STRUCTURAL ADJUSTMENT PROGRAMMES: COMPOSITION AND EFFECTS Chapter 14: Akbar Zaidi Lecture: 25

STRUCTURAL ADJUSTMENT PROGRAMMES: COMPOSITION AND EFFECTS

Chapter 14: Akbar ZaidiLecture: 25

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: devaluation2. Lifting trade restrictions (quotas)

2. Fiscal Policy1. Reduce fiscal deficits: Cut down public

expenditure2. Reform tax system3. Cut or eliminate energy subsidies

3) Public enterprises1. Close down unprofitable public enterprises2. Stop preferential treatment to public

enterprises

4)Financial Sector1. Improve regulatory framework2. Relax interest rate ceilings3. Restructure institutions

5) Industrial Policy1. Remove protectionism2. Encourage industries that produce for

export purposes

6)Agriculture1. Remove bias against agriculture: remove

protection to industry2. 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 programKey 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


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


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 programFinancial 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 programFinancial 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


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


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 Rate of return on T-bills increased from 6 to 13%


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


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


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?

Documents

STRUCTURAL ADJUSTMENT PROGRAMMES: COMPOSITION AND EFFECTS Chapter 14: Akbar Zaidi Lecture: 25