The document discusses the balance of payments of Pakistan. It defines the balance of payments as a record of economic transactions between a country and the rest of the world. It notes that Pakistan has generally run a persistent current account deficit, except for a few years after independence and devaluations. The main causes of Pakistan's imbalance include slow production growth, political uncertainty, restrictive fiscal policies, and import restrictions in developed countries. The document recommends policies like increasing exports, reducing inflation and imports, industry reforms, and flexible exchange rates to improve Pakistan's balance of payments.

1. Balance of payments
Course code: ECO 202
Lecture

2. Lecture Outline
1. Composition of BOP
2. Pakistan’s BOP
3. Causes of BOP imbalance

3. Some theoretical Aspects
• It’s a comprehensive record of economic transactions of the residents of a
country with the rest of the world during a given time period.
• It’s a tabulation of the credit and debit transactions of a country with foreign
countries and international institutions.
• Payments are recorded on the debit side and receipts on the credit side.
Debit side are recorded with a minus (-) sign and credit items are with plus
(+) sign.
• Statistics Department of State Bank of Pakistan is responsible to compile
Pakistan’s Balance of Payments Statistics (BOP) as per IMF format (BPM5)

4. Why is it important ?
• Its main aim is to provide the government information about the international
eco position of the country and to help make decisions about monetary and
fiscal issues, on one hand, and about trade and payments on the other.
• Government authorities are constant users of balance of payments and
other statistics in carrying out their responsibilities of monitoring economic
activity, formulating recommendations an appropriate balance of payments
and domestic economic policies and evaluating various economic
strategies.
• Regional balance of payments statistics are used both by the Pakistan’s
authorities and by the authorities of partner countries to monitor
developments in economic relations between Pakistan and those countries
or specific country grouping.

5. • Pakistan’s balance of payments is used by academic and business
observers as well as by policy maker around the world in monitoring
developments in the worldwide payments position and in comparative
studies of trends in the balance of payments of various countries.
• BOP data is also used by international bodies such as IMF, World Bank and
other external stakeholders etc.
Why is it important ?

6. Composition of BOP
• Components of Balance of Payments:
• Balance of payments statement is divided into two parts:
Balance of payments on Current Account
Balance of payments on Capital Account
• Balance of payments on Current Account:
• This component of balance of payments is further divided into two parts:
Balance of Trade/ Visible Items
Balance of Invisibles Items.
• In balance of trade we include the value of exports and imports of all visible
goods (tangible goods only) during a year.
• The difference between the value of exports and value of imports is called
balance of trade. It may be favorable (positive), unfavorable (negative) or
balanced.
Balance of Trade = Visible Exports – visible Imports
Favourable Balance of Trade = Exports > Imports
Unfavourable Balance of Trade = Exports < Imports

7. Balance of Invisibles:
We include the value of different types of services which are also known
as invisible items (intangibles), rendered to or received from rest of the
world.
Types of Services:
Factor services like services of land, labor, capital, etc.
Non- factor services like tourism, transportation, insurance, banking,
etc.
Private transfers like donations, gifts, remittances, etc.
Official transfers like grants from abroad, etc.
The difference between the value of exports and value of imports of
invisible goods or services is called balance of invisibles. As balance of
goods trade, it may also be favorable (positive), unfavorable (negative)
or balanced.

8. The sum total of the balance of trade (BOT) and balance of invisibles
(BOI) gives us balance of payment (BOP) on current account, i.e.,
BOP current A/c = BOT + BOI
BOP on current account may also be favorable, unfavorable or
balanced during a year.
A favorable BOP on current account means that a country has earned
more foreign exchange than it has spent during the year.
This situation is also known as BOP surplus or current account
surplus.
An unfavorable BOP on current account means that a country has
spent more foreign exchange than it has earned during the year.
This situation is known as BOP deficit or current account deficit.
When a country’s total earnings is equal to its total expenditure of
foreign exchange during a year, it is called balanced BOP in
current account.

9. Balance of payments on Capital Account:
Capital account statement records the flows of capital. Flows of
capital may take any of the following forms:
1. Non- debt creating inflows:
Foreign direct investment (FDI); and
Portfolio investment (PI)
.
2. Debt creating inflows:
External assistance;
External commercial borrowings;
Short- term credits;
NRI deposits
Capital flows are required to settle surplus or deficit in BOP on
current account.

10. A country which has a current account surplus should be sending out
its capital in different forms. It ought to have a capital account deficit.
This deficit will cancel the current account surplus.
A country which has a current account deficit must arrange a net
inflow of capital from abroad.
Capital account surplus is required to finance current account deficit.
Thus, a country which has a current account surplus will manage a
capital account deficit and vice versa.
Overall balance of payments is the sum total of BOP on current
account and BOP on capital account.

