Structural Adjustment

Programs of the IMF - Impact

on Pakistan Banking Sector
CPS Process

Assignment 1
PSDM
Submitted By:
Group AD-1
Ashwath Narayana B Sanket 16S509
Parth Paresh Patel 16S535
Shwetha C K 16S548
Tuhina Kumar 16S552
Vishnu Pallath 16S557

[Email address]
Structural Adjustment Programs of the IMF - Impact on Pakistan Banking Sector

Introduction:
The economy of Pakistan was on a brink of collapse in 1990. The primary reason for
this was that the banking system could not support the economy. The public sector banks
were primarily lending to the government and the public sector organistaions. Due to this,
there was no lending to small and medium enterprises (SMEs) and the agricultural sector,
both of which contribute considerably to the employment rate in Pakistan.
Thus, the IMF came to their help with their bailout package that includes a loan and an
additional condition to implement the structural adjustment programs. Structural adjustment
programs refer to a set of policies often introduced as a condition for gaining loans from The
IMF. It usually involves a combination of free market policies such as privatization, free trade
and deregulation. The IMF and The World Bank suggested to privatise the entire banking
system of Pakistan to transform the state-owned banking system into a privately owned
system. This policy was implemented to increase the efficiency of the countrys banking
sector so that it can better support its growth. The banking system was held up as a perfect
example of privatisations success.

However, privatization had an adverse impact on the economy. The banking sector was
highly concentrated with five major banks that accounted for 60% of deposits. The interest
rate spread in Pakistan was as high as 6% while it was only 2% and 3% in Korea and
Malaysia respectively. This means that the banks gave a very low return on deposits but
charged a very high rate of interest on loans. Also, there was lack of availability of credit for
the private sector and the agricultural sector. Instead, they financed the unproductive
consumer sector.

Let us now see in detail how this happened and what effects it had on the economy of
Pakistan.

Creative Problem Solution:

The CPS (Creative Problem Solving) technique is a go to method used to solve real
world problems. It is a medium through which problems can be better understood and
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creative solutions developed. Also the process is a flexible one which gives the freedom to
switch between different steps in order to make the process more coherent and as simple as
possible. The major steps involved in the process are:
1.Explore the challenge
Objective Finding
Fact Finding - 5W 1H
Problem Finding - Fish Bone Diagram
2.Genereate Ideas
Idea Finding Brain Storming
3.Prepare for action
Solution Finding Survey
Acceptance Finding - Parallel Thinking

Objective
Finding

Acceptence
Finding Fact Finding
Parallel 5W 1H
Thinking

Problem
Solution
Finding
Finding
Fish Bone
Survey
Diagram
Idea Finding
Brain
Storming
Fig: CPS Flow Diagram

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The above diagram gives the flow of the process that has been used in analyzing this
particular case in hand. Let us now go in depth into each step and try to arrive at a creative
solution for the problem.

Explore the Challenge:

1.Objective Finding
The objective is to find how efficient has the Pakistans banking sector become after
implementation of Structural Adjustment Programs (SAP) by the IMF.

2.Fact Finding (5W 1H)

5W 1H is a method of fact finding where in the reader asks detailed questions like
What, When, Where, Who, Why and How to collect the facts about a scenario.
Given below is the 5W 1H analysis for the given scenario:
Who:
Pakistan Government
IMF
Pakistan Banking Sector
Private Sector (Manufacturing Sector of Pakistan, Agricultural Sector
of Pakistan)
Public Sector of Pakistan
What:
Liberalisation and privatisation of banking sector of Pakistan
Increase in interest spread
Low net investment to assets ratio
Decline in lending to Agricultural Sector
Lack of availability of credit to private sectors
Increase of credit in unproductive consumer finance sector
When:
1990 2012
Where:
Pakistan
Why:
High NPLs (Projected)
How:
The high non-performing loans of the public sector banks caused
primarily by feeding the fiscal deficit of the government lead these
banks to ignore the private sector and lead the economy to the brink of
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 collapse. The IMF intervened by providing loans with an additional
clause of implementing their structural adjustment programs (SAPs).
These SAPs recommended the privatisation of the banking sector of
Pakistan.

3. Problem Finding (Fish Bone Diagram)

Fish Bone Diagram or cause and Effect Diagram is a tool that helps to identify, sort
and display possible causes of a specific problem. It graphically illustrates the relationship
between a given outcome and all the factors that influence the outcome.
Given below is the fish bone diagram for the inefficiency of the banking sector in the
Pakistan Economy:

Fig: Fish Bone Diagram

Analysis of the Fish Bone Diagram:
The level of detail is well balanced
There are some causes repeated, but cannot be considered as root cause.
Lack of Financing for private investment and Increase in interest rate spread are
some causes for which actions could be developed

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Generating Ideas:

4. Idea Finding (Brain Storming)

Brainstorming is a process of generating creative ideas and solutions through
intensive group discussion.
After brainstorming among the group, the following ideas for solution were collected. The
frequency of each idea is also mentioned below.
Freque
Internal:
ncy
Implement lower interest rate ceiling. 1
Decrease returns on Government Bonds 3
Important to fund the priority sectors like agriculture. 3
Reverse Repo-rate should be set at an optimum level 1
Mobilise the savings in the economy to finance the
private sector 4
Disinvestment process to be carried out in specified
sectors 1
Nationalization of banks in the country 1
Change the bankruptcy laws 1
External:
Structural Adjustment Programs should not be a
compulsory feature of bailout schemes 4
Suggest country specific policy implementation which
is tailor made for each country 3
Give equal voting shares to each country in the
decision making 2
Identify alternate sources of credit in the international
market like the New Development Bank formed by the BRICS
or the regional banks formed by various regional trade blocks 1
Plan for Action:
5. Solution Finding
Shortlisting Based on Frequency:

Based on the frequency of ideas collated through brainstorming, they are

shortlisted into 5.
Rating of the Shortlisted Ideas:

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 Shortlisted ideas are rated on the basis of Ease of Implementation and
Quality of Idea to get a final solution. For this a survey has been conducted and the results
of the survey is tabulated below.

