Lecture 31

Balance of payments
Instructor: Prof.Dr.Qaisar Abbas
Course code: ECO 400

Lecture Outline

1. Composition of BOP
2. Pakistans BOP
3. Causes of BOP imbalance

Some theoretical Aspects

Its a comprehensive record of eco transactions of the residents of a country

with the rest of the world during a given time period.

Its a tabulation of the credit and debit transactions of a country with foreign
countries and international institutions.

Statistics Department of State Bank of Pakistan is responsible to compile

Pakistans Balance of Payments Statistics (BOP) as per IMF format (BPM5)

Why is it important ?

Its main aim is to provide the government information about the international
eco position of the country and to help make decisions about monetary and
fiscal issues, on one hand, and about trade and payments on the other.

Government authorities are constant users of balance of payments and

other statistics in carrying out their responsibilities of monitoring economic
activity, formulating recommendations an appropriate balance of payments
and domestic economic policies and evaluating various economic
strategies.

Regional balance of payments statistics are used both by the Pakistans

authorities and by the authorities of partner countries to monitor
developments in economic relations between Pakistan and those countries
or specific country grouping.

Why is it important ?

Pakistans balance of payments is used by academic and business

observers as well as by policy maker around the world in monitoring
developments in the worldwide payments position and in comparative
studies of trends in the balance of payments of various countries.

BOP data is also used by international bodies such as IMF, World Bank and
other external stakeholders etc.

Composition of BOP

Current Account: deals with the trade transactions of goods and services,
international services (tourism, transportation) and unilateral transfers (gifts and
foreign aid).

Capital Account: consists of direct investment and purchases of interestbearing financial instruments, non-interest bearing demand deposits, gold.

Official Reserve Asset Account: measures the change in the nations liquid
and non liquid liabilities to foreign official holders and the change in the official
reserve assets during a year.

Pakistans BOP

Pakistans BOP situation has not been satisfactory since independence. The
country with the exception of three years has been running a persistent deficit
in her BOP on current account
These years are as follows:
1947-1948
1950-1951 (due to Korean War exports increased)
1972-1973 ( Devaluation of PKR)

Pakistans BOP

We have been having a trade balance in almost all years except for the three years
i.e 1947-48, 1950-51 and 1972-73.

1947-48: exports were Rs 444 million, imports were Rs. 319 million and trade surplus
of Rs. 125 million.

1950-51:Trade surplus was of Rs 176 million. It was due to excess exports of cotton
and jute.

1972-73: trade surplus was of Rs. 153 million. Reason was massive currency
devaluation in 1972, rupee was depreciated from 4.76 to 11 rupees per dollar.
Exports share in GDP rose to 14.9%

Pakistans BOP

1982-83:After witnessing a significant improvement in 1982-83, the BOP

deteriorated sharply in 1983-84 and this trend continued in 1984-85. Lower
growth in merchandise exports and a decline in home remittances
contributed to this situation.

1987-88: Pakistans balance of payments position which had deteriorated

sharply in 1987-88 with draw-down of $462 million on the foreign exchange
reserves, received a terms of trade shock in 1988-89

1989-90:The BOP has shown improved performance during 1989-90 with

reduction in current account deficit and increase in net international
reserves.

Pakistans BOP Problem

Merchandise and services account has been showing poor performance over
the years since 1972-73.

Combined deficit over the years are.

1972-73, Rs 12.8 billion, 1975-76, Rs 25.84 billion, 1978-79, Rs. 30.05 billion
and 1979-80, Rs. 31.62 billion.

Economy was temporary depending on external factors i.e foreign remittances

and foreign aid in 1980-81.

BOP deteriorated sharply in 1983 to 1985 because of lower growth in

merchandise exports.

Trade deficit increased in1989 due to floods in punjab and sind and
disturbances in karachi.

Pakistans BOP Problem

Govt implemented SAP to remove imbalances in BOP. Key elements were

flexible exchange rates, trade and tariff reforms and viable fiscal balance.

Because of all these measures, trade deficit declined from US$1.93 billion in
1988-89 to US$ 1.70 billion in 1989-90.

Workers remittances were showing some declining and rising trend from
1982-83 to 2003-04.

Current Position

Pakistan is still suffering a BOP problem mainly because foreign exchange

earning capacity depends on primary goods which being cheaper fetch
lesser foreign exchange and for which market is unstable.

Development program require import of equipment which also cause trade

deficit.

Trade and Payments Growth (%)

Average (Annual)
1980s

1990s

2000s

1999-00

2006-07

200910(R)

Exports
(fob)

8.5

5.6

9.9

8.8

4.5

2.9

Imports
(fob)

4.5

3.2

13.7

-0.1

8.0

-1.7

Trade
Deficit

0.9

--0.6

6.2

-32.3

15.0

-8.6

Workers
Remittan
ces

1.9

-5.3

26.8

-7.2

19.4

14.0

12.2

-4.6

-52.9

-30.3

-57.4

Current
21.2
A/c deficit

Trade and Payments Growth (%)

Average (Annual) (%) of GDP (MP)
1980s

1990s

2000s

1999-00

2006-07

200910(R)

Exports
(fob)

9.8

13.0

12.4

11.2

11.9

11.1

Imports
(fob)

18.7

17.4

16.7

13.1

18.5

17.6

Trade
Deficit

8.9

4.4

4.0

1.9

6.6

6.5

Current
3.9
A/c deficit

4.5

1.5

1.6

5.1

2.2

Causes of Imbalance in BOP

Slow growth of production: the scope for increasing the export of fruit,
vegetable and livestock products was very high in middle east, but the
potential for increasing the prod of these items was not properly realized.

Marketable portion of agri prod was very small part of total prod.

Underutilization of existing capacity is there.

Political Uncertainty: the events started with the dissolution of assembly in

1988, it greatly affected psychology of business communities.

Causes of Imbalance in BOP

Fiscal policies: heavy import duties on raw material are so high that high
cost of prod makes the goods uncompetitive in the world market.

These import duties work like export duties.

Approach of tax rebate was adopted on production of export, but this

procedure was very time consuming and complex. So it greatly reduced the
impact of tax rebate.

The approach should be to tax consumption not prod.

Trade restrictions of developed countries: it has a huge impact on Pakistan's

export of cotton and textile.

Causes of Imbalance in BOP

Import substitution policy of Pakistan: it is causing higher domestic prices,

inefficient industries because in absence of foreign competition there is no
incentive for reducing the prod cost.

Heavy import of food-grains and energy

Inflation

Pricing policy

Foreign exchange remittances:

Policy Options

Make exports more elastic.

Reduce inflation

Reduction in import of luxury items

Import of raw material available in country should be disallowed.

Enhance production

High quality exportable goods should be produced at competitive cost

Reduction in export duties, allowing export incentives

Establish joint ventures with friendly countries to encourage prod.

Policy Options

Floating exchange rate can also correct BOP disequilibrium.

Fully utilize idle capacity.

Encourage export of manufactured goods, particularly engineering goods.

Export oriented industries should be exempted from sales and excise

duties.

Recommended Books

Ishrat Husain, Pakistan: The economy of an

University Press.

elitist state, Oxford

Zaidi, S. Akbar,(1999),Issues in Pakistan Economy, Oxford University

Press.

Saeed, K. Amjad,(2007)Economy of Pakistan, Institute of Business

Management, Lahore.

Economics Survey of Pakistan (Latest Issues), Economic Advisors Wing,

Ministry of Finance, Government of Pakistan