Inter Fin Bop Problem Faced by Developing Countries

BOP PROBLEMS FACED BY DEVELOPING COUNTRIES

SR NO TOPIC PG NO

1. INTRODUCTION 2

2. APPROACHES TO THE BALANCE OF PAYMENT 3

3. COLLECTION,REPORTING AND PRESENTATION OF BOP

STATISTICS

4

4. SURPLUS AND DEFICIT IN BOP 5

5. PROFILE OF DEVELOPING COUNTRIES 7

6. CAUSES OF BOP PROBLEM FOR DEVELOPING COUNTRIES 8

7. INDIA AND ITS BOP TRADE RESTRICTIONS 12

8. BOP PROBLEM IN PAKISTAN 16

9. BOP SITUATION IN PAKISTAN 17

10. CAUSES OF BOP PROBLEMS IN PAKISTAN 20

11. POLICY MEASURES TO REDUCE BOP DEFICIT IN PAKISTAN 23

12. CONCLUSION 26

13. BIBLIOGRAPHY 28

INDEX

1


CHAPTER.01

INTRODUCTION

The balance of Payment (BOP) of a country is a systematic record of all

economic transactions between the residents of the reporting country and the

residents of foreign countries during a given period of time. Balance of Payment

(BOP) is a statistical statement that systematically summarizes, for a specific time

period, the economic transactions of an economy with the rest of the world.

Transactions, for the most part between residents and non-residents, consists of

those involving goods, services and income; those involving financial claims on,

and liabilities to, the rest of the world; and those (such as gifts) classified as

transfers, which involve offsetting entries to balance — in an accounting sense —

one side transactions. The balance of payments is one of the most important

statistical statements for any country. It tells us how many goods and services the

country has been exporting and importing and whether the country has been

borrowing from or lending money to the rest of the world. It also tells whether or

not the central monetary authority has added to or reduced its reserves of foreign

currency is reported in the statistics.

So a nation’s BOP accounts are the statistical record of all transactions

taking place between its residents and the rest of the world. The BOP accounts also

show the connection between foreign transactions and national money supplies.

Therefore a thorough understanding of BOP accounting will help us in evaluating

the implications of a country’s international transactions. So in order to know what

is happening to the course of international trade, government keeps track of the

transactions between countries. The main purpose of BOP is to inform the

government about the international economic position of a country and to help

make decisions about monetary and fiscal issues, on one hand, and about trade and

payments on the other hand.

2


CHAPTER.02

APPROACHES TO THE BALANCE OF PAYMENT

There are three analytical approaches to the BOP: (i) the elasticities approach (ii)

the absorption approach and (iii) the monetary approach.

(i) The Elasticities Approach

Robinson developed this approach originally in 1930’s. It concentrates

on the elasticity condition necessary for a devaluation to improve the current

account component of BOP. It is a partial equilibrium model, which focus on the

response of exports and imports to charges in relative prices and ignores income

effects, capital flow, and the money market.

(ii) The Absorption Approach

This approach emphasizes the fact that payments imbalances are

characterized by ex ante divergences between aggregate income receipts and

aggregate domestic expenditures (absorption). This approach focuses specific

attention upon the product market, rather less on the exchange rate market and

appears to ignore completely the money market.

(iii) The Monetary Approach

According to this approach it would appear that what is happening to a

country’s BOP will depend, given the demand for money in that country and in the

rest of the world, upon the rate of the growth of the money supply in the country

vis-à-vis the rate of growth of the money supply in the rest of the world. The key

feature of the monetary approach is the automatic balance of payments adjustment

mechanism i.e., a BOP surplus or deficit is removed by adjustment of money

supply to money demand.

3


CHAPTER.03

COLLECTION, REPORTING AND PRESENTATION OF BALANCE OF

PAYMENT STATISTICS

The balance of payment statistics records all the transactions between

domestic and foreign residents when they purchase or sale of goods, services or of

financial assets such as bonds, equities and banking transactions. Recorded figures

are normally in domestic currency of the reporting country. The authorities are

collecting these information from the custom departments, surveys of tourists, data

on capital inflows and out flows are obtained from banks, and information on

government expenditures and receipts with foreign residents is obtained from local

authorities and central government agencies. The responses from the various

sources are compiled by government statistical agencies.

