Name: Muhammad Ali
Class: Soc W-361
Development and Modernization
Section: 2
Research Paper First Draft (REVISED)
Due Date: November 20, 2017
Date Submitted: November 20, 2017
Date Resubmitted: December 04, 2017
Word Count: 3500
ECONOMIC ANALYSIS:
THE IMPOSITION AND EFFECTS OF INTERNATIONAL MONETARY FUND’S STRUCTURAL ADJUSTMENT PROGRAMS ON PAKISTAN’S DEVELOPMENT
ABSTRACT:
The main purpose of this paper is to explore the effects of the Structural Adjustment Programs imposed by the International Monetary Fund on Pakistan from 1988 till 2008. Starting with the Initial US $516 million loan granted in 1988, and then eight further Economic Stability Packages till 2008. The paper will shed light on whether the fiscal policies imposed on Pakistan helped it to achieve economic stability and bridge the fiscal gaps, or did they create further divide pushing the country deeper into a fiscal rabbit hole? Secondly, the paper will compare the IMF conditions imposed and explore each condition in depth measuring its efficacy versus efficiency. We will also evaluate the roles of both Military, and Democratic Governments in the development of Pakistan, and enforcement of IMF’s prescribed methods for economic rejuvenation. We will consider the current condition of Pakistan’s Economy and explore IMF’s projections for the future of Pakistan’s Economy, and Development. Overall the aim of this paper is to show that IMF’s Structural Adjustment Programs have varied effects. The cookie-cutter policies do not provide the same results for at different times uniformly as there are multiple factors involved, and each one of those factors has a major role to play when it comes to development of a country.
INTRODUCTION:
Since its independence from the British Raj in 1947, Pakistan has been plagued by constant political turmoil. Haphazard internal policies, multiple military coup d’états followed by corrupt and incompetent civilian governments have turned the structure of the country into a running joke. Amidst all the political drama and repertoire crisis, Pakistan has managed to remain financially afloat. The World Bank and Pakistan’s relation traces back to 1971. East Pakistan (Present-day Bangladesh) was hit by a devastating tropical cyclone (Bhola Cyclone) on November 12, 1970, recorded as one of the deadliest natural disasters, an estimated 500,000 people lost their lives. To cope with the widespread devastation The World Bank granted a $25 million International Development Association loan to Pakistan in 1971. Later in 1979, The World Bank started a Resident Mission in Pakistan, and finally by 1988, Pakistan became an official member of the IMF. Since then Pakistan has heavily relied on the IMF for monetary assistance. The fund has been a major source of loans which have helped bridge the ever-increasing fiscal gap. Each of the IMF’s grants came with a certain set of prescribed conditions which were placed to ensure that the loan can be paid back on time. However, the conditions imposed on Pakistan were so harsh that instead of achieving the desired effect of promoting economic growth and development, the country fell deeper into a fiscal rabbit hole. The nature of conditions sanctioned when paired with the corrupt interim governments and political instability caused the IMF’s Structural Adjustment Programs to fail on delivering the promised economic prosperity.
IMF’S CONTROL OVER ECONOMIC POLICY:
Under General Zia-ul-Haq’s dictatorship the Pakistani Rupee was pegged on to the US Dollar to stay afloat. However, instead of maintaining its exchange rate, the rupee further devalued by 38.5% over the next 6 years. In order to cope with the sinking economy Pakistan knocked on IMF’s door. At the time, a standby loan of 516 million USD was made to The State Bank of Pakistan which was already under direct control of IMF as all the high-ranking officials were directly accountable to it. The IMF negotiated the loan on the condition that an Interim government would be set up in place of the existing government. The new Interim government was set up within three weeks and the loan agreement was finalized. Needless to say, the program failed miserably as most if not all of the money received as the loan installments was exhausted with little or no accountability over the period of 3 years. Another Facility Loan was negotiated in 1991, only this time the conditions were much harsher. There was wide spread privatization of state owned enterprises and open trade agreements. Public Expenditures were greatly reduced in order to bridge the fiscal gap. Government subsidies were stripped and the prices of wheat, petrol, dairy, and other food items shot up by almost 3000% in a short amount of time
By the end of 1994 another agreement was made, and this time the emphasis was on trade reforms which included elimination of multiple exchange rates for the rupee. Tariffs were rationalized, and for the first time there was application of sales tax, and excise tax on utilities.