11. •Pakistan’s BOP situation has not been satisfactory since independence. The
country with the exception of three years has been running a persistent deficit
in her BOP on current account
•These years are as follows:
• 1947-1948
• 1950-1951 (due to Korean War exports increased)
• 1972-1973 ( Devaluation of PKR)
Pakistan’s BOP

12. Pakistan’s BOP
• We have been having a trade balance in almost all years except for the
three years i.e 1947-48, 1950-51 and 1972-73.
• 1947-48: exports were Rs 444 million, imports were Rs. 319 million and
trade surplus of Rs. 125 million.
• 1950-51:Trade surplus was of Rs 176 million. It was due to excess exports
of cotton and jute.
• 1972-73: trade surplus was of Rs. 153 million. Reason was massive
currency devaluation in 1972, rupee was depreciated from 4.76 to 11
rupees per dollar. Exports share in GDP rose to 14.9%

13. • 1982-83:After witnessing a significant improvement in 1982-83, the BOP
deteriorated sharply in 1983-84 and this trend continued in 1984-85. Lower
growth in merchandise exports and a decline in home remittances
contributed to this situation.
• 1987-88: Pakistan’s BOP position which had deteriorated sharply in 1987-
88 with draw-down of $462 million on the foreign exchange reserves,
received a terms of trade shock in 1988-89.
• 1989-90:The BOP has shown improved performance during 1989-90 with
reduction in current account deficit and increase in net international
reserves.
Pakistan’s BOP

14. Pakistan’s BOP Problem
• Merchandise and services account has been showing poor performance
over the years since 1972-73.
• Combined deficit over the years
• 1972-73, Rs 12.8 billion, 1975-76, Rs 25.84 billion, 1978-79, Rs. 30.05
billion and 1979-80, Rs. 31.62 billion.
• Economy was temporary depending on external factors i.e foreign
remittances and foreign aid in 1980-81.
• BOP deteriorated sharply in 1983 to 1985 because of lower growth in
merchandise exports.
• Trade deficit increased in1989 due to floods in Punjab and sindh and
disturbances in Karachi.

15. Pakistan’s BOP Problem
• Govt implemented SAP to remove imbalances in BOP. Key elements were
flexible exchange rates, trade and tariff reforms and viable fiscal balance.
• Because of all these measures, trade deficit declined from US$1.93 billion
in 1988-89 to US$ 1.70 billion in 1989-90.
• Worker’s remittances were showing some declining and rising trend from
1982-83 to 2003-04.

16. Current Position
• Pakistan is still suffering a BOP problem mainly because foreign exchange
earning capacity depends on primary goods which being cheaper fetch
lesser foreign exchange and for which market is unstable.
• Development program require import of equipment which also cause trade
deficit.

17. Causes of Imbalance in BOP
• Slow growth of production: the scope for increasing the export of fruit,
vegetable and livestock products was very high in middle east, but the
potential for increasing the prod of these items was not properly realized.
• Marketable portion of agri production was very small part of total prod.
• Underutilization of existing capacity is there.
• Political Uncertainty: the events started with the dissolution of assembly in
1988, it greatly affected psychology of business communities.

18. Causes of Imbalance in BOP
• Fiscal policies: heavy import duties on raw material are so high that high
cost of prod makes the goods uncompetitive in the world market.
• These import duties work like export duties.
• Approach of tax rebate was adopted on production of export, but this
procedure was very time consuming and complex. So it greatly reduced the
impact of tax rebate.
• The approach should be to tax consumption not prod.
• Trade restrictions of developed countries: it has a huge impact on
Pakistan's export of cotton and textile.

19. Causes of Imbalance in BOP
• Import substitution policy of Pakistan:
it is causing higher domestic prices, inefficient industries because in
absence of foreign competition there is no incentive for reducing the prod
cost.
• Heavy import of food-grains and energy
• Inflation (now hyper-inflation)
• Foreign exchange remittances:

20. Policy Options
• Make exports more elastic.
• Reduce inflation
• Reduction in import of luxury items
• Import of raw material available in country should be disallowed.
• Enhance production
• High quality exportable goods should be produced at competitive cost
• Reduction in export duties, allowing export incentives
• Establish joint ventures with friendly countries to encourage prod.

21. Policy Options
• Floating exchange rate can also correct BOP disequilibrium.
• Fully utilize idle capacity.
• Encourage export of manufactured goods, particularly engineering goods.
• Export oriented industries should be exempted from sales and excise
duties.

22. Significance of Balance of Payments:
There are following significance of the balance of payments:
1. Balance of payment accounts takes the stock of county’s foreign
exchange receipts and payments obligations with a view to correcting
accounting aberrations.
2. It yields necessary information on the strength and weaknesses of the
country international economic transactions.
3. By analyzing the balance of payments accounts of the past years, we
can find out overall gains and losses from international economic
transactions
4. Balance of payments accounts Caution us and provide enough signals
for future policy formulations.
5. With the help of balance of payments accounts, we are able to know the
manner in which national economy affects and is affected by transactions
with the rest of the world markets.

23. Recommended Books
•
• Ishrat Husain, “Pakistan: The economy of an elitist state”, Oxford
University Press.
• Zaidi, S. Akbar,(1999),“Issues in Pakistan Economy”, Oxford University
Press.
• Saeed, K. Amjad,(2007)“Economy of Pakistan, Institute of Business
Management, Lahore.
• Economics Survey of Pakistan (Latest Issues), Economic Advisor’s Wing,
Ministry of Finance, Government of Pakistan