BENAZIR AND NAWAZ SHARIF 1988 1996 Background political

BENAZIR AND NAWAZ SHARIF 1988 -1996

Background 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 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

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.

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 rapid growth in government debt: domestic public debt increased from Rs 290 b 1988 to Rs 909 b by 1996 Public sectors external debt nearly doubled Rise in ratio of debt to GDP 1996 : 82% of GDP Interest payments: 6. 1% of GDP

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 shortterm debt.

Excessive Additional Taxation 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 198 o’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

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 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 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 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. 7 b Under the 1988 structural adjustment facility from IMF, the fiscal deficit was to be reduced from 8. 5% in 1987 -8 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: 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: 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. .

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 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 1980 s, 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.

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 (M 2) 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 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 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).