STRUCTURAL ADJUSTMENT

PROGRAMMES: COMPOSITION
AND EFFECTS
Lecture: 25 Chapter 14: Akbar Zaidi
 General belief in developing countries :
Washington consensus has taken over
and is influencing to suit their own
interest

 Own governments have lost all

autonomy: Dictation from WB and IMF

 Outside influence is not new

Development and Export of
Development thinking

Model suggested in 1950s and 1960s: Focused

entirely on growth ( trickle down)

 Industrialization was the mechanism: import

substitution

 Realized that agriculture was neglected 

Green revolution

 Poor human development indicators

 In late 1980s: Loans for stabilization,
involvement became more direct and
aggressive (SAP)

 1960s and 1980 as parallels: Growth was

foremost
 In 1980s lesser protectionism, market mechanism

 1990s and 1970s: Social action programs,

poverty reduction
From SAL to SAP
 1970s: Smaller role, provision of loan for B.o.P
 Mid 70s: Commercial bank loans due to
petrodollars
 Extensive, luxury consumption accumulation of debt
 Interest rates in US shot up to
18%Commercial loans no longer available to
finance projects and debt servicing
 IMF steps in :
 Stabilization: BoP, cut domestic demand , money
supply, public spending, devaluation
 Recovery and growth
 Loans of longer duration : more conditions attached
SAP: Composition
 General: applied to countries irrespective of
differences
1. Trade policy: Export led path

1. Competitive exchange rate: devaluation

2. Lifting trade restrictions (quotas)
2. Fiscal Policy
1. Reduce fiscal deficits: Cut down public
expenditure
2. Reform tax system
3. Cut or eliminate energy subsidies
3) Public enterprises
1. Close down unprofitable public enterprises
2. Stop preferential treatment to public
enterprises

4)Financial Sector
1. Improve regulatory framework
2. Relax interest rate ceilings
3. Restructure institutions
5) Industrial Policy
1. Remove protectionism
2. Encourage industries that produce for
export purposes

6)Agriculture
1. Remove bias against agriculture: remove
protection to industry
2. Discontinue subsidies
Implementation and Effects
 Large number of studies
 “We certainly cannot say whether the adoption
of programmes supported by the fund led to an
improvement in inflation and growth
performance. In fact, it is often found that
programmes are associated with a rise in
inflation and fall in growth rate”
 Fiscal cut: Fall in investment and growth,
recessionary
 Erosion of industrial base in fragile economies
due to openness
 Social unrest

 Poverty and inequality have risen

 Cuts in health and education expenditure

 WB admits : ‘New poor’

 IMF : Solving poverty is not the aim

 Change in IMF packages now

STRUCTURAL ADJUSTMENT
PROGRAMMES IN PAKISTAN
Chapter 15
Introduction
 Marked difference in constitution and
application of programe prior to and post
1988

 Since 1988, Pakistan’s economic policies,

management & performance have almost
totally been determined by the country’s
adherence to IMF/WB sponsored SAP’s

 The SAP’s are so minutely detailed that the

govt has little room to be innovative, and it
merely follows the steps outlined in the
document no independent or original
economic program
 History
 First loan: 1958
 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 year each

 Z.A. Bhutto govt.: 4 more standby loans

 Prior to the mid-70’s, stabilization and SAP’s

did not play a major role in the management
of the economies of the third world.
History

 1980: Pakistan entered into a long-term

Extended Fund Facility (EFF) for a period of
3 years under Gen. Zia
 Amount was 3 times the amount lent post 1947

 Another long term agreement was signed

by the interim govt. after the death of Zia
 When Benazir’s govt. overtook office the very
next day, it ratified the already agreed program
 Sharif’s 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

 Agreed to policy framework paper

 Laid the basis for the more comprehensive,

long-term agreement made in 1994

 Was the GoP initiating the program based on

its own needs, or was it imposed by the WB/IMF
members?
History
 BB comes into power for the 2nd time:
handed over a pre-prepared, detailed
program to endorse

