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Marium Zehra
Topics covered
Lost decade an introduction
Was 1990s really a lost decade
Political regime
Structural adjustment program IMF
Monetory policy
Objectives of monetory control
Market based monetory control
Regulatory and supervisory reforms
Reforms for independent banking system
Fiscal reforms
Tax reforms
Foreign exchange policies and mechanism
Export promotion policies
Article by Ishrat Hussain
Critical evaluation

An era of political turmoil and changing economic policies leading to the
emergence of the lost decade
After the death of General Zia-ul-Haq in 1988, the nation returned to democracy . Seven different
governments (three interim-appointed & four elected) ruled Pakistan in this period. This period saw
heightened political instability. Despite far-reaching reforms introduced in 1991, economic indicators
once again fell sharply in contrast with the 1980s for several reasons other than political instability.
In the 1990s, economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation
was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the
governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif
was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement.
Economic stabilization program of deregulation, privatization and liberalization was introduced by

In the late 1990s, the Taliban government and Mullah Mohammad Omar was recognized as
the legitimate leader of Afghanistan. Due to this Pakistan faced many allegations, quoting
that Pakistan was supporting military aid to the Taliban group since 1994 to provide support
to the anti soviet alliance.
Due to Asian financial crisis, economic growth rapidly declined towards the end of this period.
Economic sanctions were also imposed on Pakistan due to first series of test of nuclear
devices in 1998. This test was basically a response of Indian nuclear test which had brought
ripples of fear regarding nuclear arms in South Asian region.
Until the end of 1980s, Pakistan was considered the most developed country in South Asia.
Unfortunately, it was taken over by India. In 1990s, Pakistan GDP growth rate was the lowest
amongst the SAARC countries. In 1996, Pakistan ranked the second most corrupt country
as per indicators of transparency international.
Tough decisions to end subsidies, to remove price distortions, mobilize domestic resources,
widen the tax base, eliminate discretionary controls were avoided with the result that the
cumulative effect of deferred decision appeared as huge credibility gap vis--vis international
financial institutions. Thus, eroded the productive base of economy.
However, Pakistan faced some positive aspects as well of this decade, as privatization led to
greater competition among commercial banks, SBP strict regulations, massive investment
and devaluation of rupee.

Was 1990s really a lost decade
While 1980s was a period of missed opportunities, the legacy of the economic managers of
this decade left for those who followed them including large fiscal deficit( result of large govt.
expenditure and no initiation of economic reforms.
1990s appeared as slowing down of economic growth because of the shocks beyond the
control of the economic managers.
For instance, large fluctuation and decline in cotton production due to pest attack, continuing
slowing down of remittances inflows, bad weather conditions and sanctions due to nuclear
test. Lastly, interim governments entered into agreements with multilateral financial
institutions, with the burden and constraints imposed to be borne by succeeding political
governments, resulted in worse management.
Secondly, short comings of economic management in 1990s made the matter worse . For
instance, the raising the interest rates to market prices on government borrowings, increased
the debt burden of government. It rose from 4.9% of GDP in 1987/88 to 7.7% of GDP in
1999/2000. The fiscal deficit should have been reduced prior to financial reforms.
Thirdly, the target lowering of fiscal deficit as part of the IMF program by reducing
development expenditure, declined sharply from 6.4% of GDP-yoy 1992-93 to 2.8% in 2000-
01. The private investment was also falling at this time led to greater unemployment, which
ultimately has increased poverty.

Fourthly, not sufficient effort was made to increase the employment intensity
of public sector expenditure. Unemployment was doubled as compared to
previous era i.e. 3% in 1980s.
Fifth, efforts were not made to increase the low human development
Sixth, the safety net provided to poor people through welfare activities
remained at a very low level
Seventh, the freezing of FCY accounts due to the fear of nuclear tests
shattered investors confidence.
Source; Janjua 2004, History of State Bank of Pakistan 1988-2003 p.8-11
Positive Side of 1990s
The average growth rate of agriculture remained high i.e. 4.4%
Second, major qualitative factor was economic reforms which transferred the
Pakistan's economy from closed and over-regulated system to a more open and
deregulated economy.
Privatization of banking system that boost competition,
Strict governance and independence of SBP from political pressure
Massive investment in countrys infrastructure of telecommunication, electricity
and roads,
The 1991 NFC award,
The 1998 population census
The 1991 water accord.