Over the next two decades Pakistan approached IMF a number of times for multiple other Stand-by loans. The period starting from 1988, all the way to 2008 can be divided into two distinct periods, from 1988 to 1991 was focused more on bridging the fiscal gap, and imposed new tariffs. While the SAP’s in the period from 1999- 2008 was focused more on the Macro-Economic growth and Increasing the GDP.
Analyzing the Structural Adjustment Program of 1988.
According to the Meltzer Report (2000), “The Structural Adjustment program of 1988 was an effort to manage the economy at a micro level”. It focused mainly on adjustment of power tariffs, Natural gas and Petroleum prices, imposition of tariffs on water and sewerage usage. Food prices were adjusted accordingly, and subsidies were stripped away from staple food items.
For the First Time In the history of Pakistan General Sales Tax was introduced under the Sales Tax act of 1990. The conditions imposed against the loan hurt the poorest of the people not only were they pushed further into poverty, millions found themselves unemployed over night because of the wide-spread privatizations. On top of that crushing hikes on prices of daily items further diminished the standard of living for the masses. Law and order situation further worsened as poverty hit a record high. Ex-economist at IMF, Davidson Buddho pointed out that IMF’s conditions were absurd, and most of the time did not relate to the issues at hand. He states in his resignation letter (1990):
When we [IMF employees] went on a mission, we did not even have the scope to innovate, to look at the country [Pakistan] and make projections, that you thought were reasonable; there was already a briefing paper before we entered the country. We were told [by the IMF] what we were expected to do, and give conditionality in terms of what the fiscal deficit was and how much it should be reduced; even before we entered the mission. We were expected to structure our findings in relation to the figures in the briefing paper, which were put there without any research, and were predetermined. So, the conditionality was also predetermined. In this sense, every IMF mission is fraudulent even today.
Let’s take Buddho’s point and assess it with the key conditions of the Structural Adjustment Program of 1988, which was spread over the first 3 years, we can see that the aims of the fund were primarily focused on reducing the fiscal and current account deficits simultaneously. As per the conditions stated below it is obvious that there is no wiggle room, per se, for any economic or capital growth towards the country’s welfare.
• Reduction of the budget deficit to 6.5% of GDP in 1988-1989, and to 5.5% 1989 -1990, and further to 4.8% in 1990-91.
• Cap inflation level at 10% in 1988-89, and gradually reduce the level to 7% in 1989-90 and to 6.5% in 1990-91.
• Reduction of External Current Account Deficit to 3.4% of GDP in 1988-89, and further to 2.8% in 1989-90, and to 2.6% in 1990-91.
• Reduction of Civilian External Debt Service Ratio from 27% to 22% till 1991.
• Increase gross official foreign exchange reserves of 3weeks of imports to the level of 7 weeks of imports by 1990-1991.
• Contain growth of domestic credit and money supply in line with the growth of nominal GDP at the target inflation level.
Over the course of the next few years, the Government of Pakistan implemented the prescribed conditions by introducing Wage restraint and Freezing of employment in the public sector. What this meant, was that the entire burden to reduce the country’s fiscal deficit landed on the shoulders of the working middle class of the country. Employment cost fell from 35.5% to 32.3% of the allotted public expenditure (Anwar 1996). Government wages declined and poverty levels rose to a record high. Paired with the imposition of a General Sales Tax ranging from 18% to 68% only added to the problem. Everyday Items such as edible oil, propane cylinders, fans, air coolers, bicycles and TV sets were subjected to GST. The removal of subsidies increased Petroleum prices by 42% and household natural gas prices by 37% (Economic Survey of Pakistan 1993). On the other hand, rupee devalued further as IMF pushed for a fixed exchange rate, and trade liberalization surged imports which increased the current account deficit from 7.4% to 8.7% of total GDP by 1990. To put things into perspective the Poverty levels rose from 23.5% of 1988 to 29.7% by1999. Poverty Depth (Poverty Gap Index) rose from a mere 4.4 % to 48% from 1988 to 1999 respectively (Haroon Jamal 2003).
