Balance of Payments

A summary statement of a nation’s financial transactions for a specific time

with the outside world.

It comprises of
 Capital transfers and changes in an economy's external financial claims
and liabilities.
 All the goods, services, factor income and current transfers an economy
receives from or provides to the rest of the world.

Transactions are generally between residents and non-residents. The

exceptions are the exchange of transferable foreign financial assets between
residents and transferable foreign financial liabilities between non-residents.
For the purposes of the Balance of Payments, residency relates to the
economic territory of a country, not nationality. An international unit is
resident unit when it has a centre of economic interest in the economic
territory of a country. The Balance of Payments methodology uses a double-
entry accounting system. This means that every recorded item should have a
debit and a credit, and there should be a net balance of zero.

In practice, the figures rarely balance to the point where they cancel each
other out. This is the result of errors or omissions in the compilation of
statements. A separate balancing item is used to offset the credit or debit.

Balance of Payments credits show a decrease in assets or an increase in

liabilities; debits show an increase in assets or decrease in liabilities,
summarized in the table below:

Positive and Negative effects on Balance of Payments Accounts

Positive effects (Credit) Negative effects Debit
1. Any sale of goods and services 1. Any purchase of goods and
abroad (exports). services from abroad (Imports)
2. Any earning on investment in a 2. Any investment in a foreign
 country.
foreign country. 3. Income payable abroad
3. Income receivable from abroad 4. Transfers to abroad
4. Transfers from abroad 5. Any payment of a foreign
5. Any receipt of foreign money. country.
6. Increases in external liabilities 6. Any gift or aid given abroad.
7.Any gift or aid from a foreign country. 7. Decreases in external liabilities
8.Decrease in external assets 8. Increases in external assets
9. Any foreign sale of stocks or bonds. 9. Any purchase of stock or bonds
from abroad.

Balance of payments in Pakistan, past and present

Pakistan was caught in vicious deficit balance of payments trap after the pre-
plan period. During pre-plan period (1948-49 to 1954-55), Pakistan's
performance in the foreign trade sector was reasonably good.
Its exports exceeded the imports and formed 114 per cent of total imports. It
had surplus BoT up to 1954-55. The year 1955-56 was the last year in which
Pakistan had a favorable balance of trade. Since that time, Pakistan has been
facing a serious problem of deficit in her BoT and BoP.
In 1971, Pakistan's exports decreased considerably and its imports surged,
especially of capital goods, thus creating a trade deficit. Workers
remittances, especially from the Middle East countries, increased
tremendously which helped a great in stabilizing the BoP.
The deficit in BoT was $836 million on an average while current account
deficit in BoP was $699 million on an average between 1971-72 and 1977-
78 (the tenure of late Mr. Z. A. Bhutto). The trade deficit as percentage of
GNP remained 6.3 per cent while current account deficit in BoP remained
5.6 per cent on an average during 1971-72 to 1977-78.
The inflow of workers remittance increased 1080 per cent from 1971-72 to
1977-78.The magnitude of workers' remittances increased from $107 million
in 1971-72 to $1156 million in 1977-78.
The BoP position deteriorated during Zia's regime (1978-79 to 1984-85). A
deficit in BoT increased to $2958 million on an average from 1978-79 to
1984-85. Current account deficit in BoP increased to $993 million on an
average during 1978-79 to 1984-85.
The inflow of workers remittances continued increasing, especially from the
Middle East, from 1977-78 to 1982-83 and reached a peak level of $2886
million in 1982-83. This inflow gradually decreased in the last two years of
his regime.
The magnitude of workers' remittances from 1978-79 to 1984-85 was $1849
million on an average. The trade deficit as percentage of GNP rose to 9.9 per
cent while current account deficit in BoP on an average decreased to 3.7 per
cent in this period.
The Table shows that the external BoP gained strength during Junejo's period
from 1985-86 to 1987-88. Exports grew on an average by 33 per cent while
imports decreased during first two years while increased in the last year.
Export remained at a level of $3601 million on an average during this
period. Deficit in the balance of trade decreased to $2631 million and current
account deficit in the BoP decreased to $1211 million on an average during
these years.
The trade deficit as percentage of GNP declined to 6.9 per cent while the
current account deficit in balance of payment declined to 3.1 per cent during
1985-86 and 1987 and 1988.
Workers' remittances showed a declining trend from $2595 million in 1985-
86 to $2013 million in 1987-88. The magnitude of workers remittances on an
average between 1985-86 and 1987-88 was $2295 million.

