What is the impact of Liberalization and SAPs in Pakistan?

Pakistan launched SAPs in 1988 under the guidelines of the IMF and World Bank. The 13 years of military rule (1975 to 1988), had ruined the economy.

The new democratic regime was confronted with low GDP growth rates, high external debts, low exports, low industrial production, and deteriorating forex reserves.

The overall condition of the economy was extremely bad and the democratic government had no choice other than to approach the IMF and World Bank for financial assistance. While granting loans the IMF and World Bank advised the government to initiate economic reforms.

The main focus of the reforms was to reduce fiscal deficit in government finance. The IMF asked the government to lower its fiscal deficit to 4 per cent of GDP which was in double digit. For achieving this target, the IMF advised high taxation and a decrease in public expenditure. The largest cuts in public expenditure came in the area of development: from 9.3 percent in 1981 to 3.5 per cent (of GDP) in 1997.

Another key area of the SAPs was reduction in tariff rates which were brought down to 45 per cent in 1999 from 125 per cent in 1992. For boosting up the exports the devaluation of the Pakistani currency was recommended and since 1988 the devaluation is continuing at regular intervals.

Along with these steps, the selling-off of state-owned enterprises was also advised. The IMF advised the Pakistani government to implement SAPs initially in six areas. First, reforms in trade policy by adjusting the country’s currency visa-vis US dollar.

This was to be done by consistently depreciating the currency and keeping level of exchange rate competitive. In addition, restrictions on exports were to be removed and quantitative restrictions on imports, i.e. quotas, and tariffs were to be reduced.

The trade policy thus focused on outward-oriented export-led path. Secondly, reforms in fiscal policy to reduce and eliminate fiscal deficits by curtailing public expenditure. This was to be achieved by increasing prices in the public sector so as to meet costs and increase revenues.

Reforms in the tax system, substantial cut or elimination of subsidies to agricultural and energy sectors were the other ingredients. Thirdly, reforms aimed at privatising unprofitable public sector units. Fourthly, reforms in financial sector by way of relaxing interests rates ceilings as well as liberalising time deposit and lending rates.

Fifthly, reforms in industrial policy include removal of protection to industrial sector and price controls over goods. Lastly, reforms in agriculture sector by eliminating bias against agriculture by adjusting the exchange rate and by removing protection offered to industry. The reforms should see liberalisation of agricultural prices and discontinuation of subsides.

Impact of SAPs on the Pakistani economy

After the implementation of SAPs, the GDP growth rate has declined and there was a moderate rise is exports. This is attributed to the currency depreciation rather than quality appreciation in export products. The rise in FDI inflows is also very moderate indicating that foreign investors have not paid enough attention to the liberalisation programmes.

In other words, mere opening up of the economy is not a sufficient condition for attracting higher doses of foreign investment; an efficient infrastructure plus social and political stability are important. Currently Pakistan is lacking on this front.

The SAPs have not helped Pakistan in bringing fundamental change in the structure of economy. The share of manufacturing sector in national income remained low and over the period has gone down. As we noted earlier, the decline in manufacturing sector adversely affects the employment generation. An economy with growing manufacturing sector provides macro-economic stability.

The rise in services sector can provide temporary relief to employment problem. Similarly, the question of good governance always looms large over Pakistan. Frequent military takeover of the government sends wrong signal to the private domestic and foreign investors.

The rise in the military expenditure which is beyond 5 per cent of the national income is excessive, especially for a developing country like Pakistan. The government expenditure on developmental heads such as education and health has been declining.