 Signed the extended 3 year facility

 Moeen’s govt. was responsible for framing

the program and getting it approved by
the IMF; BB’s govt. just ‘stamped’ it.
History
 The only time a democratically elected
govt. itself took a loan was Nawaz
Sharif’s second govt (97-99)

 A total of 4 agreements made b/w this

govt. and the IMF
 All 4 agreements suspended or abrogated
History
Which governments have completed programs?
 Nawaz Sharif’s second govt. completed its program or
fulfilled the agreement/ commitments to the IMF and
WB

 Musharaf: Poverty Reduction and Growth Fund (01-04)

 Previous governments (88-99) had incomplete

implementations but core policy measures –
devaluation, price, exchange rate, interest rate and
trade liberalization; public enterprise reform; and
subsidy withdrawal were implemented however
reluctant and slow they may have been in the
implementation
History
Based on the above:

 There are major political connotations to

the SAP’s in the context of Pakistan

 How much autonomy has the GoP had,

since most of these agreements were
signed by interim governments.
Implementation of the SAP’s: an
examination of the 1988 program

Structural adjustment programs are very

specific and are designed in detail
- References to trivial concerns, such as
 Telephone charges
 Deregulation of bus fares
 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

gradually to a sustainable level (4.8% by

1991)

 Contain the rate of inflation (gradual

reduction to 6.5 by 1991)

 Reduce the external current account deficit o

sustainable level (2.6% by 1991)

 Reduce the civilian external debt-service

ratio (22% by 1991)
 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 at above 5%

 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

 Raise revenue to GDP ratio from 17.6% to 20% in

1991/92

 Gradually impose sales tax on imports and also on

domestically produced goods (GST)

 Restructure the income tax system for greater equity

 Increase prices and user charges of utilities for

revenue

 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 (from 125 to

100%)

 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: competition

 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

 Abolish negative real interest rates on

concessional credit programs

 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 investment and improve its efficiency
 Deregulation
 Adjustment in administered prices
 Better fiscal efforts
Achievements and Failures
Fiscal Policy: implementation was weakest in this
area
 Tax revenues as a % of GDP remained stagnant

 Steps taken in taxation

 numerous income and wealth tax exemptions were

eliminated
 simplification and rationalization of the tax structure
 Attempts to improve tax administration
 Actual results?
 Number of tax payers and coverage remained low

 121 commodity categories exempt from the GST, so

progress in reducing concessions remained limited

Achievements and Failures
Trade and Balance of Payments: CA deficit declined
 Step-wise reduction in maximum tariff rates

 Elimination of many non tariff barriers

 Import licenses were abolished

 Exports increased sharply (11.5% p.a.)

 Deterioration in services balance

 Noticeable increase in FDI and foreign portfolio

investment due to foreign currency accounts: CA
deficit decreased
 Achievements and Failures

Financial Sector
 Resident Pakistani’s were allowed to open foreign
currency accounts in Pakistan (frozen in 1998)

 Banks were authorized to increase interest rates on

deposits

 MCB and ABL were sold to the private sector

 10 new private sector commercial banks and 8

investment banks were sanctioned

 Increased activity and capitalization in the stock
market
 Achievements and Failures
Liberalization and Privatization:
 A forceful program of liberalizing the

economy from govt control undertaken

 Power generation, commercial and

investment banking, and air and sea

transport opened to priavte investors
 Sanctioning of private investment

abolished
 Regulatory restrictions abolished
 Registration of technical and foreign loans
 Procedures for employment of foreign workers
 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
 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 dominated
Achievements and Failures

 Domestic savings increased (due to

FCD’s)

 Energy prices increased by an average

of 4% in real terms
WB’s 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/IMF’s 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 :

the SAP of 1988 has not been much of a
success
WB/IMF’s evaluation of the
1988 program
 William McCleary (WB):
 Pakistan’s economy was doing well for itself,
and then the IMF intervened, after which it did
somewhat better for a few years
 Pakistan’s 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/IMF’s 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 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
Pakistan’s 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 US’s 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
 1980’s: 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
 Pakistan’s 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 Pakistan’s 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?