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AYUB KHAN REGIME

(1958-1969)
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Prepared by: Fahad Zaki Farooqui


Born on May 14, 1907 in Rehana village, near Haripur, Hazara,
Pakistan.
Studied at Aligarh Muslim University.
Joined the army of the British Colonial powers in 1926.
Fought in World War II as Commissioned Officer.
Attained the rank of Brigadier General in 1947
In 1950, became first Pakistani to lead army as its Commander-
In-Chief.
Army took control of the country in 1958 & appointed General
Ayub Khan as Chief Martial Law Administrator.
Soon after, Ayub Khan declared himself as President.
PERSONAL PROFILE
AYUB KHANS ERA
October 27,1958 to March 25,1969.

Economic condition of Pakistan:
Country was in total disarray
Had no economic weapon in their
armory to fight the battle of its
recovery.
AYUB KHANS ERA


Growth rate of 11 years (1959-70) was as high as
6.25%.
Created an environment where the private sector was
encouraged to establish medium and small-scale
industries in Pakistan.
Opened up avenues for new job opportunities, the
economic graph of the country started rising.
He was the first Pakistani ruler who attempted to bring
in land reforms but the idea was not implemented
properly.
Labor, law and administrative reforms were also
introduced during his regime
ECONOMIC STRATEGY

The commitment to rapid industrialization.
The benefits of economic growth would drop
down to the poorer segments of the society.

Key priority
Achieve rapid rates of economic growth &
price stability.
Develop Pakistans industrial & agricultural
capacity.
MONETARY POLICY (1958-69)


The year 1959-60 marked the beginning of a phase of
liberalization and deregulation of the economy and substantial
flow of resources from abroad.

This included gradual liberalization of import policy and
introduction of Export Bonus Scheme.

From this period government granted liberal concessions to the
private sector to establish industries in the country. Resulting
an increase in monetary supply.

First plan (1955-60)- the monetary expansion amounted to Rs.
1.96 Billions.

Second plan (1960-65)- the money supply increased by Rs.2.80
Billions.
MONETARY POLICY (1958-69)


The bank credit both in the private and public
sector expanded to Rs 1.62 Billions during the
1st and during the 2nd plan period it was equal
to Rs. 4.77 Billions.
THE ECONOMIC PERFORMANCE OF THE
COUNTRY

The countrys economic performance in terms of growth
rates of the important sectors includes: -

1. Agriculture

2. Manufacturing

3. Balance of payments situation

4. Price index

GROWTH TRENDS
Years GDP Agriculture Industrial Sector
1950s 3.1 1.6 7.7
1960s 6.8 5.1 9.9
1970s 4.8 2.4 5.5
1980s 6.5 5.4 8.2
1990s 5 4.4 5.5


One of the salient feature of the Ayub Khans decade was The
reversal of the neglect in agricultural sector that had been there in
the early 1960's.
A series of reforms strengthened the Pakistani agriculture sector.
Rural infrastructure investment was increased to improve the
overall availability of irrigation water and the amount of cultivated
land.
The two factors that contributed to the revival of agriculture were:

The green revolution, characterized by the introduction of high
yielding varieties of rice and wheat.
The mechanization and diffusion of technology among
agriculture producers.

POLICIES IN THE AGRICULTURE
SECTOR

Green revolution
Green revolution is a concept used for food production of new
and improved varieties of seeds, fertilizers, irrigation and
machinery.

As a result, between 1960-1965, agriculture production grew
by 3.8% per annum.
This phenomenal increase in growth can be broken into two
phases.
Between 1960 and 1964-65, irrigation was the main cause
of development

Between 1965-66 and 1968-69 the use of high yielding
varieties seeds and chemical fertilizers became widely
common in West Pakistan which was the main cause of
development then

POLICIES IN THE AGRICULTURE
SECTOR


Improved Seeds
Agricultural Machinery
Tube well Irrigation

Between 1959 and 1964 agriculture grew at an
over all rate of 3.7% and by 6.3% between 1965
& 1970's
POLICIES IN THE AGRICULTURE
SECTOR


Focus on reconstruction and development of agriculture
based industries

Priority of Ayubs administration was to achieve the rapid
rate of economic growth and develop Pakistans industrial
capacity.

Emphasized on private sector.

Removal of administrative controls and price stability to
provide a macro economic environment conducive to
private investment.

