AYUB KHAN REGIME
(1958-1969)
P
Prepared by: Fahad Zaki Farooqui
PERSONAL PROFILE
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.
AYUB KHANS 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 KHANS 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 Pakistans industrial &
agricultural capacity.
MONETARY POLICY (195869)
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 countrys 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
4.4
5.5
POLICIES IN THE AGRICULTURE
SECTOR
One of the salient feature of the Ayub Khans 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 INDUSTRIAL SECTOR
Focus on reconstruction and development of
agriculture based industries
Priority of Ayubs administration was to achieve the
rapid rate of economic growth and develop
Pakistans 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
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.
2.
3.
4.
5.
Establishment of Financial & Development
Corporations
Industrial Trading Estates
Price Controls
Investment Promotion Bureau
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
1959
1965
1966
13.20
16.59
26.11
26.28
Mn
Mn
Mn
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 Pakistans 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 GOODS
Industrial 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
BALANCE OF TRADE
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
Pakistans 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.
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.
Governments 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 banks 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 countrys
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 KHANS 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 Khans 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 Pakistans 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.