Political regime
1990s was highly regarded as the period of political instability where seven different
governments ruled over Pakistan.
The most prominent regimes were of Benazir Bhutto (PPP) and Nawaz Sharif (PML-N).
The elections were held in 1988 after the sudden death of Zia-ul-Haq due to plane crash.
PPP won the elections and Benazir Bhutto took over the office, remained there till 1990. She
got victory again in the elections of 1993. In 1996 she was removed by Nawaz Sharif due to
corruption charges, whose tenure also ended with the military take over in 1999.

The different regimes during lost decade are as follows:
1. Benazir Bhutto: 02 Dec 1988 06 Aug. 1990(PPP)
2. Ghulam Mustafa Jatoi: 06 Aug. 1990 06 Non. 1990 (interim pm)
3. Nawaz Sharif: 06 Nov. 1990 18 July 1993
4. Moeeenuddin Ahmed Qureshi: 18 July 1993 19 Oct. 1993 (interim pm)
5. Benazir Bhutto: 19 Oct. 1993 05 Nov. 1996 (PPP)
6. Malik Meraj Khalid: 05 Nov. 1996 17 Feb. 1997 ( interim pm)
7. Nawaz Sharif : 17 Feb. 1997 12 Oct. 1999 (PML-N)
IMF lending arrangements since 1988
During the 1980s, the Pakistan's economy, despite registering impressive growth rate with
moderate rate of inflation, was characterized with structural problems, including narrow and
inelastic base of federal and provincial taxes, weaknesses in expenditure control, a relatively
restricted trade regime, a narrow export base with a large merchandise trade deficit, heavy
reliance on workers remittances and resultant vulnerability of both the external current
account and gross official foreign exchange reserve.
Pakistan domestic fiscal deficit had risen to 8.6% of GDP b7 1987/88 from an annual
average of about 8% in 1984/85 1986/87.
Domestic liquidity expanded, resulted in overruns of credit in both private and public sector.
Thus the current account deficit rose to 4.3% of GNP in 1987/88 as compared to 2.1% in
1986/87. moreover, the forex declined to $438 million due to sharp rise in external short term
To address these major macroeconomic imbalances and structural problems the government
of Pakistan, in consultation with IMF and world bank initiated a structural adjustment program
in 1988/89 for achieving bop over the medium term while maintaining satisfactory growth
US$516 Million was extended to Pakistan, largest loan advanced by the IMF to any country
under this Facility. It was a soft loan but with hard adjustment as interest rate was low but
conditions attached were stringent.
Therefore, characterized as period of deregulation, privatization and liberalization.

Structural adjustment program
Structural Adjustment Facility (SAF) Package 1988-1991(initial package was for three years) accompanied
stringent conditions, which Pakistan was required to meet over the period of three fiscal years.
US$516 Million was extended to Pakistan, largest loan advanced by the IMF to any country under this
Facility. It was a soft loan but with hard adjustment as interest rate was low but conditions attached were
The main objectives of the lending program are as follows:
Sustain real growth at about 5.5%
Increase gross domestic savings from 10.3% of gdp in 1988/89 to 14.7% in 1991/92
Rise gross investment ratio from 17.5% of gdp in 1988/89 to 18.9% in 1991/1992.
Reduced the rate of inflation from from 9.2% to 6%

