Transcript l24

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

1.
General: applied to countries irrespective of
differences
Trade policy: Export led path
1.
2.
2.
Competitive exchange rate: devaluation
Lifting trade restrictions (quotas)
Fiscal Policy
1.
2.
3.
Reduce fiscal deficits: Cut down public expenditure
Reform tax system
Cut or eliminate energy subsidies
3) Public enterprises
1.
2.
Close down unprofitable public enterprises
Stop preferential treatment to public enterprises
4)Financial Sector
1.
2.
3.
Improve regulatory framework
Relax interest rate ceilings
Restructure institutions
5) Industrial Policy
1.
2.
Remove protectionism
Encourage industries that produce for export
purposes
6)Agriculture
1.
2.
Remove bias against agriculture: remove protection to
industry
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
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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 (9799)
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)
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

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)
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
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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
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
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
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Reduction in the maximum tariff rates (from 125 to 100%)
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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
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

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
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How can we determine the extent of its success?
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
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
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Exports increased sharply (11.5% p.a.)
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Deterioration in services balance
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Noticeable increase in FDI and foreign portfolio investment
due to foreign currency accounts: CA deficit decreased
Achievements and Failures
Financial Sector
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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%
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
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

Performance of the agricultural sector, particularly cotton,
improved significantly
Subsidies on pesticides, seeds and agricultural machinery
were eliminated
Prices of fertilizers adjusted upwards
Industry
2.
•
•
•
Industrial value added increased by 6.3% p.a.
Large investments undertaken in all major energy sources
Cotton industries dominated
Achievements and Failures
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
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
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
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
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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
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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
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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?