It comes as no surprise that the SAP of 1988 failed in the worst possible way. The blame goes both ways as IMF’s prescribed conditions were overly stringent, and on the other hand the interim governments between 1988-1999 had personal vested interests, and failed to understand the long-term effects of the conditions imposed. Where the country required expenditure on Human Development, much of the money loaned was spent on renovating pre-existing roads and building the unnecessary costly motorway between Lahore and Islamabad. The rest of the loaned amount was spent on the obsolete and useless Nuclear program of the time. Had the money been allotted to renewable energy instead of nuclear weaponry, Pakistan would not have been neck deep into energy crisis, as it is today.
Post 9/11 Era:
By the end of the 90’s era, Pakistan was in a total debt of 52,111.99 Million USD. International Remittances had plummeted to 1 billion USD, and Investment inflows were less than 400 million USD. The trade balance was negative 1244.0 million USD. Oil prices drove up exponentially and the biggest issue of the decade was that the government failed to meet its current obligation of Imports, GDP, and debt services.
Pakistan approached the IMF one more time for Monetary assistance, this time the
IMF provided arrangements under the Poverty Reduction and Growth Facility Program. It must be duly noted that the only reason why the IMF opted to help Pakistan during General Pervez Musharraf’s dictatorship was because Pakistan had declared itself an avant-garde state against terrorism after the September 11, 2001 terrorism incident. The leading newspaper of Pakistan (The Dawn, Karachi, Sept. 19, 2001) responded:
Pakistan is under considerable pressure from the United States to accept certain political conditions in return for an IMF bail-out package…. The biggest issue is Pakistan’s Afghan Policy. One of the biggest economies of the world, the US holds majority shares in the IMF and greatly influences the Fund’s decisions through the Federal Treasury to fulfill Washington’s political agenda. The unofficial of political conditions include a change in Pakistan’s policy on Taliban Government…, acceptance of UNSC monitors on Afghanistan, reining in of Jihadi (militant) organizations, freezing of the nuclear and missile programs, and improvement in relations with India …. Despite the implementation of a painful reform program dictated by the IMF, any deviation by Pakistan on political condition will make it difficult for Islamabad to get the PRGF.
While the PRGF of 2001 received considerable criticism by the media and economic experts in Pakistan, it was a much-needed reform at the time. The conditions of the standby loan were similar to earlier adjustment programs but differed in an important way. Instead of placing the burden on the middle class of the country as done previously, the responsibility to reduce the fiscal deficit landed on the elite of the country. The following were the set of conditions implied by the IMF in the PRGF program:
• Reducing overall budget deficit by increasing tax collections. Widening of tax base, improving tax administration, and imposing stricter expenditure controls.
• Reduction of public debt burden.
• Maintain competitive and flexible exchange rate and adopt tight monetary policy
• Introduce and implement Structural reforms in fiscal and financial sector
• Take measures for Poverty alleviation (to give the program human face).
Right of the bat we can assess that this was a much better program compared to the SAP of 1988. The results were also much better, although there was moderate growth from 2000 to 2004. The program removed capital control laws and encouraged foreign investors to bring in and pull back their capital at their will. This brought in multiple Middle Eastern Real Estate Development Entities into the area, and major development began on the shore areas of Karachi (Sindh) and Gawadar (Balochistan). Fiscal Sector Reforms were also introduced, and the foreign exchange was liberalized, the rupee was no longer fixed. A number of large government operated banks were privatized and the economy for the first time in 20 years saw some form of growth.