Monetory policy
The government initiated financial and monetory reforms to support the structural reforms in
trade and fiscal policies in 1987/88.
Along with exercising direct credit control methods, steps were taken for debt management
and for the promotion of establishment of capital markets. The rate of national saving
scheme (NSS) was rationalized. The rate of return on the government debt instrument was
changed to market oriented rates, applied to short term T-bills. In march 1991, government
securities were auctioned off.
1990s witnessed market based system of monetory and credit management. This included
introduction of public debt auctioning, abolition of credit ceilings and credit deposit ratio,
removal of cap on interest rates. This has paved the way for indirect monetory controls
through OMOs supplemented by small change in CRR.
Following the acceptance of the obligations of article VIII , sections 2,3 and 4 of the IMF
articles of agreement by the government, the SBP abolished the multiple exchange rate
system on may 19,1999, replacing it with a unified exchange rate and making rupee
convertible on current international transaction.
The foreign accounts for non- residents were introduced in 1973, the resident FCDs were
deregulated in Feb. 1991, both of the accounts get protection from disclosure. The interest
rates of the accounts is a fraction of a percent higher than LIBOR, varies with the maturity in
lieu with the swap agreement between the SBP and commercial banks.
A forward forex fee of 3% of deposits per year was introduced in June 1992 when the SBP
phased out the policy of providing free full forward exchange cover to FIs with respect to

Objectives of monetory control
Strengthen financial intermediation through the rationalization of structures of rates of return on wide range of debt instrument.
Minimize the adverse effects of mandatory and concessional credit allocation.
Strengthen the financial system through enhanced supervision and regulation.
Encourage private sector participation in domestic banking.

Privatization of banks were necessary at that time for boosting competition. After the nationalization in 1947, the commercial
banks lost the commercial orientation; which had brought an adverse impact on their efficiency, market responsiveness and
financial strength. New private banks were established

SBP issued new prudential regulations for enhancing the supervision and regulation of commercial banks including more rigorous
limits on credit concentration and the contingent liabilities, inflexible guidelines for the separation of bank ownership and
management, tighter margin requirements on equity based advances, strengthening the system of provisioning and classification
for the NPA.
Through an amendment to the state bank act of 1956, in 1993,SBP was given operational independence to conduct monetory
policy and to regulate and supervise the banking sector.

Rationalization of NSS
Government liberalized interest rates further in 1994/95 .
Pakistans financial system was given an important role when government securities auction market was developed. This was due
to the fact that rate of return on T-bills reflects market valuation of low risk asset. The auctioning of government securities was
introduced in 1991 and rationalized the structure of NSS.
Market based monetory control
SBP had achieved progress in terms of monetory control through market based
instruments. The liquidity was managed in secondary market through OMOs.
CDR and indicative credit targets
After credit ceiling mechanism, SBP encouraged credit to deposit ratio
mechanism for commmercial banks for credit expansion. This has also been
eliminated later. The ceiling on lending rate has been removed and indicative
credit targets were used, aimed at credit targets to banks, based on 1) size of
banks 2) rate of return offered on saving deposits 3)recovery of defaulted loans 4)
banks forecast regarding deposit mobilization and 5) quality of loan portfolio.

OMOs were polished more to minimize short term interest rate volatility in the
interbank market through two way OMO and a deposit facility at SBP to absorb
surplus or overnight funds.
Reserve requirements were also changed from daily to weekly basis.
These steps resulted in increased share of financial savings into marketable debt
instruments. Both by broadening the market for government securities and market
related terms on the various debt instrument.
Market based monetory control
In order to liberalize financial sector more, a broad based reform program was
introduced in 1989 under financial sector adjustment loan (FSAL).
This was aimed at reduced segmentation of credit markets, introduction of
auctioning system for government debt, limit directed credit, raise interest rates,
strengthening banking supervision and giving operational autonomy to SBP.
Through 1997/98, monetory reforms were carried out with a greater reliance on
market based instruments, including;
A reform of primary dealer system for government securities was initiated.
The t-bills of different maturities (3m, 6mand 1Y)
The existing federal bonds were eliminated.
Regulatory & Supervisory Reforms
The government attributed the weakness of financial system as the core reason for the decline of real
economic growth, domestic savings and macroeconomic imbalances. Therefore, in order to correct those
flaws, G.o.P implemented legal regulatory and supervisory reforms.
The prominent reforms are as follows:
To strengthen the autonomy and authority of SBP, laws have been enacted, for the protection of state
owned banks and DFIs from political influence. Moreover, to facilitate loan recovery and the unification of
banking court system.
The supervisory capacity of SBP was also enhanced.
The complete management of the various state owned banks and DFIs have been professionalized and the
losses were minimized through downsizing. SBP has carried out all these activities.