POLICIES IN THE INDUSTRIAL SECTOR
POLICIES IN THE INDUSTRIAL SECTOR


In February 1959, Government announced a new industrial
policy. The main emphasis was put on the utilization of raw
materials available in the country to benefit small and
medium scale industries.
Among the major steps that were taken in the promotion of
industrialization were:

1. Establishment of Financial & Development Corporations
2. Industrial Trading Estates
3. Price Controls
4. Investment Promotion Bureau
5. Encouragement of Private Enterprises
1. Establishment of Financial & Development Corporations
PIDC played an important role
Set up with a capital of 1 billion
PIDC was put incharge to promote the following industries:
Jute
Paper-board and newsprint
Heavy engineering
Fertilizers
Sugar
Cement
Textiles etc

2. Industrial Trading Estates
Four new estates for small industries were established in
Bahawalpur, Gujarat, Larkana, and Peshawar
It helped in the process of industrialization by handling the
initial difficulties faced by new industrialists

3. Price Controls
In October 1958, the government took several measures to
check the rising spiral of prices.
Price controls covering a large number of consumer goods and
industrial raw materials were imposed.
These measures led to a fall in prices and improvement in
supply position of a large number of articles.

4. Investment Promotion Bureau

In order to attract foreign investment the government set up an
investment promotion bureau in April 1959.
The main function of this organization was to sanction proposals
for the establishment of new industries involving foreign
investments.
To provide guidance to industrialists and serve as a clearing
house for problems of foreign investors in the matter of
procurement of land, building materials, water, power, railway
etc





5. Encouragement of Private Enterprise

Establishment of investment promotion bureau to give
information and guidance to private investments.

Industrial legislation with a view to facilitating the growth
of industry with minimum government interference.

Giving further incentives for encouragement of exports.

OTHER MEASURES


- SUPPLY OF CREDIT
Liberally provided to the industrial sector by both the commercial banks &
the specialized credit institutions

- FOREIGN AIDS AND LOANS
Foreign aid and loans received from friendly countries, played a dominant
role in industrial and economic development of Pakistan. Without such
aid the remarkable growth in that era could not be possible

- FOREIGN INVESTMENTS
Liberal policies in tax concession and other measures taken by
government, the inflow of capital increased
According to state bank of Pakistan foreign private investments
increased

1956 13.20 Mn
1959 16.59 Mn
1965 26.11 Mn
1966 26.28 Mn



FOREIGN TRADE POLICY


Export Bonus System

The export sector responded dramatically to the policies.

Growth rates of exports jumped to 7% per annum.

Large diversification of the composition of Pakistans export portfolio, with cotton
and jute slowly replacing primary commodities.

Ninety percent of the export growth in the 1960's was due to the increase in
manufactured export, which grew at an annual rate of 20 %.

Significant dismantling of import licenses and hence, greater ease in importing
industrial raw material and spare parts for industry.
BALANCE OF PAYMENTS


Few reasons for the negative balance of payment.

IMPORT OF CAPITAL GOODS
Industrial base in the early times was almost negligible.
In order to build the economy, Pakistan had to import capital goods
like machinery, etc for rapid industrialization .
Heavy import of machinery considerably increased the import bill and
effected the balance of payment on current account.

INCREASE IN IMPORT PAYMENTS OF FERTILIZERS
Due to the increase in prices of fertilizers, edible oil, there was a
sharp increase in the import payments.

CONSUMPTION ORIENTED SOCIETY
Pakistan as a whole is consumption oriented society.
The import of consumer goods was 16% of the total import.
Most of the consumer goods imported from outside could easily be
manufactured in Pakistan and ease the situation in balance of
payment.
BALANCE OF TRADE
(In Crores Rupees)
YEAR
(JUL-JUN) EXPORTS IMPORTS BALANCE
1959-1960 184.27 246.10 -61.83
1964-1965 240.77 537.42 -296.65
1968-1969 330.54 489.66 -159.12
1969-1970 333.71 509.81 -176.10
DEFICIT FINANCING:
Trade deficit in the early times was financed by the foreign aid
In hope that as development proceeds and income rises, not only
the country capacity to save increases and the initial gap
between investment and domestic saving rates be bridged, but
also that a sufficient level of export surplus would be created to
discharge the debt obligation incurred earlier.
This hope was never realized. The result was that the balance of
payment position grew increasingly worse with the progress of
development planning in the country.
At the beginning of the first five-year plan, about 19% of
Pakistans import and 35% of its development expenditure were
being financed by foreign aid.
At the end of the plan period, these proportions had risen to
31% & 38% respectively.
Halfway through the second plan, these proportions had shoot
up to 56 and 42 percent respectively.
It was not realized at the time that such heavy dependence on
foreign resources even for development purposes could cause
serious balance of payment difficulties in the future.
In 1967-68 foreign aid was financing 50% of imports and 34% of
development expenditures.
BALANCE OF TRADE
MONETARY POLICY
The objectives of monetary policy are:

Keep inflation and deflation in check
Maintain full employment.