To counter the problem of widespread corruption National Accountability Bureau was established, and strict penalties were enforced on officials who were found guilty of corruption across the board. Government Expenditures were reduced, and State-Owned Enterprises with in Oil (WAPDA, KESC), Gas (SUI), Banking (MCB), and telecommunication (PTCL) sectors were privatized. Tax Reforms and rationalized custom tariffs provided better performance for the economy. Total GDP rose from 60 Billion USD in 2000/2001 to 170 Billion USD by 2007/2008
It is interesting to note that during the two decades 1988-1999 and 2000-2008, the SAPs normally included similar conditions such as fiscal austerity; currency devaluation; inflation control through monetary tightness; Neo Liberal Policies like reducing government interventions in domestic markets lowering trade barriers, and Income policies such wage restraint, abolishing of subsidies and transfer programs, and export promotion. Yet the results are remarkably different between the two decades.
Role of Military, and the Civilian Governments:
The question which rises here is what caused the results to be so drastically different? While one program led the country into a fiscal rabbit hole, the other turned it around 180 degrees, and put it on a road to growth? The answer to this question is a complex one, and perhaps most of it has to deal with the power structure with in Pakistan. There has always been a tug of war between the military, and the civilian government. Multiple Coup d’états and other military power plays have always hurt Pakistan’s democracy. Even to this day there is a political crisis, as the civilian government cannot exercise its powers without being interrupted by the military. Military Budget cuts have never been imposed, while the civil governments have been blamed in the past for being corrupt, overspending, and having personal vested interests. In contrast Pakistan’s military does not do any research and development, instead of its budget is blown on importing arms, and other supplies from international sources. For a country struggling with high poverty, it makes no sense that more than 70 percent of its budget is allotted to the armed forces, which are not accountable to the general public. It is empirical to understand that multiple foreign forces also have a major influence on Pakistan’s inner workings. Coupled with the global business atmosphere, multiple foreign entities have started to view Pakistan as a development haven, but then again it is just a matter of another military coup d’état, and the foreign investors will find other places to invest their money.
IMF’s Future Projections for Pakistan
On October 24, 2016, Christine Lagarde, Managing Director of the IMF released a public statement after visiting Pakistan for the first time. She dubbed that it was an important time for Pakistan “a moment of opportunity” for Pakistan to be undergoing an economic transformation. She further commented that Pakistan was building a strong foundation to join the merging economic markets:
Just three years ago, the country was on the brink of an economic crisis. Today, and thanks to the authorities’ homegrown program of reforms that the IMF supported, the economy is on a much stronger footing. Public finances have improved considerably, external reserve buffers have been rebuilt, and growth has been gradually strengthening. These are very encouraging developments…. Pakistan has also made important strides in growth- supporting policies. A clear example is the power sector. Not everything has been resolved, but disruptive power outages have come down—from about nine hours to one hour per day for industries, and from eight to five hours for urban consumers. There have been equally important achievements on the budget revenue side. By closing tax loopholes and setting up a more targeted approach to widen the tax base, revenue collection improved by 2 ½ percent of GDP over the past three years….Having achieved such difficult reforms, the economy has come a long way. Now, with a more resilient economy and growth picking up, Pakistan has reached a moment of opportunity. It can now embark on the next generation of reforms to generate higher and more inclusive growth, and tap into the dynamism of emerging economies.
The IMF webpage also shows that the Real GDP growth is steady at 5.3 percent, and the inflation is relatively stable at 4.1% as of 2017.
Conclusion:
The Structural Adjustment programs prescribed by the IMF show a mixed bag of results, while almost running the country to the ground in 1988, to completely changing the economic dynamic by early 2000’s. The cookie cutter policies of austerity, wage freezing, and implementing neoliberal tactics on trade infact do more harm than good to the economy of a country. At least, in the case of Pakistan It has clearly not worked as well as forecasted. While latter conditions of the IMF have improved the economic atmosphere of Pakistan, it must by noted that efforts for economic rejuvenation have also been made on the part of the people of Pakistan. While order has been brought back to the economy in comparison to 1988, the ghost of the conditions imposed back then has created a fiscal crater for the lower middle class of the country, while inflation is on the rise again, violence runs rampant as people are once again pushed into poverty. The problem with IMF loans and conditionality is that it fails to forecast the results in the long run, and while Pakistan’s economy seems to be growing for the time being, no one can be 100% sure that this will remain the same.
Works Cited:
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