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Balance of Payment

Amber Qadar MS- Management Sciences Allama Iqbal Open University Islamabad

Learning Objectives
Balance of Payment Difference between BOP and BOT Pakistans Balance of Payment Performance Terminology of BOP BOP Future Expectations

Balance of Payment
A summary statement of all the transactions of the residents of a nation with the rest of the world during particular period of time, usually a year

Difference Between BOP and BOT

Balance of Payment
BOP is the difference between the values of exports and imports of both visible and invisible items of a country during a given period of time. BOP includes BOT also. BOP = BOT + Exports of Services BOP shows the real economic position of a country.

Balance of Trade BOT is the difference between the values of exports and imports of only physical items of a country during a given period of time. BOT does not include the BOP. It is the part of BOP. It does not show the actual economic position of a country.
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Terminology of BOP

If Exports > Imports = Trade Surplus If Imports > Exports = Trade Deficit If Exports = Imports = Trade Equilibrium

BOP Accounting Principles

Double Entry Convention BOP is always Balance Surplus or Deficit actually means Surplus or Deficit of Current Account of BOP Inflows (Exports) +ve sign = Credit Outflow (Imports) ve sign = Debit
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Pakistans BOP Performance

Fiscal Year 1950-51 1954-55 1955-56 1958-59 1959-60 1965-66 Situation Favourable Favourable Favourable Favourable Favourable Unfavourable Reason Due to the Korean War (Rs. 578.0 Crore) Due to Devaluation and restrictions on imports (Rs. 09.9 Crore) Due to 20% increase in exports Bonus Vouchers Scheme and Restrictions on Imports Bonus Vouchers Scheme and Restrictions on Imports Deficit due to war against India

2007-08
2008-09 2009-10 2010-11

Unfavourable
Unfavourable Unfavourable Unfavourable

Deficit ($ 16.8 billion)

Deficit ($ 12.72 billion) Deficit ($ 10.945 billion) Deficit ($ 8.3 billion)

Components of BOP
1. Current Account 2. Financial and Capital Account 3. Errors and Omission

Current Account
i. ii. iii. iv. Trade Balances Net Service Balance Current Income Balance Current Transfers

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Current Account
1. Trade Balances: sum of exports and imports of
Merchandise goods

2. Net Service Balance: sum of receipts and payment on export and import of services such as
Travel Freight Insurance Transportation
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3. Current Income Balance: sum of all receipts and payments of

Interest on loans Profits Dividends Royalties etc.

4. Current Transfers: sum of all private and official transfers such as

workers remittances through banks receipts through exchange companies.

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Balance of Payment (Economic Survey of Pakistan)

US $ Million
Item Current Account Balance -3,946 July June 2009 10 2010 11 2,14 July April 2010 11 4,66 2011-2012 -3,394

Trade Balance
Goods: Export Goods: Import Services Balance Services: Credit Services: Debit Income Account Balance Income: Credit Income: Debit Current Transfer Net Of which:

-11,536
19,673 31,209 -1,690 5,229 6,919 -3,282 5,61 3,843 12,562

-10,516
25,356 35,872 -1,940 5,768 7,708 -3,017 7,16 3,733 15,687

-8,499
20,460 28,959 -1,225 4,917 6,142 -2,465 5,63 3,028 12,655

-12,683
20,474 33,157 -2,347 4,101 6,448 -2,655 6,68 3,323 14,291

Workers Remittances

8,906

11,201

9,046

10,877

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Position of Pakistans Current Account

The trade deficit expanded mainly due to the 14.5 percent growth in imports and the 0.1 percent increase in exports Sharp rise in the import bill due to the higher international prices of crude oil. Our service and income account are also not showing satisfactory results. Our remittance account showed increment as in 2010- 2011 it contributed to $9.00 b while it reached to $10.8 b.
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Capital Account
The capital account is designed to capture onesided financial transactions, i.e. transactions in which one country gifts financial assets to another country with no expectation of receiving anything in kind. In today's world, this implies one major type of transaction - debt forgiveness and relief. { Forgiveness of U.S. debt by foreigners count as credits (+) { Forgiveness of foreign debt by U.S. entities count as debits (-)
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Financial Account
Financial Account includes the purchase and sale of financial and non-financial assets. A positive value for the financial account is called a financial account surplus.

A negative value for the financial account is called a financial account deficit.
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Financial Account
1. 2. 3. 4. Foreign Direct Investment Portfolio Investment Other Investments - Loans and Currency Reserve Assets

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Foreign Direct Investment

Purchases of U.S. capital assets (factories, machines, companies) by foreigners are credits(+) Purchases of foreign capital assets (factories, machines, companies) by U.S. residents are debits (-) Sales of U.S. capital assets by foreigners count as debits to the financial account (-) Sales of foreign capital assets by U.S. residents count as credits to the financial account(+)
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Portfolio Investment
Purchases of U.S. securities (stocks, bonds, money-market accounts) by foreigners are credits (+) Purchases of foreign securities (stocks, bonds, money-market accounts) by U.S. residents are debits (-) Sales of U.S. securities by foreigners count as debits to the financial account (-) Sales of foreign securities by U.S. residents count as credits to the financial account (+)
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Other Investments - Loans and Currency

Increases in loans & trade credits to U.S. residents by foreigners count as credits (+) Increases in loans & trade credits to foreigners by U.S. residents counts as debits(-)

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Foreign Reserves Account

It shows the foreign exchange position of a country. Official reserve account has the records of foreign official holding and increase reserves of gold and foreign currencies.

Position of Pakistans Capital Account

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Position of Pakistans Capital Account

FDI declined by $625 m Other investments stood at $721m during July April 2011-12 Reasons for decline in FDI:
Law and Order Situation Energy Crises

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Foreign Reserves

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 Pakistans Foreign Exchange Reserves reached by $ 16.49m at the end of April 2012 Although in 2011, foreign reserves are at the highest point (major contribution of IMF) Decline in 2012 was mainly due to the repayment of $400m to IMF.

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Balance of Payment Future Expectation

FDI may increase if there is political stability. If the IMF, World bank and Asian Development Bank released their loans to Pakistan, then BOP may show some improvement. If energy crises comes to an end, then it will have a good impact on BOP. Our exports may increase and BOP may show good results because of natural disasters in some countries.
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Balance of Payment Future Expectation

From fruit exports from Balochistan, BOP can be improved. Strong demand of Pakistani fruits exist in countries like Hong Kong, Netherlands, India, SriLanka, kenya, Malaysia and Japan. Chinas investor are still showing confidence in Pakistans economy. If this remains constant in coming year Pakistans BOP can be improved. Recent increase in oil prices will hurt Pakistans BOP as our major imports are based on oil and petroleum. If govt. pay proper attention in boosting exports, BOP will show positive results.
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