Structural Adjustment

Programmes in Pakistan

Introduction
Since 1988, Pakistans economic policies,
management nd performance have almost totally
been determined by the countrys adherence to
IMF/WB sponsored SAPs
The various govt.s since 1988 have had no
independent or original economic program of their
own
The SAPs are so minutely detailed that the govt
has little room to be innovative, and it merely
follows the steps outlined in the document

History
Long association with the IMF
First loan: 1958
Standby agreement worth SDR25 million
Loan cancelled prior to the expiration date, and the entire
amount of the loan went unused

Ayub govt: 2 more standby agreements, both with a

duration of 1 years each
Z.A. Bhutto govt.: 4 more standby loans
Prior to the mid-70s, stabilization and SAPs did not play
a major role in the management of the economies of the
third world.

History
The nature and extent of IMF involvement changed
drastically since the 80s
1980: Pakistan entered into a long-term Extended Fund
Facility (EFF) for a period of 3 years under Gen. Zia
Another long term agreement was signed by the
interim govt. after the death of Zia
When Benazirs govt. overtook office the very next day, it
ratified the already agreed program
Sharifs govt. was also bound by the covenants of the
agreement

History
Another agreement signed in 1993
Signed by the interim govt. of Moeen Qureshi, a former
WB staff member
Laid the basis for the more comprehensive, long-term
agreement made in 1994
Immense overlapping of interest, over the content of
the program, between the IMF and the GoP
Was the GoP initiating the program based on its own
needs, or was it imposed by the WB/IMF members?

History
When BB comes into power for the second
time, her govt. is again handed a preprepared, detailed program, which she was
expected to endorse
1994: BBs govt. signs the extended 3 year
facility (EFF and ESAF)
Moeens govt. was responsible for framing the
program and getting it approved by the IMF;
BBs govt. just stamped it.

History
The only time a democratically elected
govt. itself took a loan was Nawaz Sharifs
second govt.
A total of 4 agreements made b/w this govt.
and the IMF:
2 EFFs and 2 ESAFs

History
Pakistan was known as a one tranche country
With the exception of Nawaz Sharifs second govt.,
none of the govt.s since 1988 completed its program or
fulfilled the agreement/ commitments to the IMF and
WB
Nevertheless, the core policy measures devaluation,
price, exchange rate, interest rate and trade
liberalization; public enterprise reform; and subsidy
withdrawal were implemented by govt.s in this
period, however reluctant and slow they may have been
in the implementation

History
Based on the above
There are major political connotations to the
SAPs in the context of Pakistan
A number of foreign and domestic interests are
at work
How much autonomy has the GoP had, since
most of these agreements were signed by
interim governments.

Implementation of the SAPs: an

examination of the 1988 program
Structural adjustment programs are very
specific and are designed in detail:
Goes into the minute detail of everything
References to trivial concerns, such as

Telephone charges
Deregulation of bus fares
Gas prices charged to HH consumers
Water and sewerage tariffs
Taxes and user charges for roads, rails and aviation

An examination of the 1988

program
Larger issues which the1988 program
addressed:
Improve financial internal and external
balances
Increase savings rate (esp. in the public sector)
Encourage private sector investment

An examination of the 1988

program
Key objectives:

Reduce the overall budgetary deficit

Contain the rate of inflation
Reduce the external current account deficit
Reduce the civilian external debt-service ratio
Increase gross official foreign exchange reserves
Contain the growth of domestic credit and money supply in
line with the growth of nominal GDP
Sustain real GDP growth

Three key areas of reform: fiscal policy, foreign trade

policy, and the financial sector

An examination of the 1988

program
Fiscal Policy
Emphasis put on resource mobilization
Increase tax revenue elasticity
Gradually impose sales tax on imports and also on domestically
produced goods (GST)
Restructure the income tax system
Increase prices and user charges of utilities
Increase charges for higher edu and health
Take measures to strengthen the tax administration
Reduce the growth of current expenditures
Lower/eliminate subsidies on fertilizers
Tighten control over provincial expenditures, so that they make efforts
to generate their own revenues

An examination of the 1988

program
Trade
Non-tariff barriers to be replaced by tariffs
Reduce the number of banned commodities from 400 to
80
Reduction in the maximum tariff rates
Streamlining the entire tariff structure on imports, and
getting rid of concessions to certain sectors
Increase exports, particularly higher-valued exports
Private sector to be permitted greater involvement in
the export of rice and cotton

An examination of the 1988

program
Financial Sector
Remove controls so that this sector plays an important
role in allocating resources
Improve efficiency and profitability of the banking
system
Increase the autonomy and accountability of public sector
financial institutions
Tighten prudential regulations
Strengthen the legal framework for debt recovery
Establish a credit information bureau within the State
Bank

An examination of the 1988

program
Financial Sector (contd):
Abolish negative real interest rates on concessional credit
programs
Make interest rates more responsive to market conditions
Limit the directed credit schemes
Encourage the establishment of private banks
Govt expected to pursue cautious domestic credit
policies so that inflation remains under control
Monetary expansion to be kept in line with nominal GDP

Achievements and Failures of the

1988 Program
How can we determine the extent of its success?
Identify program targets and then examine whether
those targets were met

Targets?
GDP growth rates of 5.5% or above each year
Increase, and improve the efficiency of, investment
Deregulation, increase imports, adjustment in
administered prices
Better fiscal efforts

Achievements and Failures

Fiscal Policy: implementation was weakest in this
area
Tax revenues as a %age of GDP remained stagnant
Steps taken in taxation: numerous income and wealth tax
exemptions were eliminated; simplification and
rationalization of the tax structure; improved tax
administration
Number of tax payers and coverage remained low
121 commodity categories exempt from the GST, so progress in
reducing concessions remained limited

Debt to GDP ratio failed to improve

Achievements and Failures

Trade and Balance of Payments:

Step-wise reduction in maximum tariff rates

Elimination of many NTBs
Import licenses were abolished
Trade liberalization encouraged the import of goods and
services
Deterioration in the services balance

Exports increased sharply (11.5% p.a.)

