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IJI government's 30 months in office: a case of unsustainable development.

When on 18th July 1993, the IJI government's 30-month term of office came to an end, the country's economy was indisputably in great disarray. The outgoing government had attributed the debacle to floods, political uncertainty and other circumstances beyond their control but there can be little doubt that the cumulative effect of their own policies was responsible, to a large extent, for the serious economic difficulties in which the country found itself, on their departure from office.

Before examining some specific aspects of the IJI government's economic performance, a few broad observations may be permitted. The IJI's strategy was one of ambitious-but unsustainable development, the making of tall promises which could not be kept and undertaking grandiose programmes for which resources did not exist. Another grave error made by the outgoing government was to push forward with liberalisation at a reckless speed, while resource imbalances deteriorated, ignoring warning based on experience of other countries that freeing the markets without ensuring fiscal and external stability can lead to economic disaster.

The fact that the regime threw away the benefits of structural change by failure to control deficits is evident from the import policy, which is far more restrictive now compared to what it was when the IJI government assumed office.

A review of economic aggregates, during the last three years reveals that the IJI government's performance was lack lustre, with only a few areas showing slight improvement. The record of the IJI regime on GDP, fiscal and external balances, inflation, reduction in dependence on aid, and social progress is inferior, compared to the predecessor governments. The impression of dynamism and progress has been generated partly by speedier deregulation but mainly by populist measures, of a short term nature, most of them unsustainable. The regime's policy of distributing largesses awarding concessions and indulging in cronyism has lowered ethical standard and weakened economic discipline.

Government policies, instead of encouraging genuine enterprise and risk-taking, in a competitive environment, has tended to favour manipulation, rent-receiving and partisan politics.

Decline in growth rate

Turning now to specifics, growth in GDP or output, despite its limitations, is a good indicator of economic progress. Accelerated growth was one of the principal targets of the IJI government. At the commencement of their term of office, there was a spurt in output, which was taken as proof of success of liberalisation policies. Regrettably, the third and last year of their tenure shows a sharp decline. Growth in GDP, as an average per annum, amounts to 5.5 per cent under three years of IJI compared to 6.5 per cent achieved by the country in the period 1980-86. The regime cannot blame the weather or cotton for its below average performance, because if the output of raw cotton declined sharply in 1992-93, it had also risen dramatically in 1991-92. The outgoing government has faced the usual mix of good and bad weather. what is indeed surprising is that annual rate of growth in large-scale manufacturing also declined, compared to 1980-86, despite all the attention that was given to this sector by the IJI government.

The decline in GDP, by an average of one per cent per annum, during the IJI's term of office, falsifies the claim that the country had embarked on a great journey of progress, under the leadership of the industrialist Prime Minister. For the fiscal-monetary sector, I give in the table below the performance of the IJI government, compared to their own targets and the record of their predecessors, in respect of three important indicators.

Loose Monetary Policy

It would be seen that budgetary deficits were high even in the early eighties. It was the task of the IJI government to bring down the deficit to sustainable levels. In fact, under the IJI government the budget deficit deteriorated by a further 1.4 percent of GDP. IN many countries, fiscal extravagance is countered by a tight monetary policy. In Pakistan, a loose monetary policy aggravated the adverse effects of fiscal deficits. Broad money increased at an average rate of nearly 19 percent, far in excess of targets and prudent limits of borrowing. It is not surprising that in the IJI term of office, inflation was 40 per cent higher than under their predecessors. The average increase in the Consumer Price Index, under the IJI was 10.69 per cent as against 6.11 per cent during 1980-86.

The government has been lucky that inflation has not been higher. The expansionary fiscal and monetary policies could have easily led to a price explosion. Partly, inflation was kept under control through liberal imports, which drained the exchequer, helped to moderate prices. The government's extravagane was deliberately undertaken, to finance populist measures, to secure immediate popularity, even at the risk of rendering the country insolvent.

The IJI government took a number of commendable steps to open up and diversify the financial sector but marred their performance by lack of transparency in privatisation of nationalised banks, the cover-up of the cooperative scandal, coercion of nationalised banks to finance loss-making schemes of doubtful utility, the continuing distortion of interest rates and weakening the authority of the central bank.

The financial sector, though much expanded, remains in a state of uncertainty. Heavy bank borrowing by government is crowding out the private sector and making a mockery of credit policy. The interest rate structure is fragmented, with a wide dispersion, between the lowest concessional rate and the highest commercial lending rate. Confidence in new institutions is not very strong because regulatory arrangements have not been adequately strengthened and interference by government in management of credit policies continues. Loan indiscipline, always a problem, has been further aggravated by incidents such as the cooperative scandal, where the provincial government stood silently by, while billions of rupees were looted from the co-operative banks.

