IMPACT OF INFLATION, UNEMPLOYMENT, AND EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH AND STABILITY IN PAKISTAN

Abstract

This study examines the dynamic interplay between inflation, unemployment, and exchange rate volatility and their combined impact on economic growth and macroeconomic stability in Pakistan over the period 2015–2026. Drawing on recent macroeconomic data and policy developments, the paper highlights Pakistan’s transition from a balance-of-payments crisis toward a phase of cautious stabilization under International Monetary Fund (IMF)-supported reforms. The findings indicate that while headline inflation declined sharply from historic highs in 2023 to single digits by 2025, core inflation remains persistent due to structural rigidities, subsidy withdrawals, and forward-looking expectations, reflecting limitations of the traditional Phillips Curve framework in Pakistan. Despite modest GDP recovery, unemployment particularly among youth and educated individuals continues to rise, revealing a pattern of “jobless growth” driven by skills mismatches, weak industrial absorption, and limited private sector expansion. At the same time, exchange rate stabilization and improved current account balances have strengthened foreign reserves; however, high exchange rate pass-through effects continue to transmit external shocks into domestic inflation and increase the burden of external debt servicing. The study further identifies structural constraints, including energy sector inefficiencies, circular debt, low tax-to-GDP ratio, and vulnerability to climate and global economic shocks, as key impediments to sustainable growth. Additionally, the persistence of poverty, declining human development indicators, and rising inequality underscore a critical disconnect between macroeconomic stabilization and social welfare outcomes. The paper concludes that achieving durable and inclusive economic growth in Pakistan requires a balanced policy approach that goes beyond stabilization, emphasizing structural reforms, human capital development, labor market alignment, and export competitiveness to ensure long-term economic resilience and stability.