There is no unique method governing the presentation of balance of payments

statistics and there can be considerable variations in the presentations of different

national authorities. However, the International Monetary Fund provides

guidelines for the compilation of such statistics published in its Balance of

Payment manual. In addition IMF publishes the balance of payment statistics of all

its member countries in a standardized format facilitating inter-country

comparison. These are presented in two publications — The Balance of Payment

Statistics Year Book and the International Financial Statistics. The usual reporting

period for all statistics is year. However, some of the statistics that make up the

balance of payments are also published on a more regular monthly and quarterly

basis.

According to IMF standard the record of BOP can be divided into two major parts;

the current account and the capital account, which are further subdivided into some

other parts. A schematic representation of the BOP can be seen as under:

4


CHAPTER.04

SURPLUS AND DEFICIT IN BALANCE OF PAYMENT

Any payment to foreigners is a deficit item in BOP while any receipt from

foreigners is a surplus item in BOP. In other words whenever the demand for

foreign exchange is more than the supply of foreign exchange the deficit in BOP

occurs.

If receipts are equal to payments on the current account and long-term

capital account of balance of payment, then it is said the balance of payment of that

country is in balance. If receipts are larger than payments on both the accounts,

than it is said that the balance of payment is surplus. Conversely if payments are

larger then the receipt on both of these accounts, then it is said that the balance of

payment is in deficit. If there is persistent deficit in BOP then country should take

some measures. However, when a country enjoys surplus it feels a sense of relief.

The countries that have persistent deficit in their BOP may take one or more of the

following measures.

1. By receiving assistance from IMF

2. By getting short term loans from other countries

3. By receiving grants from other countries

4. By selling foreign assets of the country

5. By reducing investment made in other countries.

6. By selling foreign currencies from country’s foreign exchange

reserves.

7. Business firms of the country can purchase goods on credit from other

countries. The values of these imports need to be paid later on, etc.

5


The position of a country having surplus in BOP is different from the country

having deficit in BOP. If there is persistent surplus in a country, there is a

continuous increase in the reserves of foreign exchange of that country and it is not

necessary to correct this kind of situation. Some countries however take some

measures sometimes to help the other countries. In addition, these steps would

help these countries to reduce internal inflationary pressures. Sometimes, the

countries running their surpluses are compelled to reduce the surpluses. For the

sake of balancing their BOP, these countries can lower rate of interest, can reduce

tax rates and can, raise government expenditures. They can lower tariff and other

barriers to trade. They can also liberalize export of capital or can do revaluation

(i.e., raising the external value of its currency) or they can eliminate subsidies on

exports. There are few countries having surplus most of the time – one of them is

USA. From about World War-I until 1980, the United States was a net creditor

internationally; that is, it had more foreign assets than liabilities. Since the early

1980’s, however, the United States has continuously run larger annual current

account deficit. These current account deficits have had to be financed by net

foreign borrowing including sale of US owned assets to foreigners as well as the

incurring of new foreign debts.

6


CHAPTER.05

PROFILE OF DEVELOPING COUNTRIES

Most of the world’s population is substantially poor. The income range among

these developing countries is very wide. Some of these countries, such as

Singapore, are in fact on the verge of being “graduated” too advanced country

status, both in terms of official statistics and in the way they think about

themselves. Others, such as Bangladesh, remain desperately poor. Nonetheless, for

virtually all-developing countries attempt to close the income gap with more

advanced nations has been a central concern of economic policy. We have to see

some basic facts of developing countries, which are responsible for deficit in BOP.

These are large Population size, high Population growth rate and large family size,

low output and low per capita income, weak structure of production, more hunger

and poor health, low literacy rate, varying income inequality, political instability, a

high proportion of the labour force in agriculture, inadequate technology and

capital, low saving rate, dual economy and an unskilled labor force, varying

dependence on international trade and a high proportion of primary product export.

7


CHAPTER.06

CAUSES OF BOP PROBLEMS IN DEVELOPING COUNTRIES

BOP problem in developing countries is not caused by a single reason rather there

are multi reasons due to which this problem take place. The main factors are

discussed below:

Central Banks do not hold the currency of a small developing country as reserves,

because neither the government nor private banks will freely convert them into

gold, dollars or other international reserve assets. Only convertible foreign

currencies are held as foreign exchange reserves.