The BoP position witnessed a significant improvement during first tenures of

both Ms. Benazir Bhutto (1988-89 to 1990-91) and Mohammad Nawaz
Sharif (1991-92 to 1993-94). The deficit in BoT decreased to $2728 million
on an average between 1988-89 to 1990-91 and to $2501million on an
average between 1991-92 to 1993-94.
The current account deficit in BoP fell to $1998 million on an average
between 1988-89 to 1990-91and to $2333 million on average between 1991-
92 and 1993-94. This reveals that BoP and BoT remained stabilized during
the first tenures of both- Benazir and Nawaz Sharif - (1988-89 to 1993-94).
Trade deficit as a percentage of GDP stabilized on an average around 4.7 per
cent during Benazir's and Nawaz's tenures. The current account BoP as a
percentage of GDP on an average was 4.7 per cent in Benazir's period while
4.6 % in Nawaz’s period.
Pakistan's external balance of payment deteriorated in the second tenure of
Ms. Benazir (1994-95 to 1996-97). The deficit in BoT and current account
deficit in BoP increased to $3128 million and $3635 million on an average
between 1994-95 and 1996-97 respectively.

Trade deficit as a percentage of GDP on an average was 4.7 per cent while
deficit in current account balance of payments increased to 5.8 per cent.
There was a sudden upsurge in the inflow of workers remittances from
Kuwait and were $1866 million in 1994-95.

This inflow could not maintain its momentum and was reduced in the
following two years of Benazir's government. The magnitude of inflow of
workers remittances from 1994-95 to 1996-97 on an average was $1578
million.

This adverse performance in foreign balance of payment was due to the

weak macroeconomic management and lack of commitments to undertake
difficult structural reforms.

The overall balance of payment position during the second tenure of Nawaz
Sharif (1997-98 to 1999-00) witnessed a significant improvement despite the
adverse external environment.

Both current account deficit in BoP and BoT decreased in this period. The
deficit in the balance of trade decreased to $1788 million while current
account in the BoP decreased to $1833 million during 1997-98 and 1999-00
despite the sanctions imposed by the G-8 countries on bilateral and
multilateral lending as a consequence of Pakistan's nuclear tests in May
1998.

The deficit in the balance of trade as a percentage of GDP and current

account deficit in balance of payments as a percentage of GDP also showed
the same trend.

The deficit in the balance of trade as percentage of GDP on an average

declined to 2.5 per cent while current account deficit in balance of payments
declined to 2.9 per cent on an average during 1997-98 and 1999-00. Workers'
remittances exhibited a declining trend during these years. The magnitude of
workers remittance on an average was $1178 million.

The economy started showing signs of improvement with the start of

Musharaf's regime. His government launched a comprehensive set of
economic stabilization and structural reform measures.

Pakistan's exports increased from $7.8 billion in 1999-00 to $9.2 billion in

FY00-01. The deficit in BoT decreased to $1269 million while current
account BoP decreased to $513 million in FY00-01.
The real improvement in BoP started after the event of September 11, FY01.
The post-September 11 events helped a great deal in ameliorating Pakistan's
chronic external deficit in balance of payments.

Significant reduction in the trade deficit, more than doubling of foreign

remittances, and budgetary support from coalition partners in the war against
terror enabled Pakistan to run a current account surplus for the first time
since 1956-57.

There was a sharp decline in trade deficit in FY01-02. The trade deficit fell
by 75.5 per cent to $286 million over the level of $ 1338 million of FY00-
01. The current account deficit in balance of payment emerged with a
surplus of $913 million in FY01-02.

The current account BoP remained in surplus from FY01-02 to FY03-04.The

magnitude of surplus in current account BoP for FY01-02 was $1338
million, for FY02-03 $ 3165 million and for FY03-04 (July-March FY03-04)
was $1369 million.

The conclusion drawn from the analysis of the BoT and BoP behavior during
different governments between 1971-74 and FY03-04 envisaged that BoT
and BoP improved during the governments of Bhutto and Junejo (1971-72 to
1977-78 and 1985-86-1987-88) while BoT and BoP deteriorated during Zia's
regime (1978-79 to 1984-85.

The BoT and current account BoP stabilized during the first tenure of both
Benazir and Nawaz Sharif while deteriorated in her second tenure while BoT
and BoP stabilized in Nawaz Sharif's second period.

The performance of Benazir in first tenure was better than in her second era
despite the workers remittances from abroad increased considerably during
her second tenure. Performance of Musharaf's government is much better
than the previous governments either military or democratic since 1971-72.
 Balance of Payments of Pakistan (1971-72 to 2003-04)
(Million US $)

