Transcript BENAZIR and NAWAZ SHARIF

BENAZIR AND NAWAZ
SHARIF
1988-1996
Background
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political instability, slow economic growth
Inflation, rising poverty, rising inequalities
1993 and 1996: Crisis in external payments
Benazir Bhutto -December 1988 :large macro economic imbalances ;
the fiscal deficits touched a peak of 8.5% of GDP in 1987-8 and
the current account balance of payments deficits had grown further
The investment rate had stagnated for more than a decade and
spending on human resource had been greatly neglected
Shortages of infrastructure had become serious and structural
weaknesses in manufacturing and exports were constraining future
growth
Macroeconomic Management
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4.9% growth of GDP
1993-96: Inflation of over 12%
Workers remittances declined
Interest rate payments rose
Reasons for slow growth?
Low rates of saving
Governance problems
Political and financial instability
Budget deficits
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Investment remained stagnant
Private investment as share of fixed investment
declined: bulk was in manufacturing
Privatization stepped up
Energy policy of 1994 : foreign investment
Private sector in energy
Fiscal and monetary policies
1990-1996, the general price level
doubled,average annual inflation over 11% per
annum.
Domestic credit and money supply expansion
 Fiscal deficit during 1990-3: Monetary expansion
averaging 5% of GDP
 liberalization of foreign exchange controls in
1992:foreign currency deposits.
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Fiscal deficits : root cause of inflation
6% of GDP
Poor harvests after 1991-2 and structural problems
in industry and exports
Raw cotton production dropped by one third.
Exports volume growth was only 1.1% per annum in
1994-96.
Debt Trap
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rapid growth in government debt: domestic public
debt increased from Rs 290b 1988 to Rs 909b
by1996
Public sectors external debt nearly doubled
Rise in ratio of debt to GDP
1996 :82% of GDP
Interest payments: 6.1% of GDP
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external debt burden increased to US $32 billion in
1997
The ratio of total debt service payments to exports of
goods and services rose from 20.9% to 26.9% over
1990-5.
Multilateral lending from the World Bank. IDA and ADB
accounted for 75% of net external debt inflows during
1990-5.
The large and relatively soft term flows from official
sources helped Pakistan avoid large scale borrowing
from private creditors and limit short-term debt.
Excessive Additional Taxation
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The level of additional taxation ranged from a high
of 2.4% of GDP in 1994-5 to as low of 0.6% in
1995-6
The additional taxation proposed amounted to an
extraordinary 8.2% of GDP
understandings with IMF under various standby
agreements
EFFECTIVENESS OF PUBLIC
SPENDING
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198o’shurt 1990’s hurt long-term growth
shortages in infrastructure, especially in power and
roads.
The hub power project was completed in 1997
The sale of the part of the shares of PTCL
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After 1991: large foreign currency deposits and inflows
of portfolio investment
resident Pakistanis, including firms and companies, were
allowed accounts on the same basis as non-residents
Growth in resident and non-resident foreign currency
accounts met about one quarter of the foreign
exchange gap during the five years ending 1997.
the volatility of these deposits
As the economic crisis deepened during 1995-6, clear
switch towards dollar balances
Economic Reforms
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Poor macroeconomic management, especially poor progress on
reducing fiscal deficits
The reforms were centered on major agreements with IMF and the
World Bank in 1988 and 1993 for the balance of payments support
removal of foreign exchange controls and the acceleration of the
pace of privatization in 1991-2 under Nawaz Sharif’s government
trade policy liberalization, financial sector reforms, privatization,
attracting new foreign private investment in the energy sector, the
record was mixed.
Most of the structural reforms were supported by the World Bank
lending.
Relationship with foreign institutions
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There was heavy involvement of IMF and the World
Bank in the design of economic reform and
adjustment programmes
1996: Another agreement with IMF, widespread
scepticism
World Bank did not appear to have exercised its
considerable leverage in Pakistan sufficiently to
effect long term policy changes.
IMF
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IMF entered into three major agreements with Pakistan:
November 1980; December 1988 and February 1994.
Over 1980-3, IMF provided gross disbursement
equivalent to more than US $ 1.7b
Under the 1988 structural adjustment facility from IMF,
the fiscal deficit was to be reduced from 8.5% in 19878 to 4.8% in 1990-1.
The 1994 programme once again aimed at a sharp
reduction of fixed deficit to 4% in 1994-5 to 3% in
1995-6.
