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Economy of Pakistan

Submitted to:
Sir Sheikh Usman Yousaf
Submitted by:
Muhammad Rizwan
(Mi09MBA007)
Muhammad Yasir
(Mi09MBA039)
Sammar Abbas
(Mi09MBA046)

Hailey College of Banking &


Finance
University of The Punjab
Lahore

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Economy of Pakistan

Balance of Payments (BOP)


Definition

“Balance of payments is systematic record of all economic transactions completed between the
residence of a country and the residence of the rest of the world”.

Surplus in (BOP)
If the receipts of a country are greater than its payments the result is Surplus.
Receipts > Payments

Balance in (BOP)
If the receipts of a country and its payments are equal the result is Balance.
Receipts = Payments

Deficit in (BOP)
If the receipts of a country are less than its payments the result is Deficit.
Receipts < Payments

“Simply whenever, the foreign payments of a country are more than the foreign receipts of the
country, the deficit in BOP rises. In other words, whenever the demand for foreign exchange is
more than the supply of foreign exchange the deficit in BOP occurs”.

Balance of Payments of a Country


The Balance of Payments of a country can be shown in two forms:

➢ Vertically

• Debit (Payments)
• Credit (Receipts)

➢ Horizontally
• The current account
• The capital account
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Economy of Pakistan
• The official settlements account or official reserve assets account
Vertical

When a payment is received from a foreign country, it is a credit transaction while a payment to
a foreign country is a debit transaction.

The principal items shown on the credit side are exports of goods and services, unrequited or
transfer receipts in the form of gift etc. from foreigners, borrowings from abroad, foreign direct
investment and official sale of reserve assets including gold to foreign countries and international
agencies.

The principal items on the debit side include imports of goods and services, transfer payments to
foreigners, tending to foreign countries, investments by residents in foreign countries and official
purchase of reserve assets or gold from foreign countries and internal agencies.

The credit and debit items are shown vertically in the BOP account of a country.

Horizontal
They are divided into three categories.

The Current Account:

• It includes all international trade transactions of goods and services, international service
transactions (i.e. tourism, transportation and royalty fees)
• International unilateral transfers (i.e. gifts and foreign aid).

The Capital Account:

Financial transactions consisting of direct investment and purchases of interest-bearing financial


instruments, non-interest bearing demand deposits and gold comprise the capital account.

The Official Reserve Assets Account:

Official reserve transactions consist of movements of international reserves by governments and


official agencies to accommodate imbalances arising from the current and capital accounts.

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Economy of Pakistan

Historical Perspective

Pakistan’s Balance Of Payments


Pakistan has always faced negative BOT except for three years

• 1947-48
• 1950-51
• 1972-73
Reasons of surplus in these years are:
 In 1947-48 the newly born Pakistan had a quite high exports and a handsome balance
of trade (US $ 42 million).

 In 1950-51 With the Korean War boom once again Pakistan gained a surplus in BOT
(US $ 53 million).

 In 1972-73’s positive BOT (US $ 20 million) was the massive currency devaluation
in 1972 when the rupee was devalued from Rs. 4.76 to 2.3 times higher level of Rs.
11 per US dollar. The exports increased significantly and the share of exports in GDP
rose to 14.9%.

BOP 1994-1998
Exports were stagnant & Structural problems persisted. Import growth led to widening of trade
deficit. Debt servicing burden was rising. Current account deficit hovered around $ 3-3.5 billion
or 4-5% of GDP. Financing was unsustainable as Foreign Current Accounts
and FE 45 swaps with banks were used

BOP 1999-2000
Foreign exchange regime was liberalized and all restrictions on foreign investment outflows
removed. Stable exchange rate maintained until June, 2000 and the premium over open market
rate was stable – 4 to 5%.
Current account deficit has been reduced from 3.8% to 1.6%. Export growth recovered to 10% in
1999-2000 after a long time.
In 1999-2000 cash payments of ($ 3.6 billion) were paid on external debt servicing in addition to
rescheduling of debt. External Cash outflows exceeded inflows during 1999- 2000 despite
purchases from the market and exceptional financing putting pressure on foreign reserves. There
was a draw down of almost $ 400 million from the reserves by end – June 2000.

