Era of structural adjustment (1988-1998)

The period after death of General Zia resulted in return of democracy. Pakistan had 4 general elections between 1988-1997 with Benazir Bhutto and Newaz Sharif returning in power twice. There also have been a few care taker governments since the elected governments were not able to complete the full term. But rather than democratic process, it was the economic program/process to determine the course of Pakistan since 1988 Since 1988, Pakistans economic policies and performance have been determined by IMF and WORLD BANK sponsored Structural Adjustment programs (SAPs) The economic policies labelled : economic liberalization, stabilization and openness to market friendliness. The main focus of SAP was on lowering fiscal deficit by ways of high taxation and decrease in public expenditure, raising the prices of utilities, selling off of state owned enterprises and devaluation of rupee.

Structural Adjustment Programs in Pakistan (1988 -1998)

In 1988: Stand by arrangement (SBA) and Structural adjustment facility (SAF) were ratified by Benazir Bhutto to run for 1988-1991 which were completed after delay In 1990: Nawaz Sharif government was elected and was bound by the covenants of the agreement. In 1993: after gap of two years, Stand-by agreement was signed which was one year agreement In July 1993: Nawaz Sharif's first govt was dismissed and an interim govt was headed by Moeen qureshi who signed EFF, a comprehensive three year program (1993-1996) with IMF and World bank . In Sept 1993: Moeen qureshi was given a Standby loan of SDR 265.4 m in record time by IMF In 1993: Benazir Bhutto was reelected and she endorsed 1993 program and also signed three yr loans (1997-2000) of Extended Fund facility (EFF) and Enhanced Structural Adjustment Fund(ESAF) 1997: Nawaz Sharif was reelected and was the only democratic govt that took loan from IMF for 3 yrs period (EFF) and (ESAF) but all the agreements were suspended one tranche $495 mil Contingency and compensatory financing facility (CCFF) which fulfilled its agreements.

Objectives of Structural Adjustment Programs:

The core policy measures during 1988-1999 were : devaluation, exchange rate, interest rate, trade liberalization, public enterprise reform, subsidy with drawl etc. The SAPs went into the minute details of deregulations of bus fares , adjustment of power tariffs, gas prices, water tariffs, taxes, fees, charges for roads, rail and aviation etc. But the larger OBJECTIVES of 1988 programs were to improve financial internal and external balances, increase average savings rate and promote private sector investment. The annual targets were: Reduce budgetary deficit to 6.5% of GDP in 1988-9and further to 4.1% in 1990-1 Reduce inflation from 10% in 1998-9 to 6.5% in 1990-1 Reduce external current account deficit Increase gross foreign exchange reserves Sustain real GDP growth at 5.2% in 1998-9 to 5.5 % in 1990-1

PRIVATIZATION and LIBERALIZATION:

The Privatization program began under SAPs in 1990 by Nawaz Sharif when the Did investment and Deregulation committee was established to identify enterprises to be privatized. The Committee state a principle that govt should completely retire from production of industrial goods. 109 industrial units should be privatized and 4 or 5 national commercial banks. The committee was dissolved and replaced by Privatization Commission in JAN 1991 to supervise process. In early phase, the program was unsuccessful with few bidders for targeted firms. In OCT 1991, the government advertised all the 105 industrial units fro immediate sale. One of the reasons for privatization was to raise revenue and by NOV 1992, 67/109 units have been issued letters for sale and 49/67 had been transferred to private sector and amount if Rs6 bill was received by govt.

PRIVATIZATION and LIBERALIZATION:

The three sectors to be privatized were energy, telecommunications and four commercial banks.(MCB and ABL) By late 1995, the telegraph and telephone sector had been partially privatized. The two commercial banks HBL and UBL were privatized by the Musharraf government after 1999. Liberalization was done when sanctioning of private investment and import licensing was abolished. Other regulatory restrictions such as registration of foreign and technical loan agreements and procedures for employment of foreign workers were also abolished.

AGRICULTURE AND INDUSTRY

The agricultural sector showed average growth of 28.9% in 1980-85 , faced a decline at 26.3% in 1985-90, further declined to 25% in 1990-95 and25.8% in 19952000. The annual growth rate of major crops have fallen since 1980 . In the decade 1980-90 the average annual growth of major crops was 3.3 % which fell to 2.4% in 1990s. Both production of wheat and rice fell sharply in 199000.
Source book: CFA 1.

Manufacturing and industry: In the SAP, the industrial policy outlined: Limiting the list of specific industries, de regulating business decisions, raising investment sanctioning limit annually, divesting the shares of public sector, considering a realistic trade regime, enhancing export incentives, reducing the list of restricted import items, phasing out all tariff exemptions by 1990-1. This IMF macro economic recipe had a direct impact on industrial development in Pakistan. It lead to: An increase in level of indirect taxation by July 1990 Withdrawal of subsidies on utilities and fertilizers An increase in producer prices of major crops The restriction on govt borrowing and credit allocation to public sector. The large scale manufacturing managed an impressive 7.2% in 1991-2 essentially due to rapid expansion of cotton manufacture. The WB and IMF concluded that SAPs in the industrial sector went well in late 1980-90s but after 1991 the utility prices increased and had an impact on industrial costs and competitiveness. Tariff rates have fallen from 225% in 1988-9 to 25 % in 2003-4 making imports cheaper and declaring 4000 industrial units as sick

Trade and balance of payments:

All the non tariff barriers would be replaced by tariffs. It was planned to reduce the number of banned commodities from 400 to about 80. Drastic reduction in maximum tariff rate to 125% in 1988-9 and 100 % by the mid 1990s. Most tariff exemptions and concessions were to be removed so that imports could be made cheaper. With deregulation and privatization been promoted, exports also were promoted. Import licenses were abolished except for products that were prohibited. Improved incentives for exports were given but it was seen that trade liberalization encouraged import of good s and services. After 1988 exports increased sharply by 11.6% per annum in US dollar terms which led to trade balance improvement . But there was deterioration in service balance and a sharp decline in workers remittances.

If you look at the graph below it is quiet evident that the trade deficit from 19842003 was only between $1 and $2billion , however it touched $20 billion in 2007-2008 and currently its at a whopping $16 billion. Experts would say the rise of oil since 2003-2008 was the reason Pakistani imports increased drastically

Source: www.secp.gov.pk

Pakistan over the years is caught up in the Trade Deficit cycle. Its trade deficit has been increasing over a number of years specially in the last 5 years it has crossed almost $20 Billion. Lets have a look at the Exports and Imports of Pakistan, and see trade deficit over the last 25 years.