep inflation at 12pc. Or at least, it can squeeze room for the central bank to cut interest rates as frequently and as deeply as needed to boost the private sector’s production. The recent interest rate reduction — from 22pc to 20.5pc — was welcomed by the private sector, but many business lobbies termed it too little to revive industrial output.

Published in Dawn, The Business and Finance Weekly, June 17th, 2024