Economy of Pakistan

Balance of Payments

Balance of Payments

The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time

Balance of Payments
The balance of payment record is maintained in a standard double-entry book-keeping method. International transactions enter in to the record as credit or debit. The payments received from foreign countries enter as credit and payments made to other countries as debit.

Balance of Payments

Balance of Payment is a record pertaining to a period of time;

Usually it is an Annual statement. All the transactions entering the balance of payments can be grouped under three broad accounts.

Structure of Balance of Payment (BOP)

The Current Account

The Capital Account The Financial Account

The Current Account (CA)

Current Account transactions that usually transactions in goods and services. A positive value for the current account is called a current account surplus. A negative value is called a current account deficit.

The Current Account

The current account mainly consists of 4 types of transactions: 1. Exports and imports of goods Exports of goods are credits (+) to the current account Imports of goods are debits (-) to the current account

The Current Account

The difference between exports and imports of goods is called ' Trade Balance' or 'Balance of Merchandise Trade'. Since the 1947's, Pakistan has a merchandise trade deficit except for one year.

The Current account (CA)

2. Exports and Imports of services Exports of services are credits to the current account (+) Imports of services are debits to the current account (-). Pakistan has a net debit ($-2,347mill) in services balance

The Current account

2. Exports and Imports of services This category consists of items such as
Tuition paid to universities by international students, Money spent on travel by tourists, Banking, Insurance, Freight, Medical services, Consulting Services etc.

The Current account

3. Interest payments on international investments Interest, dividends and other income received on Pakistani assets held abroad are credits (+) Interest, dividends and payments made on foreign assets held in the Pakistani are debits (-). Pakistan has a net debit ($-2,655 mill) in the investment income account; more payments are made to foreigners than foreigners make to Pakistani investors.

The Current account

4. Current transfers Remittances by Pakistani working abroad, pensions paid by foreign countries to their citizens living in the Pakistan count as credits (+). Remittances by foreigners working in the Pakistan, pensions paid by the Pakistan to its citizens living abroad, count as debits (-). Pakistani has the only surplus in current transfers i.e. US$10.8 bill. (July-April 2011-12)

2. The Financial Account (FA)

It includes the purchase and sale of financial assets. Also includes government-owned assets such as
Foreign reserves, Gold, Special drawing rights (SDRs) held with the international monetary fund, Private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account.

2. The Financial Account (FA)

The financial account consists primarily of 4 types of transactions: 1. Foreign Direct Investment Purchases of Pakistani capital assets (factories, machines, companies) by foreigners are credits (+) Purchases of foreign capital assets (factories, machines, companies) by Pakistani residents are debits (-) Sales of Pakistani capital assets by foreigners count as debits to the financial account (-) Sales of foreign capital assets by Pakistani residents count as credits to the financial account (+)

2. The Financial Account (FA)

2. Portfolio Investment Purchases of Pakistani securities (stocks, bonds, CDs, money-market accounts) by foreigners are credits (+) Purchases of foreign securities (stocks, bonds, CDs, money-market accounts) by Pakistani residents are debits (-) Sales of Pakistani securities by foreigners count as debits to the financial account (-) Sales of foreign securities by Pakistani residents count as credits to the financial account (+)

2. The Financial Account (FA)

3. Other Investments Other investment covers short- and long-term trade credits; Loans; Currency and deposits; And other accounts receivable and payable. Transactions covered under direct investment are excluded.

2. The Financial Account (FA)

3. Other Investments Increases in loans & trade credits to Pakistani residents by foreigners count as credits (+) Increases in loans & trade credits to foreigners by Pakistani residents counts as debits (-) Repayments of loans & trade credits to Pakistani residents by foreigners count as credits(+) Repayments of loans & trade credits to foreigners by Pakistani residents counts as debits (-)

2. The Financial Account (FA)

4. Reserve Assets Increases in Foreign Currency/Gold reserves held by central bank count as credits (+) Decreases Foreign Currency/Gold reserves held by central bank count as debits (-) Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments

3. The Capital Account (KA)

The major components of the capital account are 1. Acquisition or disposal of nonfinancial assets (for example, a physical asset such as land) And non-produced assets, which are needed for production but have not been produced, like a mine