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Economy of Pakistan

Pakistan’s BOP 1994-1999

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Economy of Pakistan

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Economy of Pakistan

Pakistan’s Balance of Payments


July 2008 - June 2009

Pakistan’s balance of payments showed a deficit of $9,261 million in its current account
balance during 2008-09 as against a deficit of $13,874 million during 2007-08. There has
been a significant decline of $4,613 million in current account deficit contributed by a
decrease of $2,343 million in trade deficit, mainly due to reduction of $3,650 million in
import payments.
(Million US$)
2008 -09(Q UARTERLY
) ANNUAL
ITEM Ju l - S e p O ct - De c Jan - Mar Apr - Ju n 2 008-09 2007-08
C u rre n t Accou n t B al an ce -4,21 3 -3,625 -545 -878 -9,26 1 -1 3,874
T rade balance (Goods) -4,51 9 -3,698 -2,045 -2,3 65 -12,627 -1 4,970
Export s f.o.b. 5,71 1 4,379 4,231 4,8 00 19,12 1 20,427
Import s f.o.b. 10,22 9 8,077 6,276 7,1 65 31,74 7 35,397
Serv ices (net ) -1,25 9 -1,080 -612 -430 -3,38 1 -6,457
Income (net ) -1,12 5 -1,260 -967 -1,0 55 -4,40 7 -3,923
Current t ransfers (net ) 2,69 0 2,413 3,079 2,9 72 11,15 4 11,476
Gen eral gov t . 74 12 48 29 16 3 428
Ot her sect ors 2,61 6 2,401 3,031 2,9 43 10,99 1 11,048
Capit al account (net ) 28 44 66 317 45 5 121
Fin ancial acco unt (n et ) 1,33 1 1,692 1,260 1,3 49 5,63 2 8,131
Errors an d Omissions (net ) -23 8 226 -17 146 11 8 257
O ve ral l bal an ce -3,09 1 -1,663 764 934 -3,05 6 -5,365
Reserves an d related item s 3,09 1 1 ,663 -764 -934 3,056 5,365
Reserves asset s 3,22 7 -1,429 -730 -1,7 03 -635 5,538
Use of Fun d Credit s & Loans -3 6 2,992 -34 769 3,69 1 -173
Except ional financing -10 0 100 0 0 0 0

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Economy of Pakistan

Current Situation of BOP of Pakistan in % of GDP

Year Export Import~ Trade Worker's Current


~ Deficit~ Remittance Account
s# Deficit#
2006-07 11.8 21.2 9.4 3.8 5.1
2007-08 11.6 24.4 12.8 3.9 8.5
2008-09 10.9 21.5 10.6 4.8 5.7
2009- 9.1 16.0 7.0 4.2 1.7
10*

IMPORT EXPORT AND TRADE BALANCE

Year Export Imports Balance


2006-07 1,029,312 1,851,806 -822,494
2007-08 1,196,638 2,515,072 -1,315,434
2008-09 1,383,718 2,723,570 -1,339,852
2008-09 July- 1,036,466 2,021,991 -985,525
march
2009- 1,176,388 2,081,763 -905,375
2010(pro)

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Economy of Pakistan

Summary Balance of Payments Overall 2008-09

2008 2009 Jul - Jun


ITEM
Jul – Sep Oct - Dec Jan - Mar Apr – Jun 2008-09 2007-08

Current Account Balance -4,213 -3,625 -545 -878 -9,261 -13,874

Current Account Balance without off.


