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 KHAN’S 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 KHAN’S 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 Pakistan’s 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 country’s 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 Khan’s 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 Ayub’s administration was to achieve the rapid rate of economic growth and develop Pakistan’s 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 Estates3. Price Controls4. Investment Promotion Bureau5. 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 Pakistan’s 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 GOODSIndustrial 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 Pakistan’s 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.

Government’s 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 bank’s 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 country’s 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 KHAN’S 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 Khan’s 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 Pakistan’s 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.