In the external sector, a bright feature has been the export performance of the economy. Exports did extremely well in the first two years of the period under review, attaining a growth rate of 14 per cent per year. In 1992-93, there has been a sharp decline, due to reduction in output of cotton and recession in foreign demand for textiles. The events of the last three years show both our potential for exports as well as our vulnerability due to over dependence on cotton and lack of diversification. The flexible exchange policy, followed by government has partially compensated for domestic inflation and has been helpful in keeping our exports competitive. The period saw a reasonably good growth in non-cotton manufactures, although their share of total exports is not yet highly significant.

In contrast to exports, government's management of imports has been inept and even disastrous. Further, freeing of the exchange regime and the reduction in tariffs were steps in the right direction, but these should have been balanced by rigorous control over aggregate demand and reduction in fiscal deficits. Instead, the IJI government adopted expansionary fiscal and monetary policies, which encouraged import demand. To make matters worse, the government offered trade, tariff and credit concessions which overstimulated the demand for machinery and cars. The import of motor vehicles doubled in one year from $ 500 million to $ 1 billion.

Current Account Deficit

Imprudent demand management, combined with an export set-back due to exogenous reasons, has led to a sharp deterioration in the trade balance, the current account deficit and foreign exchange reserves. The current account deficit has jumped from a little over to $ 2 billion in 1991-92to $ 3.2 billion in 1992-93, creating a stupendous deficit, which cannot be met from conventional financial sources. Emergency measures have become necessary to restrain imports and encourage exports.

The IJI government was very short sighted in the methods adopted to mobilise external finance to meet the deficit. Despite repeated warnings, the government continued to rely on short-term foreign exchange deposits. The deposits temporarily swelled the foreign exchange reserves and created an illusion of prosperity, leading government to neglect the basic health of the balance of payments position. The sharp increase in the current account deficit in 1992-93 would have led inevitably to a decline in reserves. The decline was accentuated by the sudden withdrawal of short-term deposits, which are prone to volatility. What would have been a difficult situation is tending towards a crisis.

The IJI regime had made a reduction in dependence on aid as one of the their main economic targets. It is superfluous to point out that the government did not go beyond raising slogans. Pakistan's external debt has gone up from $19.8 billion to $ 22.5 billion during the IJI's term of office.

Industrial investment had been decontrolled by the PPP government. The liberalisation claimed by the IJI regime was cosmetic and residual in character. Did the IJI policies produce a great spur of investment in the country, an industrial revolution? Regrettably, the cold statistics do not show that anything spectacular happened. The ratio of total investment to GDP has remained stagnant at around 18 per cent. Within this total, private sector investment has increased while public sector investment has gone down, when it was essential that both should go up simultaneously, if we are not to build factories, which cannot operate to capacity because of the shortage of power.

Private investment in the private sector too was heavily skewed in favour of large-scale industry. Also, after a big spur in 1991-92, the rate of growth appears to have tapered off. There are reasons to question the quality of investment which was spurred on not so much by fresh entrepreneural opportunities but by lavish tax and tariff concessions. ft may be noted that while investment in large-scale industry increased by 49 per cent in 1991-92, the increase in output next year was only 6 per cent. There is a view that much of the machinery was bought, in advance, for later use, to take advantage of unusually generous package of concessions.

The IJI government offered a special welcome to foreign investors. While some increase in the inflow of direct and portfolio investment is recorded for 1991-92, it is of modest dimensions and does not appear to have been sustained into the next year. In respect of inducting the private sector into newfields, such as energy, the IJI has merely continued policies and projects initiated by their predecessors.

Public Sector impaired

The IJI government has done considerable violence to the public sector development programme. The share of public sector in total investment has declined. The regular development programmes, mainly in the social sectors have been subjected to severe and arbitrary cuts. Large sums of money have been diverted from the budget to discretionary funds and other free spending programmes. Development priorities have been seriously distorted. Enormous resources were channelled into construction of spectacular projects, in certain sectors, such as transportation. Major spending corporations, favoured by the regime, were exempted from the scrutiny of the Planning Commission or consultation with the provinces. As a result of extravagant expenditure and lopsided priorities, the basic services provided by government have suffered a sharp decline. In Karachi, the largest industrial centre of the country and the gateway for the foreign investor, interruption in power supplies has reached unprecedented and intolerable levels. As in the case of investments, the IJI's tenure in office has made no significant impact on savings. The domestic saving rate increased marginally from 11.7 per cent to 12.2 per cent.

To conclude, the IJI government pursued the right goals and showed a lot of vigour and activity, but has few sustainable and solid achievements to its credit because of incompetence in implementation, absence of integrity and lack of fiscal responsibility. The strategy was unbalanced and unsustainable. There was too much stress on short-term populist measures and too little attention to long-term interests of the country.
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Title Annotation:Pakistan
Author:Jafarey, V.A.
Publication:Economic Review
Date:Jul 1, 1993
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