Beruflich Dokumente
Kultur Dokumente
Submitted to:
Sir Sheikh Usman Yousaf
Submitted by:
Muhammad Rizwan
(Mi09MBA007)
Muhammad Yasir
(Mi09MBA039)
Sammar Abbas
(Mi09MBA046)
“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”.
➢ Vertically
• Debit (Payments)
• Credit (Receipts)
➢ Horizontally
• The current account
• The capital account
Hailey College of Banking & Finance
Page 2
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.
• 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).
Historical Perspective
• 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.
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
(Million US Dollars)
2008 2009 Jul – Jun
ITEM
Jul – Sep Oct - Dec Jan-Mar Apr – Jun 2008-09 2007-08
Dec
SBP Reserves
6,286 7,833 8,453 10,257 10,257 9,539
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.
• The foreign official loans are specific and tied in nature and are attached with political
interference and heavy rates of interest.
• 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.
➢ 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.
➢ 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.
➢ 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
➢ 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.
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.