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International Financial

Management

BALANCE OF
PAYMENT
CURRENT ACCOUNT OF PAKISTAN

MUAZZAM IMTIAZ
ROLL NO. 22
MBA 4th (Morning) – A

Department of Management
Sciences
The Islamia University of Bahawalpur Rahim Yar Khan
Campus
Balance of Payment
“It is a systematic record of all the economic transactions between
domestic country and rest of the world is known as Balance of
Payment.”
It includes the payments and receipts during exports, imports,
foreign remittances, inward or outward investments etc…
Balance of Payment is the difference between Current Account and
Capital account of a country.
The Current Account further includes Trading Account, Service
Account, Income Account and unilateral transfers and other related
items.
The Capital account includes Loan transactions, inward or outward
investments, short-term capital and other related items.
The actual figures for balance of payment can be obtained at the
year end therefore it is projected based on the previous data and
assisting facts and figures.
Pakistan’s current account balance in the fiscal year 2008-2009 was
USD 8,547 unfavorable, debit or negative. In the same year the
capital and financial account balance was USD 3,608 favorable or
positive which lead to the Balance of payment to be USD 4,939
deficit.
In fiscal year 2009-10, current account balance is projected to be
USD 4,911 unfavorable or negative. This means that we are going to
face deficit balance of payment this year as well.
Why Pakistan is facing deficit balance of payment?
 The major reason is and has always been the imports of
luxurious and high cost goods for the elite class of the country
that increases the import bill to the dangerous level where as
on the other hand the exports are on decreasing day by day.
The textile industry was the backbone of our exports but now
it’s suffering from various crises among them the power crisis
is the major issue.

 Apart from import bill, the global recession in the recent year
has severely affected the business and trade all over the world
which also affected Pakistan.

 The investments in the country have declined to the lowest


and the major reason is the law and order situation prevailing
in the country. The self-imposed war against terrorism has
made our situation worse as no one is willing to make
investments in the country.

 The local industry is facing hard times as we don’t have


sufficient energy resources available. It has decreased the
production of goods and ultimately we have to buy them from
other countries which add to our import bill and increase the
supply of our currency.

 Pakistan is agriculture based country and we have one of the


finest and largest canal system. But would you believe that we
need to import sugar, wheat and other basic crops to meet the
demand in the country? In recent year Pakistan needed to
import tons of sugar and wheat just because of the
mismanagement of resources and water shortage created by
India by building dams on rivers which are flowing towards
Pakistan.

 Energy crisis needs to be separately mentioned because it not


only affected the Textile industry but overall the economic
activities in the country are paralyzed. And we need to put
some serious efforts to eliminate it otherwise the
consequences will be dangerous.

 Political instability in the country has always affected the


growth of the country and it does affect the trade and
ultimately the current account of the country.

 The government policies are the tools to take corrective


actions to make the things stable and on the track but wrong
policies may lead to adverse affects. We have been lacking in
good policies regarding the economy of the country.

 Inflation, as we’ve discussed in class is a factor which affect


not only the trade but the foreign exchange as well. The
increasing rate of inflation will lead to the surplus supply of the
currency and it would depreciate the currency value. Once the
currency is depreciated our current account will suffer as we
have to pay more to buy the same commodities and our import
bill will rise.

Conclusion:
When we look at the figures of Balance of Payment, we observe that
the Exports are decreasing and Imports are increasing. The income
from service sector has also declined in recent times for some
reasons. The foreign remittances or unilateral transfers has also
decreased as the people have no more trust on the Pakistan and
increasing rates of taxes are also a reason for people to avoid
sending money back to Pakistan instead invest it in foreign country.
The FDI has trembled down as the law and order condition is getting
worse day by day. Our current account balance is apparently better
than the previous year but we should not ignore that fact that it is
projected data and real figures could shuffle around due to several
reasons.

References:
Wikipedia
http://en.wikipedia.org/wiki/Balance_of_payments
State Bank of Pakistan website
http://www.sbp.org.pk/publications/bop/index.htm
Planning and Development Commission of Pakistan
http://www.planningcommission.gov.pk/