1. Macroeconomic Stabilization and Fiscal Reforms
Intro.
Attainment of long-term stability in the inflation rate, decrease in employment, and addressing the other issues is called macro-economic stability.

2. Macro Stability is a Necessary Condition for Growth and Poverty Reduction
Economic growth is considered as the most single most important factor influencing poverty
Macroeconomic stability is essential for high and sustainable rates of growth
Hence, macroeconomic stability should be a key component of any poverty reduction strategy

3. Macroeconomic stabilization and Fiscal Reforms
causes:
Flight of capital
High Govt. spending
Bad fiscal & Monetary Policy
Unemployment
Inflation
Low revenue generation

4. But Not a Sufficient Condition
However, macroeconomic stability alone is not sufficient for high rates of growth
Growth also depends upon key structural measures
Regulatory reform
Privatization
Civil service reform
Improved governance
Trade liberalization
Financial sector reform

5. Nor is Growth a Sufficient Condition for Poverty Reduction
Growth associated with progressive distributional changes will have a greater impact than growth which leaves distribution unchanged
Hence, policies which improve the distribution of income and other assets will also form essential elements of a country’s poverty reduction strategy
Land tenure reform
Pro-poor public expenditure
Measures to increase the poor’s access to financial markets

6. Elements of Macro Stability
Sound policies send clear signals to the private sector
Prudent macro policies can result in low and stable inflation, which positively impact the poor
It creates conditions for debt sustainability which finally puts the economy on the road to steady progress and poverty alleviation

7. Elements of Macro Stability (cont.)
Maintaining an appropriate exchange rate policy promotes balanced economic growth in line with comparative advantage
Maintaining an adequate level of net international reserves allows a country to weather temporary shocks without reducing pro-poor spending

8. Conceptual Framework (cont.)
Starting Point: “base case” poverty reduction strategy
Step 1: Assessment of government’s spending program
Examine composition of present budgetary expenditure taking into consideration distributional and growth impact of spending.
Scope for reallocating existing programs
Evaluation of new programs;
Ranking in order of relative importance

9. Conceptual Framework (cont.)
Step 2: Assessment of existing revenue base
Impact of present tax system on poor.
Scope for raising resources in non-regressive manner (Taxation that should not takes a larger percentage of a lower-income and a smaller percentage of a higher income. For example, a tax on the basic necessities) Minimize impediments to private sector productive investment.
Criteria: efficiency, equity, administrative feasibility, and revenue considerations.

10. Conceptual Framework (cont.)
Step 3: Scope for additional net domestic borrowing
Taking into consideration need to maintain macro stability
and ensure adequate credit to private sector
“Crowding Out” versus “Crowding In”
Relative productivity of public investment
Consistent with the need to maintain low inflation and support sustainable growth
Theory that heavy borrowing by a government soaks up the available credit, leaving little for the private sector at affordable interest rates.

11. Conceptual Framework (cont.)
Step 4: Availability of External Financing
Grants, net external borrowing, or debt relief
Amount and type of financing will vary depending on country circumstances
May be limits to amount of additional external financing that is deemed appropriate
Absorptive capacity constraints
Uncertainty regarding aid flows
Long-term dependency on external aid

12. Conceptual Framework (cont.)
Step 5: Does the desired poverty program square with expected budgetary financing?
If imbalance remains, need to ascertain extent to which additional external financing is available (purpose of PRSP)
If program cannot be reconciled with the domestic financing target and available external financing, then need to reconsider the various parameters in steps 1-4.

13. Things to Keep in Mind
No rigid, predetermined limits on a country’s fiscal position
Arriving at a workable framework will require juggling a large number of parameters and weighing the trade-offs between multiple objectives

14. Pakistan-specific stabilization programmes
1988 agreement
Pakistan received huge loan of 1.27 billion
Suggested reforms
Rupee be devalued by 20% in terms of dollar;
The imports be liberalized;
Prices should increase and subsidies be withdrawn;
Custom duty on imports be decreased and sales and exercise duty be imposed in the country; and
The industrial sector be liberalized from govt. control through deregulation and privatization.

15. Pakistan-specific stabilization programmes
The following were the key conditions of 1988 structural adjustment programme
Reduce the overall budgetary deficit from 6.5 per cent of the GDP in and to 5.5 per cent in to 4.8 per cent in ;
Contain the rate of inflation to 10 per cent in and reduce it gradually to 7 per cent by and to 6.5 by ;
Reduce the external current account deficit to 3.4 per cent of GDP in , and further to 2.8 per cent by and 2.6 by ;

16. Pakistan-specific stabilization programmes
Continued……
Reduce the civilian external debt service ratio from per cent in , to the sustainable level of less than 22 per cent in ;
Increase gross official foreign exchange reserves from the equivalent of above three week of merchandise imports at end-1987—89 to a level of about seven weeks of imports by ; and
Contain the growth of domestic credit and money supply in line with the growth of nominal GDP at the target rate of inflation, with sufficient allowance for the desired increase in net foreign assets.

17. Pakistan-specific stabilization programmes
Implementation of conditionalities
Sales tax was imposed on 44 items.
Excise duties were imposed on some other services such as travel, advertisement and hotels in addition to telephone, post and telegraph.
Tarrifs were imposed on key urban services like water and sewerage.
In Agriculture, the government reduced the support price for essential crops like wheat, rice, cotton, sugarcane and oil seeds to ensure that they were in line with the levels and trends in international market prices.

18. Pakistan-specific stabilization programmes
Negative effects of Pakistan’s dependence on the IMF:-
The programme’s main ingredients were privatization, devaluation of currency, increase in user’s charges and abolition of subsidies. It was evident that it would lead to inflation and to increased disparity between classes.
The switch from the fixed exchange rate to the floating exchange rate leading to massive devaluation of the currency made the imports expensive as more rupees had to be paid for every dollar and it made the exports cheaper.
The imports of about 308 banned items were liberalized as a result of the total value of imports increased considerably, it also resulted in adverse balance of payment. Moreover, a liberal import policy had an adverse effect on the growth of industries.

19. Pakistan-specific stabilization programmes
Continued…..
Increase in user charges meant increase in the price of electricity, fuel and gas, which affected the common man severely and led to high rise in the cost of production. Subsidies were reduced on essential items like wheat which hurt the common man. Reduction in subsidy for fertilizer and pesticides discouraged small farmers in their use.
In order to provide incentives to private sector, reduction in direct taxes were advocated without any consideration towards income distribution. It has resulted in widening the gap between the rich and the poor. It needs to be mentioned that economies like Pakistan with preponderance of poverty and inequality require direct intervention and cannot be left to the market operation.
Pakistan’s was higher investment in infrastructure sector, institutional changes in rural sector, more inflow of capital and better strategy for income distribution, but these steps were not in the priority list of IMF.

20. Pakistan-specific stabilization programmes
Social cost:
17 million children were out of school in 1995.
60 million people do not have access to health facilities.
67 million are without safe drinking water and 89 million are without basic sanitation facilities.
740,000 children die a year, half of them because of malnutrition.
One-half of primary school children drop out before reaching grade five.
Against 100 males, only 16 females are economically active;
36 million people live below poverty line;
There are nine soldiers for every one doctor and three soldiers for every two teachers.

21. Macroeconomic Stabilization and Fiscal Reforms
Conclusion