The main reforms that separated the financial system from political interference are as follows:
Privatization: This was the only approach to cut out political interference from FIs, known as divestiture of
government's ownership interests in the banks. The important institutions, privatized at that time were:
1) Investment corporation of Pakistan
2) National investment trust
3) State life insurance corporation
4) MCB
5) ABL

SBP supervisory capacity was enhanced
The legal environment for loan recovery and the enforcement of financial contracts was improved

Fiscal policy
The consolidated federal and provincial fiscal deficit which was 6% of GDP or
more in 1980s, reached 8.5% of GDP IN 1987/88.
Huge public borrowings was the main reason behind paksitans economic
Thus, fiscal reforms was the main prospect of structural reforms and successive
governments of 1990s.

The overall fiscal deficit was declined to 6.1%, only due to
reduction in development expenditure i.e. at the cost of growth
potential rather than through enhancing tax to GDP ratio.

Tax reforms
Reduction of tax rates and broadening the tax base to include untaxed sectors like textile and steel.
The tax revenue sharing system was changed primarily with the initiation of national finance
commission award in 1997 between federal and provincial level.
NFC has established a divisible pool of federally collected taxes and uniform sharing ratio across
This has also eliminated the tax discrimination in which most import taxes was allocated to the
federal government and the bulk of revenues from domestic taxes to the provinces.

General Sales Tax
Significant reforms were made in GST in 1990, modernized as value added tax. Its contribution to
total tax revenue increased from 15 percent to 42 percent. As well as the tax burden increased, the
distributional incidence has worsened; It appeared that the welfare of the poor households has been
reduced due to taxation of items such as sugar, vegetable ghee, and basic fuels, whereas rich
households remain comparatively better off because most of the services remain out of GST tax net.
In 1996, amendments were made in GST act by expanding the horizontal coverage at the
manufacturing and import stages, removing excise type features.
In 1997/98, improvements were made by including compulsory registration of importers, wholesalers
and distributors and abolishment of replacement invoices; effective extension of GST on two main
The legal framework was strengthened by dealing with reluctant taxpayers, curb tax fraud and
minimize evasion.
The GST was unified at a single rate of 12.5% in the budget of 1997/98.

Exchange rate policy
Before 29
may 1998, Pakistan used managed floating
exchange rate system. In that mechanism, SBP set the rate on
daily basis on which it buy/sell dollars with authorized dealers.
The rate was adjusted frequently to curb inflation and
regularized trade
Since 1982, Pakistani rupee was operated in floating rate
system based partly on a trade weighted basket of major
In 1999, when exchange rate was set on free float, the
exchange rate and monetory policy was fully integrated.
Forex regulations
Pakistan has a highly liberalized forex system
The main aim was to facilitate pakistani nationals working overseas, in order
to provide them a saving instrument.
In July 1994, current account convertibility of rupee was introduced and all of
the multiple currency practices were removed.
Capital accounts were also liberalized as there were no restrictions on
repatriation of profits and capital associated with FDIs. All of the residents and
non-residents were allowed to maintain foreign currency accounts and
transferring of balances abroad.
A number of banks anf FIs were given authority to deal in foreign currency, to
supervise surrender requirements and to sell foreign exchange.
Exchange receipts and payments abroad were made through authorized
foreign exchange dealer in any convertible currency in order to avoid
hundi/hawala system
Foreign Currency Accounts
The FCA became an important tool of saving by resident and non resident. The promising
conditions on FCAs allowed elites to convert their black money into white easily. Therefore, a
huge inflow of forex was noticed
The promising features on private FCAs included above market nominal rate of interest,
exemption of income from various taxes, protection from disclosure, guarantee against
exchange rate risk and unrestricted withdrawal facilities.
FCD was initially liability for G.o.P because all the residents and non residents were allowed
rupee borrowing against foreign currency account. However, govt. used these deposits for
financing current account deficits as a substitute of making painful policy adjustments.
On 28thy may 1998, SBP seized all foreign currency accounts of both residents and non
residents, due to the fear of withdrawal of FOREX by depositors due to the series of nuclear
tests. however, the depositors were allowed cash withdrawals in the form of PKR at PKR
46/$. This leads to the fluctuation of forex in the open market as high as PKR 70/$. It then
became PKR 58/$ in Sep. 1998.
However, government has announced that importers and exporters could exchange their
currencies at the average of official exchange rate and the interbank rate, hovering at around
PKR 54/$.