Borrowing from the World Bank:
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Unlike IMF, which was meant to provide only temporary balance of
payments support, the World Bank and IDA provide long term development
assistance.
The World Bank and IDA provided US $ 2.5 billion during 1990-5.
World Bank has been concerned with issues such trade policy, energy
pricing, agricultural prices, and cost recovery in agricultural.
energy sector :US $ 1.5
raise the share of internally generated resources for WAPDA’s investment
programme to 40%
Indus Basin irrigation system :much less successful in influencing the
improvement system efficiency
education, health and water supply : over US $ 1.2 billion during 1986-95.
World Bank’s lending to Pakistan actually increased to US $ 625 million in
1993-5 from US $ 515 million in 1990-2.
4 Reforms Area:
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1) Privatization and Private Sector Development:
1991:Nawaz Sharif governnmet  broad based programme of
privatization, deregulation and relaxation of controls on foreign exchange
and investment.
Main aim: reduce the drain of government resources caused by losses of
state owned enterprises and to create great opportunities for private sector
investments
The entry of the private sector into fields such as power generation, high
way construction, airlines, shipping, and banking was actively sought and
controls on private sector investment were relaxed substantially
Access to foreign exchange borrowing by both domestic and foreign
investors was greatly liberalized especially when no government guarantee
was involved.
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The Privatization Commission: identified 115 industrial
units to be privatized.
By the mid 1993 64 units had been privatized
In the 1994, the government successfully sold vouchers
to the general public (2% equity) and foreign investors
(10% of total equity), entitling them to shares of PTCL
but the management was still in the public sector at the
end of 1996.
The delays in implementation of the privatization
programme were to some extent natural, but they also
reflected institutional weaknesses in the government and
the Privatization Commission
2)Financial Sector
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financial system plays a key role in mobilization of savings and
allocation of resources
In the banking system, a preponderant role was played by the five
nationalized commercial banks (NCBs) which accounted for about
80% of the system’s assets in late 1980s, while foreign private
commercial banks ( about 10%) and four specialized banks made
up the rest.
1) the non performing assets of NCBs were growing. Political
pressures in the sanction of loans, poor credit analysis, and willful
default encouraged by a weak credit recovery mechanism, all were
contributing to over due loans.
2)the government came to realize that the various subsidized credit
schemes were not working well and were costly and subject to abuse
as credit was channeled to unintended economic uses.
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The long term goals were to assist the process of financial deepening
,reduce the risk of losses, and improve the allocation of resource in the
economy.
The financial reforms over 1990-6 did achieve a degree of interest rate
liberalization, moderate reduction in credit subsidies; strengthening of
prudential regulations and increased competition in the banking system.
The growth of financial assets (M2) in relation to GDP actually fell slightly
from 39.9% in mid 1988 to 38.5% in March 1996.
The rate on saving deposits was lower and most call deposits did not carry
any interest.
Even more serious than the growth of domestic monetary assets was the
deterioration in the health of the banking system
3)Energy Sector
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During the 1980’s, government pricing policies maintained the final
consumer prices of electricity and natural gas and agricultural based
sectors (tube wells, tractors, and fertilizer plants) at levels well below the
economic cost of supply.
Household consumption of gas and electricity more than quadrupled in a
short period of ten years before 1990, indicating annual growth rates of
15%.
Total electricity consumption expanded by close to 11%.
1992 : approval by the government of WAPDA’s strategic plan for the
privatization of the power sector in July 1992
1994 :policy and package of incentives for the private sector power
generation
The private power and infrastructure board, set up in 1994 to encourage
private sector investment in power generation, received 116 applications
for 26,000 MW of power generation.
4) Social Development
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At the beginning of 1990’s, Pakistan’s human development indicators such as life
expectancy at birth, infant mortality, adult literacy rate, and primary school
enrollment ratios compared unfavorably with most other low income countries,
including India and Bangladesh.
The primary enrollment ratio varied widely from nearly 70% for boys in Punjab to
30% and 14% for girls in Sindh and Balochistan respectively
The current budget for social services went up sharply from 1.7% of GDP in 1991-2
to 2.2% in 1993-4.
Total government expenditure on education in 1994-5 was 2.5% of GDP
The rise in female enrollment ratio from 31% to 57% over the same period was
particularly notable because it signified a substantial narrowing of gender gap in
basic education.
In 1992 the government began formulating, with the assistance of the World Bank,
a comprehensive Social Action Programme (SAP) aimed at improving and
expanding primary education, basic health care, family planning, and rural water
supply and sanitation (RWSS).