IPSG NEWSLETTER May 1997

STRUCTURAL ADJUSTMENT AND THE CRISIS OF GOVERNANCE IN PAKISTAN

by Tahira Bhatti


When Benazir Bhutto proved incapable of delivering on the reforms demanded by the IMF and by Pakistan's business elites, she was quickly overthrown ... and replaced by an unelected "caretaker regime of experts" which pushed through a lengthy agenda of economic reforms in just three month - before handing the baton over to Nawaz Sharif, whose record-high parliamentary majority was matched only by a record-low 27% voter turnout.


Following the dismissal of the Benazir Bhutto government on November 5, 1996, President Farooq Leghari's handpicked "caretaker" government and the recently installed Nawaz Sharif government have raced against time to implement a sizeable agenda of economic reforms long demanded by the IMF and by Pakistan's business oligarchs.

Events began to unfold at a dizzying pace once Bhutto was dismissed. Within hours of the midnight dismissal order, a Washington D.C.-based World Bank official, Shahid Burki landed in Islamabad to take over as the de facto Finance Minister, and a comprehensive plan of sweeping economic measures was quickly unveiled. These included cutbacks on public subsidies and development spending, a restructuring of the banking industry, sharp reductions in tariff structures, opening up the oil and gas sector to private investment, raising new taxes, and increasing utility rates. The government has thus far retrenched some 40,000 employees, while many public sector employees have actually gone without pay for several months. Additional measures include an expansion in the scope and pace of the privatisation program, with 115 public sector companies, including railways, airlines and airports, tagged for sale during 1997.

The IMF has long-demanded that Pakistan implement these and other neo- liberal economic policies, and had earlier expressed its serious misgivings with the Benazir Bhutto government over its inability to carry them through. Last June, the IMF actually suspended further disbursements to Pakistan under a $600 million standby loan agreement (SBA), citing inadequate compliance with its required policies. As a result, Pakistan, which is heavily dependent on such loans to meet interest and principal amortisation payments on its $60 billion public debt, sank into a serious foreign exchange and balance of payments crisis by October. Just prior to its dismissal, the Bhutto government had made a last-ditch attempt to pacify the IMF by announcing a "mini-budget" of fiscal spending cuts, tax increases, an 8.5% devaluation in the rupee, and even a reshuffling of the Ministry of Finance to install officials more acceptable to the IMF. But these measures, which resulted in sharp price increases in basic foodstuffs, petrol and kerosene, were greeted with complete outrage by the Pakistani people, who took to the streets in massive demonstrations and demanded their withdrawal.

By this time, it had also become clear that the IMF and Pakistan's business community had lost all confidence in Bhutto's abilities to overcome the political and economic impasse. Just two weeks before her dismissal, an article in the Wall Street Journal commented that even the measures announced in the "mini-budget" were unlikely to restore "business confidence" and called for deeper changes. Amazingly, the article, (which was widely reported in the Pakistani press), went on to suggest that the best solution lay with President Leghari dismissing the Bhutto government to "appoint a caretaker regime of experts" to implement further reforms and return the focus to a "good investment climate".

Pakistan has experienced similar crises in 1990 and 1993, when Ghulam Ishaq Khan invoked the infamous article 58(2)(b) to dismiss ruling governments. In 1993, the Nawaz Sharif government was dismissed just days after it instituted a series of unpopular economic measures demanded by the IMF. In its place, a similar "caretaker" was installed under Moeen Qureshi - an IMF official - which also spent its brief life negotiating new loans with the IMF and pushing through new structural adjustment measures.

Curiously enough, each bout of economic reforms has been forced through under conditions of extreme economic disorder, and has always been presented as the "only alternative" to rescue the country from the brink of complete economic and political chaos. But if anything, after eight years of structural adjustments, the country's economic woes are now more chronic than ever. Pakistan is described by international analysts as one of the most "open" economies in South Asia, where IMF-inspired reforms, pursued since the return to parliamentary democracy in 1988, have had their deepest impact. The opportunities for foreign and local investors in many different sectors of the economy are broader and more liberal than for example in neighbouring India. Many public sector privatisations - including those most recently announced, are targeted directly at foreign investors in the Gulf, Japan, Europe and North America. But it is within precisely these conditions that the country is now facing its worst recession in 25 years, and has turned into a "debt-junkie", perpetually at the mercy of international banks and lending agencies. With a national debt of $60 billion, in excess of 88% of its GDP, almost 50% of current expenditures or over 60% of tax receipts are used just for debt servicing.

Yet, the only prescription that successive governments have pursued is to further increase the scale of structural adjustments and privatisations and to further orient Pakistan's economy to the requirements of foreign investors and debt-holders. Burki has negotiated not only the revival of the previously suspended $600 million SBA program, but its increase by a further $300 million. In addition, there have been ongoing discussions for a billion dollar Extended Structural Adjustment Facility (ESAF) with the IMF and a number of possibilities with the World Bank.

Nawaz Sharif's newly appointed government, which has a huge parliamentary majority, has sworn to continue and deepen the policies initiated by Burki. In any event, judging from the fate that befell Benazir Bhutto when she ran afoul of the IMF, it is even more unlikely that Sharif will now dare to deviate from its dictate.

Before leaving office, Burki declared that President Leghari had pledged to uphold his reforms beyond the interim government and through the remainder of his (Leghari's) three year term. Quite what was meant by this became somewhat clearer in mid-January when Leghari announced the formation of a Committee for Defence and National Security (CDNS) - a 10 member "advisory" body which also includes the defence minister and the four senior-most military officials. The CDNS will now apparently be the final arbiter in matters of defence and economic policy - with the power to declare a national emergency if necessary.

As the recent election turnout of less than 27% demonstrated, the institutions of parliamentary democracy suffer from an utter lack of legitimacy and credibility among the Pakistani people. An acute crisis of governance is developing around the seeming inability on the part of successive governments to implement the deeply unpopular economic agenda demanded by the IMF and by Pakistan's business elites.

This in part, helps to explain why Pakistan's ruling elites have had to use the last two caretaker governments to railroad through economic measures which could not otherwise be accomplished by their parliamentary system. If the new Nawaz Sharif government should also fall victim to this crisis of governance and fail to resolve the economic and political impasse, it is not inconceivable that Pakistan's ruling elites will once again resort to the military, by calling on the CDNS to step in to declare an emergency and resolve matters through decree and dictatorship.