transfers -4,287 -3,637 -593 -907 -9,424 -14,302
Goods: Exports f.o.b 5,711 4,379 4,231 4,800 19,121 20,427
Goods: Imports f.o.b 10,229 8,077 6,276 7,165 31,747 35,397
Trade Balance -4,519 -3,698 -2,045 -2,365 -12,627 -14,970
Services: Credit 1,133 941 777 1,255 4,106 3,589
Services: Debit 2,392 2,021 1,389 1,685 7,487 10,046
Balance on Goods & Services -5,778 -4,778 -2,657 -2,795 -16,008 -21,427
Income: Credit 210 298 185 181 874 1,613
Income: Debit 1,335 1,558 1,152 1,236 5,281 5,536
Of which : Interest payments 440 656 384 435 1,915 2,175
Profit & Dividend 221 221 121 194 757 921
Balance on Gds & Serv. & Inc -6,903 -6,038 -3,624 -3,850 -20,415 -25,350
Current Transfers.: Credit 2,708 2,457 3,110 2,981 11,256 11,618
Of which:
Workers' Remittances 1,879 1,761 2,018 2,153 7,811 6,451
FCAs Residents -27 -185 -7 -52 -271 444
Saudi Oil Facility 0 0 0 0 0 0
Current Transfers :Debit 18 44 31 9 102 142
Capital Account, 28 44 66 317 455 121
Capital Account, : Credit 28 48 66 318 460 128
Project Grants 24 23 64 316 427 111
Debt Forgiveness 0 0 0 0 0 0
Others 4 25 2 2 33 17
Capital Account... Debit 0 4 0 1 5 7
Financial Account 1,331 1,692 1,260 1,349 5,632 8,131
Direct Investment Abroad -6 -2 -3 -14 -25 -75
Dir. Invest. In Rep. Econ. 1,117 1,234 691 678 3,720 5,410
Portfolio Investment Assets -10 -15 8 -24 -41 -5
Equity Securities -10 -15 8 -24 -41 -5
Debt Securities 0 0 0 0 0 0
Portfolio Investment Liab. -174 -4 -758 -96 -1,032 37
Equity Securities -171 7 -254 -93 -511 20
Debt Securities -3 -11 -504 -3 -521 17

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Economy of Pakistan
Financial Derivatives Assets 0 0 0 0 0 0

(Million US Dollars)
2008 2009 Jul – Jun
ITEM
Jul – Sep Oct - Dec Jan-Mar Apr – Jun 2008-09 2007-08
Dec

Financial Derivatives Liabilities 0 0 0 0 0 0


Other Investment Assets 448 -30 174 -32 560 32
Monetary Authorities 0 0 0 0 0 0
General Government -1 3 3 3 8 5
Banks 457 -224 93 20 346 525
Other Sector -8 191 78 -55 206 -498
Other Investment Liab. -44 509 1,148 837 2,450 2,732
Monetary Authorities 0 0 -1 0 -1 490
General Government 5 196 1,087 660 1,948 1,761
Disbursements 715 1,011 883 1,081 3,690 3,054
Long-term 715 410 795 1,036 2,956 2,354
Project loans 222 187 162 270 841 1,250
Food loans 0 0 0 0 0 0
Program loans 493 223 633 766 2,115 1,104
Short-term 0 601 88 45 734 700
Commercial loans 0 50 0 0 50 0
IDB loans 0 551 88 45 684 700
Amortization 687 815 322 422 2,246 1,272
Long-term 525 273 269 322 1,389 1,131
Short-term 162 542 53 100 857 141
Other Liabilities -23 0 526 1 504 -21
Banks 244 63 -110 94 291 66
Other Sector -293 250 172 83 212 415
Disbursements 145 409 313 197 1,064 1,027
Amortization 112 103 131 116 462 334
Other Liabilities -326 -56 -10 2 -390 -278
Net Errors and Omissions -238 226 -17 146 118 257
Overall Balance -3,091 -1,663 764 934 -3,056 -5,365
Reserves and Related Items 3,091 1,663 -764 -934 3,056 5,365
Reserve Assets 3,227 -1,429 -730 -1,703 -635 5,538
Use of Fund Credit and Loans -36 2,992 -34 769 3,691 -173
Purchases / 0 3,050 0 852 3,902 0
Repurchases 36 58 34 83 211 173
Exceptional Financing -100 100 0 0 0 0

