Structural adjustment programmes

Structural adjustment programmes

Introduction
In the 1950s and 60s, the model that was suggested and developed by academics and government officials in the USA focused entirely on growth. This model, where the general aim was to increase growth in the economics of the relatively advanced underdeveloped countries- Latin America and some Asian countries – rested on the premise that increased growth should be the fundamental focus of all policy, and eventually the fruits of growth would “trickle down” to the population at large.
From structural adjustment loans to structural adjustment
Programmes:
• In the 1970s, the IMF and World Bank used to play a smaller, though important, role in the economic development of many developing countries. They used to provide loans which were based on careful country analysis and had stringent conditions attached to them.
• The focus of the IMF was essentially on improving the balance of payments problem, while the World Bank was more focused on specific projects and sectors.
• This foreign money was lent on easy terms and had a negative real rate of interest. While interest rates were low and commercial banks were ready to lend, governments in developing countries and in the advanced countries were not very concerned about the accumulating debt.
• However when US interest rates rose to 18% to finance Ronald Reagan’s largest peace time military build up, third world countries were forced to increase their budgetary allocations to service the US $ denominated debt. While the cost of servicing outstanding debt increased, commercial credit to the third world became much tighter. In order to repay parts of their debts or, more importantly, huge interest, government spending priorities had to change. As a consequence internal investment and social expenditures began to fall.
• The results of such a policy were obvious at the outset: social expenditure fell in almost all those countries that had accumulated debts.
• There was a major change from the mid 1980s, when the programmes of the World Bank and IMF began to become more fused. Also, the distinction between stabilization and adjustment became narrower, and the structural adjustment programmes of the late 1980s onwards had elements of both. There were also differences in the time span of loans. Earlier structure adjustment loans were for 12 to 18 months, but as institutional and policy reform became an increasingly important concern, the period of the loans increased to between 3 and 5 years.
Structural adjustment programmes: composition.
A structural adjustment programmes seems to fairly general, in the sense that it’s basic principals are applied to countries irrespective of their differences- and this is one of the major criticisms of the approach. The focus of the structural adjustment programmes is on improving the balance of payments position, cutting the fiscal deficit, lowering inflation, and increasing growth. The different arenas around which these and other policies revolve are as follows:
1. Trade policy: countries are advised to adopt competitive real exchange rate, n the mechanism for doing this is devaluation.
2. Fiscal policy: the reduction and the elimination of fiscal deficits by curtailing public expenditure is a high priority, and an increase in prices in the public sector so as to meet costs increase revenues is also recommended.
3. Public enterprises: the preferential financial treatment to state economic enterprises is to be stopped and there is to be brought in line with the private sector.
4. Financial sector: institutions are to be restructured so as to facilitate resource mobilization and to reflect costs. Interest rate ceilings are to be relaxed. Time deposit rate and lending rates are to be liberalized.
5. Industrial policy: protection is to removed from the industrial sector so as to make it more competitive internationally, and price controls over goods are to be removed so as to improve resource allocation.
6. Agriculture: the bias against agriculture is to be eliminated by adjusting the exchange rate and by removing the protection offer to industry.
To summarize them the structural adjustment program is meant to improve the balance of payment positions with the help of devaluation, which is suppose to encourage exports, it should cut the fiscal deficit by increasing some prices and cutting subsidies and by decreasing government expenditure; and it should cut inflation and foster growth.
Structural adjustment programmes: implementations and effects
• It is often found that programs are associated with a rise in inflation and the fall in the growth rate.
• This stringent fiscal adjustment which is central to the structural adjustment programs has led to a sharp decline in the public investment which may be leading to serious infrastructure bottlenecks to development.
• If the adjustment effect on the growth is weak, adjustment lending creates a negative investment effect: “the influence of SAPs on aggregate investment is almost everywhere negative” and “this negative impact on investment runs counter towards one of the basic objectives of adjustment and thereby questions the assumptions on which policy lending was predicted”.
• Further more, the attempt to correct the balance of payments positions with help of devaluation and immediate and undifferentiated reduction in import tariffs has not given national industries adequate time to improve their competitiveness with foreign firms.
• Consequently, reindustrialization in many countries resulted from sudden trait liberalization and further eroded the industrial base of many fragile countries.
• Moreover, a study by Van Der Hoeven found that it was mostly the extreme poor effected by the program, since ‘ the economic environment in which they live is often more closely related to the external sector and the principal source of income –wages-has often decreased drastically as part of structural policies.
• Increasing income concentration and inequality was also found in the other success story.
• There was a sharp decline in the share of both agricultural incomes and wages and salaries.
• The worsening income distribution arose from the ‘removal of subsidies following price decontrol in the public sector, a neglect of a essential public services in health and education, as well as a sharp fall in real wages and agricultural terms of trade’.
• The effects SAP on he natural environment is also been seen to be harmful.
• The most palpable impact of SAP has been an increase in rural poverty.
• Countries under adjustments are often short of resources and of the capacity to implement the programmes.
Structural adjustment programmes in Pakistan
History
• Pakistan has had a long association with the IMF, and the first time that the government of Pakistan asked for a loan was in 1958.this was a standby arrangement worth SDR 25 million over a period of 10 months.
