STRUCTURAL ADJUSTMENT PROGRAMS:

COMPOSITION & EFFECTS

CHP16
S.Akbar Zaidi
Structural Adjustment
Programmes in Pakistan
 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
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
Implementation of the SAP’s: 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

 Implementation of the SAP’s: 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 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
 Implementation of the SAP’s: an examination of the 1988 program
Fiscal Policy
• Emphasis put on resource mobilization
o 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
o Lower/eliminate subsidies on fertilizers
• Tighten control over provincial expenditures, so that they make
efforts to generate their own revenues
 Implementation of the SAP’s: 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
 Implementation of the SAP’s: 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
• 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 of the 1988 Program
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 of the 1988 Program
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 of the 1988 Program
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
o10 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 of the 1988 Program
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 private investors
• Sanctioning of private investment abolished
• Regulatory restrictions abolished
• Registration of technical and foreign loans
• Procedures for employment of foreign workers
 Achievements and Failures of the 1988 Program
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