The developing countries are borrowing from abroad to finance their current

account deficit and start spending the funds but they have to increase their export

capacity necessary to generate export earnings, to repay the debt. But due to their

internal constraints the developing countries are not able to utilize the borrowed

money properly that put them in the awkward position.

There is one entry in balance of payment that is called “Statistical discrepancy” or

“errors and omissions”. These measurement errors are larger in developing

countries due to mishandling of data because not having a sophisticated statistics

department due to their limited resources.

The developing countries may have the slow means of transportation and

communication. So goods that leave one developing country’s ports near the end of

the accounting year, may not reach their destination in time to be recorded in the

recipients import statistics for the same year. So there may be a chance of

8


discrepancy of missing data.

Sometimes interest payments earned abroad are not reported to government

authorities in the recipient’s home country. In many cases such interest payments

are credited directly to a foreign bank account and do not even cross-national

borders. So this situation is of great loss for developing countries.

Many developing countries can face the problem of dis-equilibrium in the balance

of payment because of persistent deficits in their trade with developed countries.

Developing countries has to make huge imports from advanced countries for the

sake of implementation their economic development programmes but they are

unable to make as much exports out of their domestic production to finance their

imports.

The inflow of grants from developed countries and foreign capital to these

countries is far short of their needs. As a result those countries are loosing their

reserves of foreign currencies and facing very serious difficulties in this regards.

Special drawing rights (SDRs) sometimes described as “”Paper Gold” are assets

created by IMF and their value is defined in terms of five currencies the Dollar,

Yen, Mark, Pound and French Frank. All these currencies are related to the

developed block. The developing countries would be having the exchange rate

difficulties at the time of improvement in the deficit of BOP; because only

convertible foreign currencies are held as foreign exchange reserves.

In developing countries there is a problem of dual economy. Often relatively

modern, capital-intensive, high-wage industrial sectors exist in the same country as

well as a very poor traditional agriculture sector. This division of a single economy

9


into two sectors creates uneven distribution of wealth and is probably a sign of

markets working poorly. In case there is a combined effort for a country to correct

the BOP position would be difficult for whole of the economy, as this economy has

been divided into two sectors.

The developing countries basically based on agriculture. The production of

agriculture is highly uncertain. In case of any decrease, draught etc. the output of

agriculture can come down and the agricultural export decline sharply. So

agriculture-base economy cannot improve the BOP deficit rather the gap would be

increased many time.

It is the duty of the central bank to maintain a stable ratio between reserves and

liabilities but it cannot be done due to a lot of pressure from the country’s

problems such as political problems etc. At the same time central bank is not only

an important holder of assets.

The developing countries are highly populated with higher population growth rate.

These situations increase the use of domestic goods and increase the demand of

imported goods. These countries are not able to meet the requirements of the

increasing population.

The existing natural resources of the developing countries are depleting very fast.

These countries are not able to dig out new resources due to their own limitations.

In this way their exports of natural resources such as iron, gas, copper etc. are

coming down.

This is world of competition; developed countries are not allowing the developing

10


countries to come forward for competition due to highly sophisticated technology.

Developing countries are often in a state of uncertainty; the political situation in

most of the time is disturbing the environment. Their economic policies are often

being changed. Due to this uncertain situation the domestic capital is going out and

no new investment is coming in, thus there is very small inflow of capital.

Developed countries are specialized in the production of those goods in which they

have comparative advantage to some other goods. But due to less resource the

developing countries cannot adopt this pattern.

Developed countries sometimes in the form of a group are tightening the trade

restriction for developing countries. Sometime they are imposing different type of

tariff and quota restrictions. They can do so because they are powerful and have an

upper hand. Now World Trade Organization (WTO) has been setup comprising

154 members of the world countries but there is again a doubt about the working

of WTO.

11


CHAPTER.07

INDIA AND ITS BALANCE-OF-PAYMENTS TRADE RESTRICTIONS

The "duality" that characterizes many developing economies also marks India's

economy. On one hand, India ranks in the top ten of world economies in terms of

aggregate output, and has "one of the world's largest pools of highly trained

technical manpower." On the other hand, India's stark socioeconomic disparities

and its massive- and massively poor-population have led the United Nations

to rank India in the bottom quarter of the world's nations in terms of human

development.

