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What is Balance of payment ?

³Balance of payments is a record of

economic transactions between the
residents of one country and the rest
of the world during the course of
one year.
year.´
he balance of payments like all
balance sheets must balance.
balance. he
items which lead to an inflow of
foreign earnings are placed on the
credit side of the balance sheet,
whereas the items which give rise to
an out flow of foreign currency are
placed on the debit side.
side.
meficit & surplusÊ
surplusÊ
meficit = mebit > Credit
Surplus = mebit < Credit

he deficit in the current account is

met from reserves of gold and
foreign Currencies and borrowing
from the rest of the world.
world.
Purpose
urpose of BOPÊ
BOPÊ

Its main purpose is to provide the

govt..
govt information about the
international economic position of
the country and to help make
decisions about monetary and fiscal
issues, on the one hand, and about
trade and payments on the other.
other.
9ain items OF BOPÊ
BOPÊ

he main items which are included in

the balance of payments are:
are:

1) he Current account

2) he Capital account
3) he official reserve assets account
1). he Current account:
he current account is composed of:
of:
A).. Imports and exports of visible
A)
goods
B).. Services such as expenses on
B)
travel, transport, insurance, fees,
commissions
C).. Unrequited transfers, donations,
C)
pensions grants etc.
etc.
„). Capital accountÊ
accountÊ
Capital account is made up of a
variety of capital movements
between one country and the rest of
world during a given period of time
which is a year.
year. he capital
movements of short and long term
loans between the countries are
carried out by Government, firms
and Households.
Households.
3). he official reserve
assets accountÊ
accountÊ
Official reserve transactions consist
of movements of international
reserves by governments and official
agencies to accommodate
imbalances arising from the current
and capital accounts.
accounts.
 Pakistan¶s Balance of
Payments:
Pakistan¶s balance of payments
situation has not been satisfactory
since independence.
independence. he country
with the exception of five years i.e.
(1950-
1950-51,
51, 1954
1954--55
55,, 1955
1955--56,
56, 1958
1958--59,
59,
and 1959-
1959-60)
60) has been running a
persistent deficit in its balance of
payments on current account
account..
 he five years in which Pakistan¶s
current account showed surplus are as
follows::
follows

Î Surplus of Rs.
Rs. 578
578..o crore in 1950 ± 51

Î Surplus of Rs.
Rs. 09
09..9 crore in 1954 ± 55

Î Surplus in 1958 ± 60
Current situation:
Currently Pakistan¶s balance of payments
showed a deficit in its current account
balance during following years.
years.

year BOP 

2004--05
2004 - 1,534

2005--06
2005 - 4,990
Factors contributing towards
adverse balance of paymentsÊ
paymentsÊ

1). Import of capital goods.

goods.

he heavy import of machinery,

technocrats etc, has considerably
increased the import bill and has
adversely affected the balance of
payment on current account
account..
„
Rise in oil prices.
prices.

he sharp rise in the prices of oil

particularly in 70,s
70,s and also in the
beginning of 1980,s
1980,s and 1990,s
1990,s and
from 2003 onward is taking a big
chunk of the foreign exchange
earnings..
earnings
[
Increase in import
payments for fertilizers etc.
etc.

mue to increase in the prices of

fertilizers, machinery, petroleum,
edible oil etc.
etc., there is a sharp
increase in the import payments to
the outside world.
world. he balance of
payment has, therefore, been
adversely affected.
affected.
ñ
onsumption oriented
societyÊÊ
society

he Pakistanis as a whole are

consumption oriented.
oriented. he import
of consumer goods is about 16% 16% of
the total imports
imports.. 9ost of the
consumers goods imported from
abroad can be easily manufactured
in the country and can ease the
situation in the balance of payments

r
Import industrial raw
material::
material

9ost of the industries which were

established for achieving the twin
objective of earning and saving foreign
exchange have been eating away roughly
3% of the aggregate import bill. bill. he
excessive import of industrial inputs is a
strain on the balance of payments on
current account
account..

 ). meterioration in terms of
tradeÊÊ
trade

In
Pakistan, the import unit values are

In

higher than the export unit values for the
last over three decades.
decades. A decline in term
of trade causes imbalance in the balance
of payments
7). Higher payments for
freight insurance

Pakistan has to make higher

payments for non factors services
such as freight, insurance,
transports, travel etc
M
cotton
cotton--rice led growth
growth::

Pakistan is heavily depending on the

exports of two primary commodities
cotton and rice and textile
manufactures.. If there is any natural
manufactures
disaster, decline in exports causes
an imbalance on the current
account..
account
9). momestic developments

A number of momestic developments like

political uncertainty, floods,
nationalization of industries, shortage in
availability of credit to private sector,
labor, inefficient handling of vessels and
cargo at Karachi airport, have cut down
industrial production, reduced exports
and have enlarged the import bills.
bills. All
these have contributed in making a
persistent deficit in the balance of
payments

10)). International factors:
10 factors:

he sluggish growth in world market

imposition of anti dumping duties,
propaganda about child labor, fall in
the production of large scale
manufacturing, over valuation of
Pak.. rupee etc.
Pak etc. have reduced the
export earnings of Pakistan.
Pakistan.
9easures for correcting the
adverse balance of payments:

he adverse balance of payments can

be decreased in three ways:
ways:

(A). Export led growth

(A). growth..
(B).. Reduction in imports
(B)
(C).. Reduction in invisible growth.
(C) growth.
A). Export led growth

he following measures should be adopt
for increasing exports alleviating the
balance of payments problems.
problems.

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B). Reduction in imports
importsÊÊ

he decline in the import of

consumer goods and industrial raw
material which we can produce
within the country can greatly
reduce the deficit gap.
gap.
C). Reduction in invisible
importsÊÊ
imports

he payments on invisible imports

like shipping, insurance, banking
services, expenses on diplomats etc.
etc.
has been on increase.
increase. It has to be
curtailed down.
down.
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