Economy of Pakistan

Submitted to: Sir Sheikh Usman Yousaf Submitted by: Muhammad Rizwan Muhammad Yasir Sammar Abbas (Mi09MBA007) (Mi09MBA039) (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 Hailey College of Banking & Finance Page 2

The official settlements account or official reserve assets account

Economy of Pakistan
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 Pakistans 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 1972-73s 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. Hailey College of Banking & Finance Page 4

Economy of Pakistan
Pakistans BOP 1994-1999

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Economy of Pakistan

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Economy of Pakistan
Pakistans Balance of Payments July 2008 - June 2009
Pakistans 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) ITEM Current Account Balance T rade balance (Goods) Exports f.o.b. Imports f.o.b. Services (net) Income (net) Current transfers (net) General govt. Other sectors Capital account (net) Financial account(net) Errors and Omissions (net) O verall balance Reserves and related items Reserves assets Use of Fund Credits & Loans Exceptional financing -4,213 -4,519 5,711 10,229 -1,259 -1,125 2,690 74 2,616 28 1,331 -238 -3,091 3,091 3,227 -36 -100 -3,625 -3,698 4,379 8,077 -1,080 -1,260 2,413 12 2,401 44 1,692 226 -1,663 1,663 -1,429 2,992 100 -545 -2,045 4,231 6,276 -612 -967 3,079 48 3,031 66 1,260 -17 764 -764 -730 -34 0 -878 4,800 7,165 -430 -1,055 2,972 29 2,943 317 1,349 146 934 -934 -1,703 769 0 ANNUAL -9,261 19,121 31,747 -3,381 -4,407 11,154 163 10,991 455 5,632 118 -3,056 3,056 -635 3,691 0 -13,874 -14,970 20,427 35,397 -6,457 -3,923 11,476 428 11,048 121 8,131 257 -5,365 5,365 5,538 -173 0 Jul - Sep O ct - Dec Jan- Mar Apr - Jun 2008-09 2007-08 -2,365 -12,627

Figure 1. Export Receipts by Major Countries 4,000 Million US$ 3,000 2,000 1,000 0

Figure 2.Import Payments by Major Countries 6,000 5,000 4,000 3,000 2,000 1,000 0

FY09

FY08

Million US$

FY09

FY08

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Economy of Pakistan
Current Situation of BOP of Pakistan Year Export ~ Import~ Trade Deficit~ Worker's Current Remittances# Account Deficit# 3.8 5.1 3.9 8.5 4.8 5.7 4.2 1.7

2006-07 11.8 21.2 9.4 2007-08 11.6 24.4 12.8 2008-09 10.9 21.5 10.6 2009-10* 9.1 16.0 7.0 Source: FBS, SBP & E.A.Wing, Finance Division

IMPORT EXPORT AND TRADE BALANCE Year 2006-07 2007-08 2008-09 2008-09 Julymarch 2009-2010(pro) Export 1,029,312 1,196,638 1,383,718 1,036,466 1,176,388 Imports 1,851,806 2,515,072 2,723,570 2,021,991 2,081,763 Balance -822,494 -1,315,434 -1,339,852 -985,525 -905,375

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Economy of Pakistan
Summary Balance of Payments Overall 2008-09
2008 Jul Sep Oct - Dec 2009 Jan - Mar Apr Jun Jul - Jun 2008-09 2007-08

ITEM

Current Account Balance Current Account Balance without off. transfers Goods: Exports f.o.b Goods: Imports f.o.b Trade Balance Services: Credit Services: Debit Balance on Goods & Services Income: Credit Income: Debit Of which : Interest payments Profit & Dividend Balance on Gds & Serv. & Inc Current Transfers.: Credit Of which: Workers' Remittances FCAs Residents Saudi Oil Facility Current Transfers :Debit Capital Account, Capital Account, : Credit Project Grants Debt Forgiveness Others Capital Account... Debit Financial Account Direct Investment Abroad Dir. Invest. In Rep. Econ. Portfolio Investment Assets Equity Securities Debt Securities Portfolio Investment Liab. Equity Securities Debt Securities Financial Derivatives Assets