• Two more standby arrangements were made in 1965 and 1968 by the Ayub khan government.
• In the case of Pakistan, as in other UDCs, the nature and the extent of the IMF involvement change drastically in the 1980’s.
• As the IMFs funding amount in pattern changed over late 1970’s and 80’s Pakistan entered in to a long term EFF in November 1980, for a period of 3 years under general Zia.
• The second recourse to a long term agreement with the IMF, following which the various governments in Pakistan have very closely followed the program, was signed by the interim government after the death general Zia ul haq. Infact, it was literally the last day of the government when the agreement was signed, and the subsequently elected prime Minster, Benazir Bhutto, took office the following day.
• There was a gap of almost two years before another agreement was signed in September 1993.
• Pakistan’s political history since 1993 will help put he present SAP in proper context.
• The enhanced SAP was prepared by Moin Quraishi interim government, and by 30th august 1993 IMF and the World Bank staff, which represented both the IMF and the government of Pakistan, had agreed to a Policy Framework Paper, which laid the bases of the more comprehensive three years programs of 1994.
• There was so much overlapping of interest over the content of the program that it became difficult to see whether the government of Pakistan was initiating the programs based on its own particular needs and priorities, or whether the IMF and World Bank members, in their official and non official capacities, were imposing the programs.
• The Moin Quraishi government was given a standby loan of SDR 265.4 million in record time by the IMF on 16th September 1993.
• Benazir’s government endorse 1993 program, but also, within 4 months, signed the 3 years loan under the EFF and the ESAF.
• The only time the democratically elected government itself took a loan from the IMF, was Nawaz Sharifs second government of 1997-1999.
• There were 4 agreements, two ESAFs and two EFFs, but as in the past, all agreements were suspended o abrogated and were never fulfilled.
• Nawaz sharif’s second government which used a one trenches $ 495 million Contingency and Compensatory Financing Facility- completed its programs and fulfilled the agreements.
• The only exception is general Musharaf’s government, which agreed to a Poverty Reduction and Growth Fund arrangement worth US $ 1.3 billion (which is equivalent to 100% of the SDR quota of Pakistan) over the period December 2001 to 2004.
• It should be clear from the above account that there are major political connotations to SAP in the context of Pakistan, something that is also confirmed by events after 9/11.
Implementations of SAP in Pakistan: an examination of the 1988 program.
The key objectives of the 1988 SAP over the tree year period, with their annual targets were as follows:
• Reduce the overall budgetary deficit to 6.5% of the GDP
• Contain the rate of inflation and reduce it gradually
• Reduce the external current account deficit
• Reduce the civilian external debt service
• Increase gross official foreign exchange reserves
• Contain the growth of domestic credit and money supply in line wit the growth of nominal GDP.
• Consistent with the macro economic adjustments, sustain real GDP growth.
Fiscal policy
• With an attempt to decrease the fiscal deficit/ GDP ration in 3 years major emphasis was put on resource mobilization, with major tax measures that were intended to increase the tax revenue elasticity.
• Excessive government expenditure, particularly current expenditure, was also to be reduced.
• This was to be achieved by reducing the growth of current expenditures, as well as by lowering and eliminating subsidies on fertilizer and revising the procurement prices of wheat.
• There was also a major attempt to tighten the control over provincial expenditures, with a new federal/ provincial revenue sharing agreement been worked out so that provincial government would make grater efforts to raise revenues.
• The implementation of the SAP as evaluated by the IMF/World Bank was weakest in the area of fiscal policy. Most quantitative targets were not met.
Trade
• The emphasis of the SAP of 1988, in the4 trade sector, was on extensively reducing tariffs so that imports could be made cheaper.
• However, there was also an attempt to increase exports, particularly higher valued exports.
• In addition, with deregulation and privatization being promoted, the private sector was to be permitted greater involvement in the export of rice and cotton, both of which were previously solely under government control.
• In the latest agreement, the PRGF of 2001, these policies have continued, deepening the reforms further.
• With the help of these programmes the exports increased sharply and the trade balance also improved significantly.
Financial sector
• The SAP of 1988 highlighted measures to improve the efficiency and profitability of the banking system and to increase the autonomy and accountability of public sector financial institutions, particularly nationalized commercial banks.
• On the monetary policy side, policies were to be undertaken to abolish negative real interest rates on concessional credit programmes, and efforts were to be made to free interest rates in the market for medium- and long term credit, making the interest rate more responsive to market conditions rather than being under the control of the government.
• In addition to these steps, the SAP of 1988 proposed policies in the monetary sector, where the government was expected to pursue cautious domestic credit policies so that inflationary pressures were curtailed and perceived improvements in the balance of payments were not jeopardized.
• The overall effect of SAP for the financial sector was pretty good.
Conclusion
• World Bank/IMF was not totally satisfied with the outcomes, as many targets were missed.
• More importantly, independent research that has been done on the impact of the program shows, very clearly, that the repercussions have been severe for poverty, employment, wages and inequality.
• Moreover, some of the outcomes of a SAP, like higher growth and lower inflation, have not been manifested themselves in Pakistan, with growth being considerably lower and inflation higher than trend levels.
• Thus, we argue that one of the main reasons why there has been such a noticeable rise in poverty in Pakistan, has been due to the adherence of such SAPs.