CAUSES OF UNFAVOURABLE BOP -OR- BOT:

These are the permanent problem of deficit in BOP:

A- LIMITED EXPORT CAPACITY
1. Narrow Export Base
Pakistan basically is an agricultural country. Its major exports are rice, cotton, raw
wool, leather, fish etc. Our exports, during the last five years, are remaining around $ 15
billion to $ 20 billion. The reason is that our export base is narrow. It is concentrated in
relatively low value added products. Value of exports during 2010-11 is $ 24 billion.
2. Consumption Oriented Society
People of Pakistan are mostly consumption oriented. Due to rapid rise in
population and increased consumption habits, the domestic manufactured goods are
mostly consumed in the country. The exportable surplus is going on decline. Govt . has to
import 4.0 million tones of wheat and heavy amounts of sugar, pulses and tea in 2005 06, being an agrarian country.
3. Less Modernization of Machinery
Since 1970s, there have been less modernization, balancing and replacement of
machinery in the private industrial sector. The fall in production and decline in the quality
of products has adversely affected exports.
4. Increase in the Sick Industrial Units
The number of sick industrial units, mainly due to nationalization of industries, has
borne up. It is on record that the performance of most of the industries in the public
sector is not satisfactory. The decline in production of semi-manufactured and
manufactured goods reduces the exportable surplus and adversely affects the volume of
trade.
5. Less Production of Value Added Goods
The share of industry in the GDP is 25.8 %. The share of value added goods must
increase to earn over many years. The share of value added goods must increase to
earn foreign exchange and turn the trend of adverse balance of payment. The production
of value added goods is at basic stage in Pakistan that leads to adverse BOP.
6. Devaluation
The repeated devaluation of rupee against US dollar has not helped in the
increase of exports. It has made the imported inputs more costly. The demand for our
goods in the international market is elastic. As such, due to devaluation, as tool for
boosting, exports are not effective.
7. Tough Competition

Stiff competition in the foreign market particularly of our value added goods has
reduced the volume of foreign trade in Pakistan. There is availability of higher standard
goods at lower prices in international market. It causes reduction in exports, which result
in deficit in BOP.
8. Increase in Prices of Inputs
The increase in the prices of fuel, electricity, high capital costs of imported
machinery, exchange rates etc. have inflated. The costs of both imported capital goods
and industrial raw material, on which domestic industry is heavily dependent the
inflationary impact of the rise in the prices of inputs are not helping in achieving the
export targets set in each financial year.
9. Anti-dumping Duties
Japan, Hong Kong and some other nations imposed antidumping duties on our
cotton yarn, fabric and bed linen. Such types of duties on our exportable goods are also
a big hurdle in the way of our exports.
10. Technical Barriers
Imposition of non-tariff, barriers like child labour, ISO 14000 etc., has adversely
affected our exports for the last years. The advanced countries of the world have
imposed technical barriers such as patents, copyrights, trade-marks and designs etc. on
their imports. Pakistan will have to upgrade the standard of purity and quality to compete
for its products in the international market.
11. Political Uncertainty
The political uncertainties in the industrial units have considerably affected the
efficiency of the industries. The fall in the volume of production, particularly in the
manufacturing value added sector has reduced export earnings. Due to reduction in
export earning, our BOP is unfavourable.
12. Fall in Terms of Trade
The import unit values are higher than the export unit values for the last over three
decades in Pakistan. A decline in terms of trade causes imbalance in the balance of
payment.
TOT = [(Export Price Index Import Price Index) 100]
TOT = (296.10 446.01) 100] = 66.39 indices
Above computation is showing that we lost about 33.61 % of our export earnings in
2005-06. According to Economic Survey of Pakistan 2010-11, terms of trade are 59.3
indices.
13. Foreign Debts Servicing

Pakistan has obtained about $ 59.5 billion from different countries and it pays interest
on these loans regularly. It paid $ 7.8 billion as debts services charges during 2010-11.
The interest payment has adversely affected the balance of payment.
B- UN-RESTRICTED IMPORT NEEDS
14. Import of Capital Goods

Pakistan has to import capital goods for rapid industrialization of the country in
order to build up the economy. The heavy import of machinery has considerable
increased the import bill and has adversely affected balance of payment.
15. Import Oriented Industry

Some of our industries are based on the imported inputs and raw material
e.g., oil and petroleum etc. Most of industries, which were established for achieving
the twin objective of earning and saving foreign exchange, have been eating away
roughly 30 % of aggregate import bill.
16. Rise in Oil Prices
The sharp rise in the prices of oil particularly in 70s and also in the beginning of
1980s and 1990s is taking a big amount of the foreign exchange earnings. Our import
bill of petroleum group is increased to $ 8670.4 million in 2007-08, while it was $ 530
million in 1978-79.
17. Increases in Import Payment for Fertilizer

There is sharp increase in the import payments to the outside world due to
increase in prices of fertilizers, edible oil and petroleum. Our balance of payment
shows debit due to high payments.
18. Defense Needs

We have to purchase modern weapons for our defense at a very high cost
from different countries, which increases burden on our BOP and it becomes
adverse. Expenditure on defense is Rs. 275 billion.

