Impact of structural adjustment program on business cycles in Pakistan: a time series analysis

Abstract

Background: Understanding of business cycles is necessary for the policymakers
because it has important bearings on the wellbeing of the society. In spite of vital
importance of business cycles, previously no studies emphasis over measuring
Structural Adjustment Program’s (SAP) effect on statistical characteristics of
business cycles i.e. persistence, co-movement and volatility for Pakistan.
Objectives: The primary objective of our study is to quantify the impact of SAP on
business cycles for Pakistan economy by using time series data from 1974-2016.
Methods: The selected variables has been divided into three groups of variables
specifically GDP’s expenditure components, real variables, and nominal variables.
In this study, whole time period is distributed in two sub periods i.e. 1974-1988
and 1989-2016. Hodrick and Prescott filter has been used for the extraction of
cyclical component from the time series while for measuring the volatility,
persistence and co-movements of the selected variables, standard deviation,
correlation coefficient and first order correlation coefficient has been used
respectively.
Results: Results of the study reveals that volatility of almost all the selected
macroeconomic variables has increased after the implementation of SAP. Volatility
of GDP, reference variable, has increased from 1.31 to 1.34. Similarly, terms of trade
was found the most volatile series amongst all the variables during post-SAP
period, with volatility of 4.25.
Conclusions: The findings suggest that SAP implemented during the period of
1988 adversely affected the economy and has not contributed in stabilizing and
structuring the economy rather it exaggerated the volatility and economic
fluctuations in Pakistan. Government of Pakistan and policymakers should
continue to implement sound fiscal and monetary policies to reduce government
budgetary deficit, as this decrease would release resources to develop physical as
well as financial infrastructures to be capable to promote stability at macro level.