3. The Capital Account (KA)

2. One-sided Financial Transactions, i.e. It includes transactions in which one country gifts financial assets to another country with no expectation of receiving anything in kind. In today's world, this implies one major type of transaction - debt forgiveness and relief. Forgiveness of Pakistani debt by foreigners count as credits (+) Forgiveness of foreign debt by Pakistan entities count as debits (-)

Balance of Payments Equilibrium

Balance of Payments Equilibrium Is defined as a condition where the sum of debits and credits from the Current Account and the Financial and Capital Account equal zero;
Current A/c + Financial A/c+ Capital A/c = 0

Static Equilibrium

In static equilibrium, exports equal imports including exports and imports of services as well as goods.

Dynamic Equilibrium

The condition for dynamic equilibrium is that exports and imports differ by the amount of autonomous capital movements.

Types of BOP Disequilibrium

(a) Cyclical disequilibrium,

(b) Secular disequilibrium, and (c) Structural Disequilibrium

Structural Disequilibrium
It takes place due to structural changes in the economy affecting demand and supply relations in commodity and factor market. Structural disequilibrium in balance of payments persists for relatively longer periods; as it is not easy to remove structural imbalance in the economy.

Important Causes Of Structural Disequilibrium

If the foreign demand for a country's products decline due to the discovery of cheaper substitutes abroad, then the country's export will decline causing a deficit. If the supply position of a country is affected due to factors like crop failure, shortage of raw-materials, strikes, political instability, etc, then there would be the deficit in the balance of payments

Important Causes Of Structural Disequilibrium

A shift in demand due to the changes in tastes, fashions, income, etc, would increase or decrease the demand for imported goods causing a disequilibrium in the balance of payments.

Changes in the rate of international capital movements may also cause structural disequilibrium A war also results in structural changes which may affect not only goods but also factor of production causing disequilibrium in balance of payments.

Cyclical Disequilibrium
When disequilibrium is caused due to the changes in trade cycles, it is termed as cyclical disequilibrium. It is possible that different phases of trade cycles like depression, boom, recession, etc, may disturb terms of trade and cause disequilibrium in balance of payments.

Important Causes Of Cyclical Disequilibrium

For instance, during boom period, imports may increase considerably due to increase in demand for imported goods. During recession and depression, imports may be reduced due to fall in demand on account of reduced income. During recession exports may increase due to fall in price. During boom period, a country may face deficit in its BOP position on account increase in imports. However, during recession its export may increase, and as such BOP position may show surplus.

Secular or Fundamental Disequilibrium

Secular or fundamental disequilibrium refers to a persistent and long-term deficit or a surplus in the balance of payments of a country It occurs when there is a continuous increase in the stock of gold and foreign exchange reserves. There is a persistent surplus & vice-versa.

Pakistans BOPs position

Current account deterioration Increased imports Less exports Power shortages Flood Problems

Current Account deficit:

The current account deficit stood at $ 3,394 million during July-April 2011-12 Mainly caused by trade and services account deficit Current transfers (workers remittances) helped to avoid further deficit.

Current Account deficit

The trade deficit expanded due to the 14.5% growth in imports And the 0.1 percent increase in exports; Thus widening the trade deficit by 49.2%. The major factor behind the widening of the trade deficit was the sharp rise in the import bill due to the higher prices of crude oil.

Current Account deficit

The services account deficit recorded an expansion of $ 1,122 million. This deterioration in the services account was primarily due to the 16.6 percent fall in services exports. Pakistan witnessed a strong growth of 25.8% in 2011 and become the 5th largest remittances recipient developing country in 2011

Financial Account
The financial account posted a surplus of $ 1,200 million. Foreign direct investment declined in the telecommunication, financial business and power sector during the period due to energy crises and circular debt However, the Oil & Gas Exploration remained the major attraction during current fiscal year as its share in overall FDI stood at 69.8 percent.

Factors Influencing Pakistans Bop

Concentration of Exports The major share of Pakistans export is still concentrated in a only three items (cotton manufactures, leather and rice). Due to unfavorable natural conditions, decline in Agricultural products badly effects textile manufacturing Concentration of Imports Pakistans exports are mainly concentrated in 8 commodities. Major import items are Machinery, petroleum & petroleum products, Edible oil, chemicals and Transport equipment.