As a % of
GNP*/GDP
Years exports Imports Trade Workers Current Trade Current
(F.O.P) (F.O.P) Balance Remittance A/c Balance A/C Bal
Balance
of
payment
1971-
619 946 - 327 107 - 443 - 2.8 - 3.8
72
1972-
707 891 - 184 124 - 130 - 3.0 - 2.0
73
1973-
1020 1493 - 473 138 - 549 - 5.3 - 6.1
74
1974-
978 2114 - 1136 212 - 1168 - 10 - 10.3
75
1975-
1162 2139 - 977 339 - 949 - 7.2 - 7.
76
1976-
1132 2418 - 1286 578 - 1051 - 8.2 - 6.7
77
1977-
1283 2751 - 1469 1156 - 605 - 7.7 - 3.1
78
1978-
1644 3816 - 2172 1397 - 1114 - 10.3 - 5.3
79
1979-
2341 4854 - 2513 1748 - 1140 - 9.9 - 4.5
80
1980-
2798 5563 - 2765 2097 - 991 - 9.0 - 3.2
81
1981-
2318 5641 - 3373 2225 - 1530 - 10.3 - 4.7
82
1982-
2627 5616 - 2979 2886 - 554 - 9.5 - 1.8
83
1983-
2663 6002 - 3334 2737 - 1028 - 10 - 3.1
84
1984-
2700 6263 - 3563 2750 - 1593 - 10.6 - 3.5
85
1985-
2942 5984 - 3042 2595 - 1234 - 8.3 - 3.4
86
1986-
3498 5792 - 2294 2278 - 719 - 6.1 - 1.9
87
1987- 4362 6919 - 2557 2013 - 1682 - 6.3 - 4.0
 88
88-89 4634 7207 - 2573 1897 - 1934 - 5.9 - 4.8
1989-
4634 7411 2483 1942 - 1891 - 4.9 - 4.7
90
1991-
6131 7619 - 3128 1848 - 2171 - 3.3 - 4.8
92
1992-
6762 8998 - 2236 1468 - 1346 - 4.8 - 2.8
93
1993-
6685 8685 - 2000 1446 - 1965 - 3.4 - 3.8
94
1994-
7759 10296 - 2537 1866 - 2484 - 3.7 - 4.1
95
1995-
8311 12015 - 3704 1461 - 4575 - 4.9 - 7.2
96
1996-
8096 11241 - 3145 1409 - 3846 - 5.7 - 6.2
97
1997-
8434 10301 - 1867 1490 - 1921 - 2.4 - 3.1
98
1998-
7528 9613 - 2085 1060 - 2429 - 2.8 - 4.1
99
1999-
8190 9602 - 1412 983 - 1143 - 2.4 - 1.6
00
2000-
8933 10202 - 1269 1087 - 513 - 2.1 - 0.7
01
2001-
9140 9434 - 294 2389 - 1338 - 1.7 + 1.9
02
2002-
10889 11333 - 444 4237 3165 - 1.3 + 3.8
03
2003-
9175 993283 - 757 2875 1369
04

Causes for negative balance of payments

1. Pakistan's balance of payments is highly dependent on workers
remittances but these remittances cannot be sustained over a long period
of time.
2. One major structural problem of exports is that it is based on relatively
low value added products. Pakistan's exports are highly concentrated in
cotton group, leather group, rice, synthetic textiles and sports goods.
3. Although Pakistan is trading with large number of countries but her
exports are highly concentrated in few countries. More than half of
 Pakistan's exports are concentrated in USA, Germany, Japan, UK, Hong
Kong, Dubai and Saudi Arabia. Such a high degree of geographic
concentration of exports is dangerous as it renders the economy
vulnerable to the manipulation of the importing countries.
4. Imports are concentrated on a limited number of commodities namely
machinery, petroleum & petroleum products, chemicals, transport
equipments, edible oil, iron and steel, fertilizer and tea.
5. Agriculture-related exports constitute a high ratio of the total exports. In
FY02-03, 73 per cent of export earnings came from the export of cotton
and cotton products, leather and rice. Such a high degree of dependency
on agriculture-related products is an element of uncertainty in export
earnings.
6. Although Pakistan is trading with a large number of countries, yet major
portion of imports comes from a few selected countries. Almost 50 per
cent of imports come from USA, Japan, Kuwait, Saudi Arabia, Germany,
the UK and Malaysia. Such a high degree of geographic concentration of
imports is undesirable and is in favor of exporting countries.
7. Pakistani societies make heavy expenditure on their rituals, weddings etc
which are useless.
8. The main cause or we can say that the biggest problem is political
uncertainty.
9. Sick industries in Pakistan are increasing while at the same time Pakistan
is facing tough competition in the world market.
10.Pakistan import oil which is the main resource in producing all the
products.

Solution

1. Government should formulate a strategy to be free of the country’s

dependency on workers’ remittances.
2. The emphasis should be on the export of the high value goods and the
services.
3. Pakistan should expand its international market.
4. The country has to expand its export base that is too narrow.
5. The industrial sector should be the major sector of the economy.
6. The trend of saving should be promoted.
7. Economic system has to change.
8. Political stability should exist.
9. Market imperfection should be removed.
10. Foreign investments should be encouraged.