Lecture 7 (Pak Eco)

PHASE V -(1988-99)
Lecture 7
THE MUDDLING NINETIES
• Bhutto 1988-1990
• Nawaz Sharif 1990-1993
• Bhutto 1993-1996
• Nawaz Sharif 1997-1999

Bhutto
The economy that the democratic government of Benazir Bhutto inherited in December 1988 was
not in good shape:
o Macro economic imbalances were large

o The fiscal deficits had touched a new peak of 8.5% of GDP in 1987-8
o The current account balance of payments deficits had grown further.
o The investment rate had stagnated
o Spending on human resource had been greatly neglected.
o Shortages of infrastructure had become serious issue and structural weaknesses in manufacturing and
exports sector were constraining future growth.
o Political intervention in state owned commercial banks also resulted in large increases in bad debts of the
banking system, increasing the large contingent liability of the public sector.
Macro Economic Management
• 1988-96 periods was marked by a slowing down of the rate of economic growth ,
sharp acceleration in inflation and worsening of distribution of benefits of growth.
• GDP growth rate during this period averaged 4.9% per annum compared to 6.6%
per annum during 1977-88.
• The rate of inflation accelerated during 1988-96 and exceeded 12% per annum
during 1993-6.
• Workers remittances continued to decline, interest rate on foreign debt rose

modestly but steadily.
Reasons for slowdown of the economy
• The continued low rates of savings and investments.
• Governance problems hindering the effective use of public sources.
• Structural problems in large scale manufacturing.
• Considerable financial and political instability.
• Macroeconomic policies  failed to halt the growing imbalances in the budget  growing financial
vulnerability.
• Long term investment in infrastructure was neglected.
• No serious efforts were made to mobilize domestic resources in the public sector for development.
Shift towards private sector
• Government stepped up the rate of privatization in 1991.
• Active pursuit of foreign private investment for energy development on the bases
of long term agreements was the key element of the new energy policy adopted in
1994.
• The first large energy development project in the private sector, the hub power
project was completed in 1997.
• With the help of the World Bank, plans for the first large oil field power station
with a capacity of 1293 MW at hub in Baluchistan were finalized.
• The sale of the part of the shares of PTCL to the foreign investors was only
a first step towards the privatization of this important entity.
• The bulk of the growth in private investment was concentrated on the

manufacturing sector.
• Private manufacturing investment:
o increased from 2.4% of GDP in 1986-8 4.3% of GDP in 1992-4

Criticism:
• Lack of transparency, corruption and concentration of wealth in a few hands
o E.g., monopoly in cement where Mian Mansha got all five plants of DG cement under
privatization scheme in 1992.
• Only 22% of privatized units performed better, however 34% were really
performing worse:
o 20 privatized units were closed

Fiscal Deficits
• In the real sense, the inability to control fiscal deficits was the root
cause  high inflation.
• The fiscal deficits averaged 6% of GDP during the fiscal years 1990-3
and 1994-6 respectively.
• The worsening of financial position of the State Bank of Pakistan

because of losses on foreign currency deposits meant that smaller
profits were available to cover fiscal deficits.
Debt Growth
• Given the high level of fiscal deficits, the rapid growth in government debt continued as
domestic public debt increased from Rs 290 billion in the mid 1988 to an estimate Rs 909
billion by mid 1996.
• Public sectors external debt nearly doubled rise in ratio of debt to GDP.
• Interest payments on public debt increased to 6.1% of GDP.
• The debt-servicing problem was compounded by a faster growth in interest payments than
in debt stock
• Pakistan’s external debt burden increased to US $32 billion in mid 1997.

Agriculture & Industry
• Declining performance of two sectors (importance declined):
o Budgetary allocations dropped in Five year plans from 20% (1978-83) to 8%

(1993-98)
• Textile industry – structural problem
o Inability to move into higher value added

o Lacked adequate quality control
Financial Sector
• Liberalization of foreign currency account
o Freezing in 1998 -> loss of investor confidence
• Loan defaults
o loans were issued based on political motivations rather than economic assessment
• Stock Market
o Restrictions on foreign investment and repatriation of gains removed in 1991

Pet projects
Politicized infrastructural development
• Nawaz Sharif
o Motorway
• 1991: signed contract with Daewoo to build a four lane motorway by 1995
o Yellow Cabs
• Easy loans to import duty free vehicles

• Banks were unable to trace 50-60% of the vehicles on defaulted loans
Pet projects
• Benazir Bhutto
o Power Sector
• 1994: 19 agreements for independent power projects (IPPs)

• Subsequent problems with high tariffs
o Social Action Programs
• Designed by World Bank – aimed at improving primary education, health care, family
planning, rural water and sanitation.

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PHASE V -(1988-99)

• Nawaz Sharif 1990-1993

• Nawaz Sharif 1997-1999

o Macro economic imbalances were large

• Workers remittances continued to decline, interest rate on foreign debt rose

• Governance problems hindering the effective use of public sources.

• Structural problems in large scale manufacturing.

• Considerable financial and political instability.

• Long term investment in infrastructure was neglected.

• The bulk of the growth in private investment was concentrated on the

• Private manufacturing investment:

o increased from 2.4% of GDP in 1986-8 4.3% of GDP in 1992-4

• Lack of transparency, corruption and concentration of wealth in a few hands

o 20 privatized units were closed

• The worsening of financial position of the State Bank of Pakistan

• Interest payments on public debt increased to 6.1% of GDP.

• Pakistan’s external debt burden increased to US $32 billion in mid 1997.

o Budgetary allocations dropped in Five year plans from 20% (1978-83) to 8%

• Textile industry – structural problem

o Inability to move into higher value added

• Liberalization of foreign currency account

o Freezing in 1998 -> loss of investor confidence

o Restrictions on foreign investment and repatriation of gains removed in 1991

• Easy loans to import duty free vehicles

• 1994: 19 agreements for independent power projects (IPPs)

o Social Action Programs

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