MEASURES TO CORRECT ADVERSE BOP

Measures to correct the deficit balance are of three types:
A.
1. Labour Intensive Industries

EXPORT LED GROWTH

Labour intensive industries should be established, because labour is cheaper

in Pakistan, these industries can be set up at lower cost. The products of these
industries can be exported.
2. Manufactured Goods

Instead of exporting primary goods like raw cotton, Pakistan should export
manufactured goods like textiles and garments, leather goods, food products and
electrical goods.
3. Reduction in Export Duties

This step will make our export competitive in the international market.
Foreigners will prefer to import from Pakistan because of low prices.
4. Quality Products

Many of our goods cannot be exported because of poor quality. Thus, electric
fans, cycles, electric motors, shoes, ball pens, crockery etc. cannot be sold abroad.
Pakistan is needed to improve the quality of its products according to international
standard.
5. Export Marketing

Agencies should be made more active. Pakistan has already done this. There
are Export Promotion Bureau, Export Development Fund and Export Processing
Zones etc. All these are playing their effective role to increase export and to correct
the BOP.
6. Immoral Practices

Many Pakistanis have brought bad name to our trade because they export
commodities of inferior quality than specified in agreements. So, all this should be
restricted.
7. Pricing of Goods

It is necessary for increasing exports that goods should be produced under

optimal conditions and offered at competitive prices in international market.
8. Packing

High quality packing is essential for promoting exports. If packing is not

attractive and durable, it will not capture foreign market.
9. Joint Venture
Establishing industries with joint venture of foreign investors can also push up the
export. The products of these industries can be sold in the foreign market.

B. REDUCTION IN IMPORTS

10. Import of Only Essential Items

Only essential items should be imported which are needed for our industrial
production. Import of luxuries should be banned. People should be educated to come out
from the complex of foreign goods.
11. Exchange Control
Exchange control is also an important step to minimize the imports. Exchange
control should be followed, so that there is no wastage of foreign exchange to import of
un-necessary and luxuries.
12. Substitutes for Imported Items
Import substitutes should be manufactured in the country. If home production of
fertilizer, paper, steel, edible oil and electrical goods are increased, there will be less
need for such imports.
C. MISCELLANEOUS
13. Decrease in Consumption
Taxes should be imposed to reduce the consumption of many items. Rich people
in our country are spending freely on unnecessary imported consumer items. So, foreign
exchange reserves are wasted.
14. Control of Smuggling
Bara markets should be eliminated. After atomic explosion, the Govt. is taking
strict measures to eliminate markets of smuggled goods.
15. Population Control
Many of our problems are arising due to fast increase in population. Sincere
efforts should be made to decrease growth rate of population. People should be
educated in this regard.
Conclusion:
Achievement of surplus in balance of payment is difficult but not impossible. It
can achieve through installing import substitution and export promoting industries.
Government should control the forex and check the import of luxuries.

The developing countries are borrowing from abroad to finance their current account
deficit and start spending the funds but they have to increase their The Balance of
Payment Problem in Developing Countries, Especially in Pakistan export capacity
necessary to generate export earnings, to repay the debt. But due to their internal
constraints the developing countries are not able to utilize the borrowed money properly
that put them in the awkward position.
There is one entry in balance of payment that is called Statistical discrepancy or errors
and omissions. These measurement errors are larger in developing countries due to

mishandling of data because not having a sophisticated statistics department due to their
limited resources.
Developing countries are often in a state of uncertainty; the political situation in most of
the time is disturbing the environment. Their economic policies are often being changed.
Due to this uncertain situation the domestic capital is going out and no new investment is
coming in, thus there is very small inflow of capital
Causes of Balance of Payment Problem for Pakistan As stated earlier Pakistan has been
facing BOP problem since the independence. Therefore, it has been under deficit since
then. Some statistical work has been done in the previous section. to see the real picture.
A brief description of BOP problems of Pakistan are given as under:
Pakistan is an agro-based economy and its exports mainly depend on rice and raw cotton.
Whenever there is an international price shock or internal draught situation the export
situation of these agricultural products are affected badly increasing the deficit gap.
The overall BOP deficit in Pakistan is being financed largely by foreign credits, which
increase our future debt, services liabilities and which would cause strains on the future
balance of payments.
The net private transfer in Pakistan consists of the home remittances of Pakistani
nationals abroad and this is a temporary phenomenon. Our economy is dependent on this
factor, which is external and uncontrolled.
Whenever there is some natural disaster such as floods etc. our economy is badly affected
and we cannot meet the requirement of improving the BOP. Further more, law and order
situation of our country is discouraging for the foreign investors to invest in Pakistan. This
situation has stopped inflow of capital in Pakistan.
High population growth has been a hurdle and main problem in BOP of Pakistan as this has
been increasing the import bill of Pakistan for importing foodstuff. On the other hand, we
are not increasing our agricultural products more than the population growth rate.
There is a lack of continuity in the government policies that is also discouraging the foreign
as well as local investors to start new projects or to do new investment, which is stopping
inflow of capital as well as increase the domestic production.
Political instability is also one of the major hurdles to improve the BOP situation of the
country. This situation is very much disappointing internationally as well as internally.
The Journal of Commerce - 45 Pakistan is always exporting raw material, which is giving very low price as compared to
manufactured goods that would be a little help to improve the deficit in BOP. In addition
to this the market for primary products is very unstable. While importing of equipments
and machinery for its developmental programmes causes a burden of interest on foreign
capital, thus exerts pressure on BOP.
Pakistan being a developing country is not able to get different types of big grants or aids
from developed countries to start its developmental programme. The developed countries
and international financial institutions helped Pakistan in small quantity and in pieces,
which is not at all helpful to improve the BOP situation of the country.
Proper pricing policies play an important role in the production and export of agricultural
commodities and Pakistan is very weak on this side. Here the farmer is not covering his
cost of production and remains in the situation of uncertainty.
During recent years there is a substantial increase in the exports of primary commodities,
particularly rice and cotton and still there is a potential for future increase and production
of these commodities. In addition there is a wide scope for increase the production of food