Sharp decline in worker remittances
Noticeable increase in FDI and foreign portfolio
investment

Achievements and Failures

Financial Sector
Resident Pakistanis were allowed to open foreign currency
accounts in Pakistan
Banking procedures were liberalized
Banks were authorized to increase interest rates
MCB and ABL were sold to the private sector
10 new private sector comm banks and 8 investment banks were
sanctioned
Increased activity and capitalization in the stock market
Auction of govt debt initiated
Rate of return on T-bills increased from 6 to 13%
Rate of return on concessionary lending scheme increased to
remove the ve real interest rate

Achievements and Failures

Liberalization and Privatization:
A forceful program of liberalizing the economy
from govt control undertaken
Import licensing was abolished
Regulatory restrictions abolished
Registration of technical and foreign loans
Procedures for employment of foreign workers

Areas where previously only the govt. sector could

invest were opened to the private sector
Power generation, commercial and investment banking,
and air and sea transport

Achievements and Failures

Other Areas:
1. Agriculture

Performance of the agricultural sector, particularly cotton,

improved significantly
Subsidies on pesticides, seeds and agricultural machinery
were eliminated
Formal controls over the price of urea lifted
Prices of fertilizers adjusted upwards

2. Industry

Industrial value added increased by 6.3% p.a.

Large investments undertaken in all major energy sources
Cotton industries dominted

Achievements and Failures

Domestic savings increased (due to FCDs)
Energy prices increased by an average of
4% in real terms
Telephone calls were subjected to excise
duty, earning substantial revenue

WBs own opinion

While performance during the adjustment
period has been strong in GDP and export
growth and in structural reforms to
encourage private sector economic activity,
it has been weaker in achieving a sustained
reduction in the fiscal deficit and in
improving external sector balances.lack
of significant improvement in poverty and
social sector indicators.

WB/IMFs evaluation of the 1988

program
4 key indicators which reflect the state of an
economy:

GDP growth rates

Budget deficit as a %age of GDP
Current account deficit/GDP ratio
Inflation rate

The latter 3 indicators were way off target, so

despite all the propaganda and fanfare, the SAP of
1988 has not been much of a success

WB/IMFs evaluation of the 1988

program
William McCleary (WB):
Pakistans economy was doing well for itself, and then
the IMF intervened, after which it did somewhat better
for a few years
Pakistans economy did well because the conditions
imposed on it were being followed, and because the
govt. of Pakistan was thinking like the IMF
The IMF/WB policies were sound and things went bad
because of the poor management of the government

WB/IMFs evaluation of the 1988

program
Mohsin Khan (IMF):
The changes that have been made, as far as
openness and outward orientation are
concerned, have been marginal
savings/investments were off target
Large fiscal deficits persisted
Efforts at resource mobilization were not
successful

Microeconomic effects
The impact was sever particularly on labor and the
poor
GST and the subsequent inflation hurt the poor
Cuts in govt. hiring to release pressure on govt.
expenditure increased unemployment
Poverty, after having decreased in the 70s and 80s,
has returned to Pakistan following the IMF programs
Low GDP growth, its sectoral distribution, lower
employment and real wages, cuts in public expenditure
and in social development

Are Governments Autonomous?

Govt.s in underdeveloped countries are
dependant on and pressurized by events,
factors, agencies and institutions outside the
realm of the govt. itself
Foreign patronage of Third World Countries
has been the norm
Local sensitivities are ignored since the govt.s
existence depends on approval from abroad

Are Governments Autonomous?

Numerous important political and governmental
decisions were influenced by Pakistans relationship
with Washington in its early years
Foreign aid has been one of the sources of
development and growth in Pakistan
Early Ayub period
1965 Soviet invasion: Pakistan in USs political disfavour
Zia resisted external pressure from the IMF and WB, since
he was in a position to do so
Post 9/11: govt.s are willing to do anything to adhere to the
Washington consensus.

Did Pakistan need to go to the IMF?

Countries that apply to the IMF/Bank have
the following characteristics:

Bad economic state

BOP is in critical deficit
Budget deficit is high
Rampant inflation
Growth rate is too low and unsustainable in the
long run

Did Pakistan need to go to the IMF?

The overall growth performance of Pakistan has been
good
1980s: all the main economic indicators showed
very decent trends
Till 91-92, the economy continued to do quite well

GDP growth rates at around 5% p.a

Private investment increasing at 20% p.a since 1988
Exports increased substantially
Overall, the economy showed signs of immense prosperity

Pakistans economy was functioning adequately

without any assistance!

Did Pakistan need to go to the IMF?

Contrast with Bolivia in 1985:
Inflation rate: 11,000%
Fiscal deficit in excess of 30% of GDP
GDP per capita was 20% less than that in 1980

Pakistan has never been in such critical conditions,

though it may have gotten there on account of following
these programs!
While Pakistans economy needs better management,
reform and alignment, does it need to run to the IMF
every 3 years?
Why does each govt. accept the stringent conditions,
more loans and more debt?