Monetary policy considers the following tools:

Required Reserved Ratios
Discount rates
Open market operations

Main Elements of monetary and credit policy were;


DEMAND FOR CREDIT:
1959-60 marked the beginning of a phase of
liberalization and deregulation of the economy and
substantial flow of resources from abroad.
Governments liberal economic policies were met with
an enthusiastic response from the private sector.
Both the expansion in investment and production
entailing liberalization enhanced demand for credit in
the private sector.
As the results of the development, demand for credit in
the private sector increased rapidly.
The cumulative credit used by private sector during
1960-61 to 1964-65 was Rs 4.53 billion compared with
Rs 1.45 billion.
QUOTA SYSTEM:

SBP introduced a quota system on august 1, 1963.

Quota for individual banks was fixed at 50% of the average of the statutory
reserves with the state bank during each week of the previous quarters.

Borrowing in excess of quota was subjected to enhanced rate of interest,
which ranged between 0.5% to 2%.

The quota system was a new measure. It was introduced to restrain credit
expansion in private sector.

However credit for the number of sectors was exempted from the quota
system like credit for agriculture finance, industrial finance and export finance.

Changes in reserve requirement and introduction of quota system were not
found to be effective in correcting the monetary situation.

Though the situation on ground had not changed much since the introduction
of credit control measures in the first half of 1965, the SBP announced a
number of relaxations in credit policy.

The quota system in respect of scheduled banks borrowing from the state bank
was withdrawn with effect from 16th august 1965.

Simultaneously, the reserve requirement was reduced from 7.5% to 6.25%
which was followed by a further reduction to 5% on 17th Sep 1965.

INCREASE IN COMM BANK BORROWING FROM SBP


As the demand for credit in the private sector expanded,
commercials banks deposit mobilization could not keep up
with the demand.

More specifically the bank credit increased from RS 1.65
billion in 1959-60 to Rs 13.56 billion, an 8.2 times

Commercial banks borrowing which was nominal up to 1959-
60 increased substantially, from Rs. 338 million in 1960-1, it
jumped to Rs.1698 Million in 1968-9.

As schedule banks continued to increase their borrowing
from the state bank, schedule banks heavy borrowing from
the SBP was not viewed favorable as they used this fund to
finance government bank borrowing.
1965 WAR


The Indian aggression in 1965 had implications for the economy,
including monetary policy.

There was a significant interruption in the inflow of foreign
assistance, which in the past had significantly contributed high
growth rate, particularly in the industrial sector and private
investment.

Also budget deficit rose from Rs. 2.1 billion in 1964-65 to Rs 5.2
billion in 1966-67.

Difficulties created by Indian aggression were compounded by an
extraordinary deficiency, which affected the countrys main crops for
two years.

Thus in 1966-67 the growth rate of economy slowed down to 3.1%
the lowest in ten-year period ending 1969-70.
AYUB KHANS FOREIGN POLICY
The objectives in that era were the security and development of Pakistan
and the preservation of its ideology.

While retaining and renewing the alliance with the United States, Ayub
Khan emphasized his preference for friendship, not subordination, and
bargained hard for higher returns to Pakistan.

Other than ideology and Kashmir, the main source of friction between
Pakistan and India was the distribution of the water of the Indus River
system.

As the upper riparian power, India controlled the head works of the
repartition irrigation canals.

After independence India had, in addition, constructed several
multipurpose projects on the eastern tributaries of the Indus.

A compromise that appeared to meet the needs of both countries was
reached during the 1960; called Indus Water Treaty.
DEMERITS OF AYUB REGIME


In spite of success in industrial diversification and export
performance, Ayub Khans policies had several shortcomings.

High rates of effective protection continued to make Pakistani
industry inefficient, and a number of international studies
documented Pakistan as a worst example of industrialization.

Unlike other countries, Pakistani use of tariffs and quotas was not
carefully planned.

The paradox of industrialization was, the regime resulted in a
progressive worsening in the balance of payment account with
the increase in the imports of machinery and other industrial raw
materials.
DEMERITS OF AYUB REGIME


The 1960's also marked Pakistans increase reliance on
foreign aid.

While the external economic assistance as a percentage of
GDP was a modest 2.8% in 1960's, it became substantial
within the next five years reaching to 6.6% in 1965.

Another negative feature of Ayub's industrial and trade
policies were the deliberate repression of wages.

It was felt that the low wages for industrial workers and
the restriction of trade union activity would help industry
acquire the critical mass needed for industrial takeoff.