Foreign currency deposits - 1998
After 29
may 1998, current banking practices were
prohibited to deal in foreign currency accounts. SBP only
allowed commercial banks to maintain small uncovered
position in forex. Thus, commercial banks surrendered
these deposits to the SBP against rupees, for lending in
Pakistan. The banks closed out their open positions by
taking out forward covers from SBP.
Export promotion policies
These are as follows:
Exemption of exports from sales tax and central excise duty.
A duty drawback scheme covering sales tax, central excise
duty and customer duty on inputs used in exports.
Export tax on raw material used in exports.
A concessionary finance and export credit guarantee scheme
Facilities for import of raw materials and machinery used in the
manufacture of exports.
Privatization program
Privatization of SOEs has been done since 1991, following the wave of liberalization,
deregulation and reduction in the role of state in the economic activity throughout the globe.
Within three years, rapid pace of privatization was observed, with more than 70 units were
privatized. The wave was gradually slowed down after 1993 due to the demand of greater
transparency and financial vulnerability. Thus, the emphasis was changed from speed to a
higher level of scrutiny and transparency:
Small manufacturing units and thermal power generation of WAPDA, which are for outright
LSM & services to be sold in suitable tranches on the national and international stock
Utilities and services such as electricity generation and distribution, banks, gas and
telecommunications, which will be first sold partially.
Article by Ishrat Hussain
At least four main factors determined Pakistan's economic performance in the 1990s.
First, political instability and frequent changes in the government followed by a reversal of decisions taken by the preceding
government created an environment of uncertainty and a lack of predictability.
Second, there was widespread mis governance by the two major political parties ruling the country during this period.
Personal, parochial and party loyalty considerations dominated decision-making while institutions were bypassed.
Third, there was a lack of political will to make timely and difficult decisions. The cumulative effect of avoiding and postponing
such decisions, coupled with the failure to correct the distortions at the right time, proved too costly.
Fourth, there were unforeseen exogenous shocks, such as the nuclear testing in May 1998 that shook investors' confidence,
accelerated the flight of capital, led to the imposition of economic sanctions and disrupted external economic assistance.
An interesting paradox is that the economic policies of both major political parties, the Pakistan Muslim League (PML) and the
Pakistan People's Party (PPP), who took turns ruling during the 1990s, were similar and could not be faulted. Both parties were
committed to deregulation, privatization, liberalization, greater reliance on market forces and other economic reforms. The
supporters of PML and PPP argued that the dismissal of the Nawaz Sharif government in 1993 and of the Benazir government
in 1996 did not allow positive trends to persist. It can only be speculated whether the economic output for the decade would
have been better had these governments completed their terms in office. Poor governance would have been largely offset by
the continuity in policies, programs and projects. The stop-and-go cycle faced by Pakistani economic actors imposed enormous
costs in terms of macroeconomic instability
Critical evaluation
All in all, we cant call 1990s a lost decade. Despite many negative factors like
low economic growth, high fiscal deficit, political instability and successful
implementation of only 2 IMF plans out of 7, there are positive factors as well. For
instance, privatization of banking system that boost competition, strict governance
and independence of SBP from political pressure, high agricultural output,
massive investment in countrys infrastructure of telecommunication, electricity
and roads, the 1991 NFC award, the 1998 population census and the 1991 water
Therefore, the problems faced were primarily due to the extension of non-
managable expenditures of 80s era and reversal of plans of following
governments of 90s era.