STRUCTURAL ADJUSTMENT PROGRAMS:

COMPOSITION & EFFECTS

CHP16
S.Akbar Zaidi
 What is SAP?

• Structural Adjustment Programmes (SAPs) are economic policies

for developing countries that have been promoted by the World
Bank and International Monetary Fund (IMF) since the early
1980s by the provision of loans conditional on the adoption of
such policies.
 An overview of IMF

• Introduction
• intergovernmental institution
• oversees the global financial system
• balance of payment problems
• the stability of currencies.
• IMF headquarters is in Washington D.C , U.S.A
• Member countries
• Where does IMF get the money from?
• member countries: payment of quotas..
• Partly in gold and partly in its own national currency.
 An overview of IMF

Functions of IMF:
• Three Major Functions of IMF
1. Surveillance
• Gathering the data and gives advices in making policies of the
country.
2. Technical Assistant
• Strengthening the human skills and institutional skills of the
country.
3. Financial Assistant
• Lending to countries to support reforms
 SAP

• 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 indicator
• 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
 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
4. Close down unprofitable public enterprises
5. Stop preferential treatment to public enterprises
 SAP: Composition

4. Financial Sector
1. Improve regulatory framework
2. Relax interest rate ceilings
3. Restructure institutions

5. Industrial Policy
4. Remove protectionism
5. Encourage industries that produce for export purposes

6. Agriculture
6. Remove bias against agriculture: remove protection to
industry
7. Discontinue subsidies
 IMF’s lending Arrangements
1. Stand-By Arrangements (SBA).
2. Extended Fund Facility
3. Poverty reduction and growth facility
4. Supplementary reserve facility
 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
 Implementation and Effects (cont.)
• 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
 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
 WB/IMF’s evaluation of the 1988 program
WB 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.
• 4 key indicators which reflect the state of an economy:
i. GDP growth rates
ii. Budget deficit as a %age of GDP
iii. Current account deficit/GDP ratio
iv. 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
 WB/IMF’s evaluation of the 1988 program
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