grains, livestock, fruit and vegetables. But the potential for increasing the production and
exports of these products is not being utilized properly.
Developed countries put restrictions on our exports in one-way or the other. After the
atomic explosion they have put us on trial. Some times they put a restriction on our export
due to under standard, then quota system or child labour etc. which affect BOP situation
badly.
Implementation of Fiscal and Monetary policies and Pakistani Tariffs on exports and
imports are not being implemented properly and with proper knowledge, which is not
improving the BOP situation in Pakistan.
The emphasis of Pakistans industrial policy has been more on import substitution than on
export expansion. This situation can increase the prices for consumers and make these
industries an inefficient. Unless this kind of situation is not finished there will be a threat
for BOP.
The Balance of Payment Problem in Developing Countries, Especially in Pakistan
- 46 Reducing the BOP deficit depends on our rapid industrial production and quality of our
products. In Pakistan we are under-utilizing the idle capacity of our industrial production.
Lack of knowledge about this situation is not in favour of improving the BOP.
Pakistan is suffering from acute external and internal debt problems, which is also one
cause of deteriorating the BOP situation of Pakistan.
Policy measures for Reducing BOP Deficit in Pakistan
Various measures may be taken for improving the different components of the BOP which
are listed below: 1. Appropriate use of Fiscal and Monetary Policies, income and wage
policies, and exchange rate policies 2. Improving the domestic political environment and
law and order situation. 3. Measures to increase agricultural productivities and to
maintain appropriate price for agricultural produce and setting up of agriculture based
industries. 4. Facilitating the foreign investors in Pakistan with improved infrastructural to
increase export. 5. Encouraging the setting up of fruit processing industries 6. Encouraging
the competitive behaviour of Pakistani investors with rest of the world. 7. Improvement of
R&D facilities and level of education in the country. 8. Encourage Pakistanis to use
domestic products, which will reduce the import bill. 9. Exemption for exporters and
domestic investors from excise duties and sales taxes and encouraging the high value
added industries. 10. Arrangement of provision of credit to small and medium size
investors and farmers. 11. Allowing duty-free import of textile machinery and duty-free
import of other old machinery. 12. Setting up of more export processing zones in the
country and supplying infrastructural facilities for the investors.
The Journal of Commerce - 47 13. Making arrangements for export of skilled manpower rather than unskilled ones on
high wages and setting up of polytechnic colleges or institutes and training centers for the
manpower going abroad. 14. Opening up of saving schemes for low-income groups to
encourage savings out of their income. 15. Making arrangement to strengthen oil and gas
and technology sectors. 16. Financing the educational activities and improving the quality
of higher education. 17. Policies may be made to facilitate indirect exports and small and
medium enterprises and ban on any type of export may be lifted. 18. Exporter of all level
may be educated about the latest international rules and regulations to compete the
international market. 19. Free import of high tech. Machinery such as computers may be
allowed. 20. Policy measures to face the debt problems of Pakistan, e.g., to improve

external debt, policy to increase countrys export may be strengthened by developing the
domestic production. 21. Restoring the donors and investors (both external and internal)
confidence. 22. Most of the producers, exporters and policy makers are not aware of
Uruguay Round Trade Agreement on Agriculture. There is an urgent need to pursue public
awareness program on the impact of trade liberalization on agriculture, including trade
policy developments, priorities and strategies of the major trading partners of Pakistan.
On the other hand, the developmental programmes of Pakistan require imports of equipments,
machinery and so the burden of interest on foreign capital exerts pressure on BOP. Pakistans
exports mainly depend on agriculture for which the natural conditions and environment in most of
the time is not favorable. At the time of draught and other circumstances the exports of Pakistan
fall sharply. As earlier told that developing countries usually export their raw material and import
the finished goods, so Pakistans export mostly include raw materials, or primary goods, which
being cheaper, fetch less foreign exchange. In Pakistan major source for financing the balance of
payments deficit continued to be foreign loans. The situation will be more clear when we will have
a look on Pakistans trade from 1947 uptil now (Annex-A).