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 SAPsThe various govt.s since 1988 have had no independent or original economic program of their ownThe SAPs are so minutely detailed that the govt has little room to be innovative, and it merely follows the steps outlined in the document

HistoryLong association with the IMFFirst loan: 1958Standby agreement worth SDR25 millionLoan cancelled prior to the expiration date, and the entire amount of the loan went unusedAyub govt: 2 more standby agreements, both with a duration of 1 years eachZ.A. Bhutto govt.: 4 more standby loansPrior to the mid-70s, stabilization and SAPs did not play a major role in the management of the economies of the third world.

HistoryThe nature and extent of IMF involvement changed drastically since the 80s1980: 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 programSharifs govt. was also bound by the covenants of the agreement

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

HistoryWhen BB comes into power for the second time, her govt. is again handed a pre-prepared, detailed program, which she was expected to endorse1994: 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.

HistoryThe 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

HistoryPakistan was known as a one tranche countryWith 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 WBNevertheless, 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

HistoryBased on the aboveThere are major political connotations to the SAPs in the context of PakistanA number of foreign and domestic interests are at workHow 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 programStructural adjustment programs are very specific and are designed in detail:Goes into the minute detail of everythingReferences to trivial concerns, such asTelephone chargesDeregulation of bus faresGas prices charged to HH consumersWater and sewerage tariffsTaxes and user charges for roads, rails and aviation

An examination of the 1988 programLarger issues which the1988 program addressed:Improve financial internal and external balancesIncrease savings rate (esp. in the public sector)Encourage private sector investment

An examination of the 1988 programKey objectives:Reduce the overall budgetary deficitContain the rate of inflationReduce the external current account deficitReduce the civilian external debt-service ratioIncrease gross official foreign exchange reservesContain the growth of domestic credit and money supply in line with the growth of nominal GDPSustain real GDP growthThree key areas of reform: fiscal policy, foreign trade policy, and the financial sector

An examination of the 1988 programFiscal PolicyEmphasis put on resource mobilizationIncrease tax revenue elasticity Gradually impose sales tax on imports and also on domestically produced goods (GST)Restructure the income tax systemIncrease prices and user charges of utilitiesIncrease charges for higher edu and healthTake measures to strengthen the tax administrationReduce the growth of current expendituresLower/eliminate subsidies on fertilizersTighten control over provincial expenditures, so that they make efforts to generate their own revenues

An examination of the 1988 programTradeNon-tariff barriers to be replaced by tariffsReduce the number of banned commodities from 400 to 80Reduction in the maximum tariff ratesStreamlining the entire tariff structure on imports, and getting rid of concessions to certain sectorsIncrease exports, particularly higher-valued exportsPrivate sector to be permitted greater involvement in the export of rice and cotton

An examination of the 1988 programFinancial SectorRemove controls so that this sector plays an important role in allocating resourcesImprove efficiency and profitability of the banking systemIncrease the autonomy and accountability of public sector financial institutionsTighten prudential regulationsStrengthen the legal framework for debt recoveryEstablish a credit information bureau within the State Bank

An examination of the 1988 programFinancial Sector (contd):Abolish negative real interest rates on concessional credit programsMake interest rates more responsive to market conditionsLimit the directed credit schemesEncourage the establishment of private banksGovt expected to pursue cautious domestic credit policies so that inflation remains under controlMonetary expansion to be kept in line with nominal GDP

Achievements and Failures of the 1988 ProgramHow can we determine the extent of its success?Identify program targets and then examine whether those targets were metTargets?GDP growth rates of 5.5% or above each yearIncrease, and improve the efficiency of, investmentDeregulation, increase imports, adjustment in administered pricesBetter fiscal efforts

Achievements and FailuresFiscal Policy: implementation was weakest in this areaTax revenues as a %age of GDP remained stagnantSteps taken in taxation: numerous income and wealth tax exemptions were eliminated; simplification and rationalization of the tax structure; improved tax administrationNumber of tax payers and coverage remained low121 commodity categories exempt from the GST, so progress in reducing concessions remained limitedDebt to GDP ratio failed to improve

Achievements and FailuresTrade and Balance of Payments: Step-wise reduction in maximum tariff ratesElimination of many NTBsImport licenses were abolishedTrade liberalization encouraged the import of goods and servicesDeterioration in the services balanceExports increased sharply (11.5% p.a.) Sharp decline in worker remittancesNoticeable increase in FDI and foreign portfolio investment

Achievements and FailuresFinancial SectorResident Pakistanis were allowed to open foreign currency accounts in PakistanBanking procedures were liberalizedBanks were authorized to increase interest ratesMCB and ABL were sold to the private sector10 new private sector comm banks and 8 investment banks were sanctionedIncreased activity and capitalization in the stock marketAuction of govt debt initiatedRate 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 FailuresLiberalization and Privatization:A forceful program of liberalizing the economy from govt control undertakenImport licensing was abolishedRegulatory restrictions abolishedRegistration of technical and foreign loansProcedures for employment of foreign workersAreas where previously only the govt. sector could invest were opened to the private sectorPower generation, commercial and investment banking, and air and sea transport

Achievements and FailuresOther Areas:AgriculturePerformance of the agricultural sector, particularly cotton, improved significantlySubsidies on pesticides, seeds and agricultural machinery were eliminatedFormal controls over the price of urea liftedPrices of fertilizers adjusted upwardsIndustryIndustrial value added increased by 6.3% p.a.Large investments undertaken in all major energy sourcesCotton industries dominted

Achievements and FailuresDomestic savings increased (due to FCDs)Energy prices increased by an average of 4% in real termsTelephone calls were subjected to excise duty, earning substantial revenue

WBs own opinionWhile 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 program4 key indicators which reflect the state of an economy:GDP growth ratesBudget deficit as a %age of GDPCurrent account deficit/GDP ratioInflation rateThe 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 programWilliam McCleary (WB):Pakistans economy was doing well for itself, and then the IMF intervened, after which it did somewhat better for a few yearsPakistans economy did well because the conditions imposed on it were being followed, and because the govt. of Pakistan was thinking like the IMFThe IMF/WB policies were sound and things went bad because of the poor management of the government

WB/IMFs evaluation of the 1988 programMohsin Khan (IMF):The changes that have been made, as far as openness and outward orientation are concerned, have been marginalsavings/investments were off targetLarge fiscal deficits persistedEfforts at resource mobilization were not successful

Microeconomic effectsThe impact was sever particularly on labor and the poorGST and the subsequent inflation hurt the poorCuts in govt. hiring to release pressure on govt. expenditure increased unemploymentPoverty, after having decreased in the 70s and 80s, has returned to Pakistan following the IMF programsLow 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. itselfForeign patronage of Third World Countries has been the normLocal 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 yearsForeign aid has been one of the sources of development and growth in PakistanEarly Ayub period1965 Soviet invasion: Pakistan in USs political disfavourZia resisted external pressure from the IMF and WB, since he was in a position to do soPost 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 stateBOP is in critical deficitBudget deficit is highRampant inflationGrowth 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 good1980s: all the main economic indicators showed very decent trendsTill 91-92, the economy continued to do quite wellGDP growth rates at around 5% p.aPrivate investment increasing at 20% p.a since 1988Exports increased substantiallyOverall, the economy showed signs of immense prosperityPakistans 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 GDPGDP per capita was 20% less than that in 1980Pakistan 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?