Financial Sector Reforms
Financial Sector Reforms in Pakistan
Zafar Mueen Nasir
Chief of Research and Dean
Department of Business Studies
Pakistan Institute of Development Economics
Islamabad
Introduction
It is well established that a vibrant and balanced financial system plays key role in promoting economic efficiency, achieving higher economic growth and stabilizing the economy. An efficient financial system not only reduces uncertainty and transactions costs, but also provides a more investor-friendly environment and promotes a better allocation of resources for investment. In contrast, regulated financial systems lead to underdeveloped and uncompetitive markets. A weak and inefficient financial system is more vulnerable to contagion, less able to cope with volatile capital flows and exchange market pressures, and likely to propagate and magnify the effects of financial crisis. Moreover, a financial sector dominated by government-owned financial institutions imposes constraints on economic growth.
Financial sector reforms are an example of measures designed to address Pakistan’s structural weaknesses. The financial sector reforms did not take place in isolation but were part of the structural adjustment programs implemented within the framework of the International Monetary Fund and the World Bank since the late 1980s. The political setting played an important role in the reform process and is therefore examined here. There is then a discussion of the impact of the reforms and structural adjustment measures, implemented to correct the internal and external imbalances. Based on the discussion, conclusions and policy recommendations are drawn to reform the financial system.
Reform program
The growth record of Pakistan in its first 60 years of existence was impressive and comparable to any high-performing developing economy. The growth rate of gross domestic product (GDP) averaged about 6 per cent a year until the late 1980s, and poverty was reduced from 46 per cent to 18 per
Zafar Mueen Nasir
Chief of Research and Dean
Department of Business Studies
Pakistan Institute of Development Economics
Islamabad
Introduction
It is well established that a vibrant and balanced financial system plays key role in promoting economic efficiency, achieving higher economic growth and stabilizing the economy. An efficient financial system not only reduces uncertainty and transactions costs, but also provides a more investor-friendly environment and promotes a better allocation of resources for investment. In contrast, regulated financial systems lead to underdeveloped and uncompetitive markets. A weak and inefficient financial system is more vulnerable to contagion, less able to cope with volatile capital flows and exchange market pressures, and likely to propagate and magnify the effects of financial crisis. Moreover, a financial sector dominated by government-owned financial institutions imposes constraints on economic growth.
Financial sector reforms are an example of measures designed to address Pakistan’s structural weaknesses. The financial sector reforms did not take place in isolation but were part of the structural adjustment programs implemented within the framework of the International Monetary Fund and the World Bank since the late 1980s. The political setting played an important role in the reform process and is therefore examined here. There is then a discussion of the impact of the reforms and structural adjustment measures, implemented to correct the internal and external imbalances. Based on the discussion, conclusions and policy recommendations are drawn to reform the financial system.
Reform program
The growth record of Pakistan in its first 60 years of existence was impressive and comparable to any high-performing developing economy. The growth rate of gross domestic product (GDP) averaged about 6 per cent a year until the late 1980s, and poverty was reduced from 46 per cent to 18 per