-4,213

-3,625

-545

-878

-9,261

-13,874

-4,287 5,711 10,229 -4,519 1,133 2,392 -5,778 210 1,335 440 221 -6,903 2,708

-3,637 4,379 8,077 -3,698 941 2,021 -4,778 298 1,558 656 221 -6,038 2,457

-593 4,231 6,276 -2,045 777 1,389 -2,657 185 1,152 384 121 -3,624 3,110

-907 4,800 7,165 -2,365 1,255 1,685 -2,795 181 1,236 435 194 -3,850 2,981

-9,424 19,121 31,747 -12,627 4,106 7,487 -16,008 874 5,281 1,915 757 -20,415 11,256

-14,302 20,427 35,397 -14,970 3,589 10,046 -21,427 1,613 5,536 2,175 921 -25,350 11,618

1,879 -27 0 18 28 28 24 0 4 0 1,331 -6 1,117 -10 -10 0 -174 -171 -3 0

1,761 -185 0 44 44 48 23 0 25 4 1,692 -2 1,234 -15 -15 0 -4 7 -11 0

2,018 -7 0 31 66 66 64 0 2 0 1,260 -3 691 8 8 0 -758 -254 -504 0

2,153 -52 0 9 317 318 316 0 2 1 1,349 -14 678 -24 -24 0 -96 -93 -3 0

7,811 -271 0 102 455 460 427 0 33 5 5,632 -25 3,720 -41 -41 0 -1,032 -511 -521 0

6,451 444 0 142 121 128 111 0 17 7 8,131 -75 5,410 -5 -5 0 37 20 17 0

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Economy of Pakistan

ITEM

2008 Jul Sep Oct - Dec Dec

0 448 0 -1 457 -8 -44 0 5 715 715 222 0 493 0 0 0 687 525 162 -23 244 -293 145 112 -326 -238 -3,091 3,091 3,227 -36 0 36 -100 0 -30 0 3 -224 191 509 0 196 1,011 410 187 0 223 601 50 551 815 273 542 0 63 250 409 103 -56 226 -1,663 1,663 -1,429 2,992 3,050 58 100

2009 Jan-Mar Apr Jun

(Million US Dollars) Jul Jun 2008-09 2007-08

Financial Derivatives Liabilities Other Investment Assets Monetary Authorities General Government Banks Other Sector Other Investment Liab. Monetary Authorities General Government Disbursements Long-term Project loans Food loans Program loans Short-term Commercial loans IDB loans Amortization Long-term Short-term Other Liabilities Banks Other Sector Disbursements Amortization Other Liabilities Net Errors and Omissions Overall Balance Reserves and Related Items Reserve Assets Use of Fund Credit and Loans Purchases / Repurchases Exceptional Financing SBP Reserves

0 174 0 3 93 78 1,148 -1 1,087 883 795 162 0 633 88 0 88 322 269 53 526 -110 172 313 131 -10 -17 764 -764 -730 -34 0 34 0

0 -32 0 3 20 -55 837 0 660 1,081 1,036 270 0 766 45 0 45 422 322 100 1 94 83 197 116 2 146 934 -934 -1,703 769 852 83 0

0 560 0 8 346 206 2,450 -1 1,948 3,690 2,956 841 0 2,115 734 50 684 2,246 1,389 857 504 291 212 1,064 462 -390 118 -3,056 3,056 -635 3,691 3,902 211 0

0 32 0 5 525 -498 2,732 490 1,761 3,054 2,354 1,250 0 1,104 700 0 700 1,272 1,131 141 -21 66 415 1,027 334 -278 257 -5,365 5,365 5,538 -173 0 173 0

6,286

7,833

8,453

10,257

10,257

9,539

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Economy of Pakistan
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 Pakistans 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 Pakistans 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 demandpull 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. Hailey College of Banking & Finance Page 14

Economy of Pakistan
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.

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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