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Economy of Pakistan

SBP Reserves
6,286 7,833 8,453 10,257 10,257 9,539

The Problems in Correction of (BOP)


The problems in correction of BOP are as under:

➢ Revenue oriented tariffs


The import and export tariffs of Pakistan are by and large revenue oriented. The balance of
payment reasons are no doubt taken into account in the determination of import and export
duties. However, there are numerous anomalies in these tariffs. There are cases where the raw
materials for a finished article are taxed at such a high rate that it is cheaper to import the
finished articles rather than import the raw materials and produce the finished articles locally. In
cases like this, there can be no possibility for producing such articles for export.

The import and export tariffs need a thorough revision from the point of view of minimizing the
tax element in the cost of production. The approach should be to tax consumption but not
production.

➢ Adverse terms of trade


This is because of this fact that prices of our exports decreasing the world market while the
prices of our imports are constantly rising. The prices of our exports fall because we export raw
materials and semi-manufactured goods which cannot be stored for a long time. In such state of
affairs, our international receipts go on falling while our payments go on increasing.
Accordingly, the deficit is sure to occur.

➢ Capital account problem


The deficit in Current Account of BOP may be washed out by a surplus in capital account. But
this is not the case with Pakistan. We have to face the following problems relating to capital
account:

• The foreign official loans are specific and tied in nature and are attached with political
interference and heavy rates of interest.

• A lot of amount is spent on repayment of loans and debt servicing.

• The private investors are still hesitant in making investment in our country because of
several reasons, like political instability, lack of proper infra-structure, lack of energy
generation plants, involvement of official procedures, and the element of stubbornness in
the country.

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Economy of Pakistan

➢ Trade restrictions of developed countries


The trade barriers raised by developed countries against the import of manufactures especially on
agricultural products by the developing countries is one of the important factors preventing
greater production and export by some industries in Pakistan, particularly the cotton textile
industry. The dismantling of these barriers through negotiations can go a long way in increasing
Pakistan’s exports of manufactured goods

➢ Inflation
Inflationary conditions are a serious obstacle to the promotion of exports. Inflation results in a
rise in the domestic cost of production so that the goods produced cannot compete in the world
market, if the rate of exchange is not suitably adjusted. So the control of inflation is essential for
keeping Pakistani goods competitive and for promoting exports. It has not been possible to
control inflation in Pakistan even in recent years.

➢ Political instability
The development of the economy depends on the political circumstances of that country.
Pakistan has been chronically suffered from different political shocks since her independence.
Our exports and BOP are the clear reflection of these political instabilities. For example, during
1988-89, exports were affected by the political uncertainty and disturbances during the greater
part of the year. The events starting from the dissolution of National Assembly on 29th May
1988 made a deep imprint on the psychology of business communities.

➢ Import substitution policy of Pakistan


The emphasis of Pakistan’s industrial policy has been more on import substitution than on export
promotion. The position of domestic industries results in higher prices for the consumer. But
what is worse is that industries having a sheltered domestic market tend to become inefficient,
because, in the absence of foreign competition, there is no incentive to reduce their production
costs.

➢ Income Type of Disequilibrium


The deficit may arise because of changes in income level of a country. If in a country the
incomes are rising more than the rest of the world, because of rise in incomes the consumption in
the country will increase and the exports will decrease. In this way foreign receipts will come
down and deficit in BOP occurs.

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Economy of Pakistan

➢ Price Type of Disequilibrium


The changes in price level are also responsible for BOP deficit. If in a country due to demand-
pull inflation or cost-push inflation, the price level rises, the domestic products will become
expensive. In this way, the exports of a country may fall and the imports of a country may
increase. In this way, receipts will come down and payments will increase and caused for deficit
in BOP.

➢ Capital Movement
The capital movement is also responsible for deficit in BOP. As due to political instability the
domestic capital is flowing out then the foreign payments of a country may increase. If the
foreign capital is not coming to the country, the receipts of a country may also go down. Thus the
changes in capital movement at capital accounts of BOP are also responsible for deficit in BOP.