Given below are the shortlisted ideas and their average ratings in the survey:

Ease of Qualit
Ide implementa y of
as Shortlisted ideas tion idea
Decrease returns on Government
(A) Bonds 3.16 4.25
Important to fund the priority
(B) sectors like agriculture. 4.17 4.32
Mobilise the savings in the economy

(C) to finance the private sector 4.9 3.9

Structural Adjustment Programs
should not be a compulsory feature of
(D) bailout schemes 4.85 4.91
Suggest country specific policy
implementation which is tailor made for
(E) each country 2.1 4.9

Based on the survey results, a chart has been plotted.

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 Survey Results
6
5 4.9 4.25 4.91
4.32
4 3.9

Ease of Implementation 3
2
1
0
1.5 2 2.5 3 3.5 4 4.5 5 5.5
Quality of Idea

Fig: Survey Results Chart

The idea with the highest rating Structural Adjustment Programs should not be a
compulsory feature of bailout schemes is highlighted in the chart.

6.Acceptance Finding

Parallel thinking developed by De Bono helps us analyze the solution derived from different
perspectives. Basically in each step we wear a different hat or perspective which enables us
to focus on one aspect at a time. This avoids any biases that one may have about the topic. In
the following section we wear the different coloured hat to identify the different views
about the solution derived from the survey that is Structural Adjustment Programs
should not be a compulsory feature of bailout schemes:

WHITE HAT:
The high non-performing loans of the public sector banks caused primarily by feeding the
fiscal deficit of the government lead these banks to ignore the private sector and lead the
economy to the brink of collapse. The IMF intervened by providing loans with an additional
clause of implementing their structural adjustment programs (SAPs). These SAPs
recommended the privatisation of the banking sector of Pakistan. This privatisation lead to:
Crowding out of the private sector-
o Lack of funding for the small and medium enterprises
o No line of credit to the agricultural sector
Interest rate spreads in Pakistan averaged over 6% after the reforms, whereas
it was only 2% in Korea and 3% in Malaysia during the same period
o lending rates doubled from 7% to 14% between 2004-2011
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 o Interest rates offered on saving deposits was as low as 2% in 2007
Average before tax returns on equity (ROE) was nearly 40% and before tax
returns on assets (ROA) was around 3% for the five major banks
The five major banks accounted for nearly 80% of total profit in the banking
sector
Net investment to asset ratio was 60% for the five major banks which means
that the banks invested a very high proportion of their capital in government
bonds (riskless securities)
Loans to private businesses as a percentage of gross domestic product (GDP)
was about 16% in 2012, in comparison to 50% for India, 112% for Malaysia
and 61.4% for Brazil.
Funds were channeled to the unproductive consumer finance sector after 9/11
incident

RED HAT:
The structural adjustment programs are responsible for the further decline in the condition of
the banking sector. They only serve the vested interests of the IMF.

BLACK HAT:
The structural adjustment programs may not necessarily lead to the growth of an economy
and might actually work in the opposite direction.

YELLOW HAT:
The privatisation of the banking sector lead to an increase in the use of credit
cards, consumer loans and personal loans
Modernisation of the banking sector
Drop in inflation to 3.5% until 2007
Initial increase in growth rate from 6.4% to 8.6%

GREEN HAT:
Decrease returns on Government Bonds
Important to fund the priority sectors like agriculture.
Mobilise the savings in the economy to finance the private sector
Structural Adjustment Programs should not be a compulsory feature of bailout
schemes

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 Suggest country specific policy implementation which is tailor made for each
country

BLUE HAT:
Even though the privatisation of the banking sector has had some positive effects on the
economy of Pakistan, the overall effect has been negative. Therefore, the structural
adjustment programs should not be a compulsory feature of bailout schemes.

Conclusion:
The structural adjustment programs (SAPs) of the IMF and the World Bank have
often been known to work in the opposite direction than intended. It has been known to
increase inequality and income disparity amongst the rich and the poor. Privatisation at an
early stage may have adverse effects as it may lead to higher prices for essential
commodities. Also, SAPs curb inflation which hinder economic growth and employment
opportunities. Furthermore, these policies cannot be ignored as a high financial penalty can
be charged. This limits the capacity of the recipient country to make policy changes and gives
foreign bodies a higher influence in critical areas of decision making.

References:

Kamal Munir & Natalya Naqvi (2013, November). Pakistans post-Reforms Banking Sector
A Critical Evaluation. Economic and Political Weekly, VOL XLVIII No.27

Florida Department of Health(DOH) Website. Basic Tools for Process Improvement, From
http://www.doh.state.fl.us/hpi/pdf/Cause_and _EffectDiagram2.pdf
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5W 1H. Learning Toolbox. Steppingstone Technology Grant, James Madison University,
MSC 1903, Harrisonburg, VA 22807.

Kalim Hyder & Qazi Masood Ahmed (2003, August). Why Private Investment in Pakistan
has Collapsed and How Can it be Restored. From
http://www.spdc.org.pk/Data/Publication/PDF/CP-50.pdf

Tejvan Pettinger (2012, November). Structural Adjustment definition. From

http://www.economicshelp.org/blog/glossary/structural-adjustment/

If Rs300b spending on PSEs stops Govt can control budget deficit (2012, March). The Nation
News Paper. From http://nation.com.pk/business/02-Mar-2012/if-rs300b-spending-on-pses-
stops-govt-can-control-budget-deficit

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