➢ Structural Changes
The structural changes which occur in an economy are also responsible for deficit in BOP. They
are as:
• If in a country, the population increases, the exports will decrease and imports will
increase.
• If in a country, the natural resources are depleted the exports may come down.
• If in the world, the substitutes are developed, they may have the effect of reducing the
exports of a country.
• If a country is engaged in the process of economic development, it has to import
machinery, raw material and a variety of goods. In this way the country will have to
spend foreign exchange on their importation.

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Economy of Pakistan

Measures to Remove Deficit in BOP


Simply to remove deficit in BOP, a country should increase its exports and decrease its imports.
They are discussed below:

➢ To Give Subsidies to Exporters


Any country which faces deficit in BOP should give subsidies to the exporters. They may also
consist of granting of loans at reduced rates to the exporters as well as providing insurance
facilities and shipment services etc. Moreover, if countries follow the policy of subsidizing the
other countries may also follow it. In this way the benefits of subsidies will not be availed.

➢ Restrictions on Imports
Any country which faces deficit in BOP may also impose restrictions on imports by increasing
the import duties, imposition of exchange control etc. In this way the imports will decrease.

➢ Deflation
The country which is facing deficit in BOP should follow the policy of deflation. This policy can
be adopted with the help of tight fiscal policy by decreasing Govt. expenditures and increasing
taxes. This will have the effect of decreasing the incomes and expenditures of the people. In this
way, there will be a deflation in the economy. As a result the imports will decrease and exports
will increase

➢ Devaluation
In 1994, the World Monetary Conference was held at Brettonwoods. In this conference it was
decided that Pound Sterling (₤), Dollar ($) and gold will be used for international transaction.
The rate of exchange so determined would remain fixed. However, a country which faces deficit
in BOP was allowed to devaluate its currency up to 10% without permission of International
Monetary Fund (I.M.F) and more than this with the permission of IMF. In this way the exports
will increase and imports will decrease. Accordingly, the deficit will be cured

➢ International Monetary Fund (I.M.F)


As the international level, the institution named as IMF has been set up. This institution has been
assigned to perform the following functions:
• To serve as a pool of international reserves.
• To keep an eye on exchange rates of currencies.
• To provide assistance to those countries who face persistent deficit in their BOP.
In this respect IMF has initiated a lot of and with the help of these farcicalities the member of
IMF who faces deficit in BOP, can get loan from IMF and use it to remove its deficit.
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Economy of Pakistan

➢ Depreciation
Under Brettonwood System it was decided that the rate of exchange between currencies will
remain fixed. But in 1971, American President Nixon suspended the convertibility of Dollar into
gold. Thus, since 1973, the world is having the managed Flexible Exchange Rate of System.
Under Flexible System, the deficit in the BOP is automatically washed through the policy of
Depression.

➢ Appreciation
The policy of appreciation is opposite to that of depreciation. It comes into being when the
country faces surplus in BOP under the flexible exchange rate system.

Suggestions to correct Deficit in BOP


The following steps should be taken in order to remove the deficit in balance of payment of
Pakistan.

 The export proportion of manufactured goods should be increased.


 The non-traditional exports should be enhanced i.e. dairy & milk products.
 The quality and cost of the export goods should be improved.
 The imports of luxurious items should be restricted.
 Reduction in export duties.
 Pakistan must encourage the export of engineering industries.
 We should import advanced technology for increasing home production.
 We should explore new markets for our exports and export exhibitions should be
organized in country i.e.: expo-centers in Karachi and Lahore.
 Increase in Invisible Receipts and Decrease in Invisible Payments

Conclusion
After having a complete study of BOP of Pakistan we conclude that Pakistan facing deficit in
balance of payments. Pakistan facing this problem since its freedom and it is due to ineffective
fiscal policies. Political instability is another cause of this deficit in BOP.
Pakistan should make trade agreement with other countries to enhance its exports.
Pakistan should obtain assess to international market to increase its foreign reserves.

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