India's attempts to address this poverty have been paradigmatic of development

policy in the international order in the postwar era. During the 1960s and 1970s,

India pursued an inward-looking policy of development, in which the state played

a substantial role in encouraging indigenous growth in target industries, both

through regulation and direct involvement of state-owned or partially-state-owned

enterprises. 63 Thus, India is a classic example of developing-country movement

during this period toward "self-reliance because the country has focused on

economic and political objectives that are grounded in principles of self-

determination and anti-imperialism.

The Indian textile industry is an even more quintessential example of this

movement. Prior to British rule, India had a thriving indigenous textile industry. In

moving his country towards political independence, Mahatma Gandhi emphasized

the ideals of self-reliance and small-scale production as a way both to wean India

from economic dependence on the colonial metropole, and to provide a highly

decentralized and accessible means of sustenance and basic poverty reduction. The

handloom became a symbol of this philosophy of self-reliance. Today, as India's

12


largest industry, the textile industry provides employment for nearly fifteen million

people.

After independence, India employed a strong import-substitution trade policy

regime. Trade accounted for less than ten percent of Indian GDP, and Indian trade

accounted for a fraction of a percent of world trade. A strong advocate of inward-

looking industrialization, India also acted as a leader in the developing-country

government movement to establish a New International Economic Order.

Like many other developing countries, however, India began charting a new and

quite different course for development in the early 1990s. In 1991, India embarked

on an ambitious liberalization program. This reform initiative came about for a

number of reasons, including a desire to participate in the "emerging markets"

phenomenon and a belief that the limits of inward-looking industrialization had

been reached. More immediately, however, was the need to resolve a balance-of-

payments crisis. Following the spike in oil prices during the Gulf War, India

experienced severe inflation and, consequently, a massive balance-of-payments

crisis that propelled the Indian government to seek aid from the IMF. In return for

emergency aid from the IMF, India entered into the IMF's structural adjustment

Program.Reforms included a new, deregulatory industrial policy designed to

encourage private sector growth. This policy consisted of foreign investment and

partial divestiture from state-owned enterprises, 68 devaluation of the rupee in

1991 and full-currentaccount convertibility of the rupee in 1994,69 reductions in

public spending, and deregulation of price controls.

Trade liberalization was also an important element of India's reform. In 1991, India

began to liberalize its elaborate regime of quantitative restrictions on imports. By

1995, India had fully lifted quantitative restrictions on a little over half of its

11,587 tariff lines, and loosened restrictions on another 1500 lines. At that time,

13


India declared to the WTO Committee on Balance-of-Payments Restrictions that

"virtually all items of capital goods, raw materials, intermediaries, components...

and other goods are freely importable. Quantitative restrictions on consumer goods

such as textiles, however, remained largely in place. India observed that "the

import of consumer items has also been eased in a gradual manner and it is the

Government intention to steadily carry this process forward."The Committee on

Balance-of-payments Restrictions was unable to reach a conclusion in 1995 as to

whether India's quantitative restrictions were justified. Rather, the opinions of the

members seemed to be divided into two camps. One camp supported India's view

that the liberalization of remaining import restrictions required additional caution,

and that the "timing and sequence of the phase-out of quantitative restrictions...

should be left to the judgment of the Indian authorities."These members "remarked

that while India's external position appeared to be stable, the overall balance-of-

payments remained structurally weak. Members cited India's widening trade deficit

in 1995 as resulting from a combination of factors, including increased imports,

declining exports, and the more general problems relating to financial liberalization

and current capital market conditions.

Further, these members concluded that it was not enough to assess the level of

reserves based on trade performance alone. Instead, they asserted that the country

should complete structural reforms "in a manner that was socially and politically

sustainable in an economy the size of India, with a large population and wide

income disparities Premature elimination of the remaining restrictive measures

might reverse India's fragile balance-of-payments situation and disrupt the

momentum of trade liberalization."

14


Other members were much less sympathetic to India's claim that the country was

implementing quantitative restrictions for balanceof- payments reasons. These

members observed that the widening trade deficit was the result of "rapid,

economic expansion [that] had triggered growth of imports of capital and

intermediate goods .

The growth of these imports should, in turn, generate expansion of India's export

capacity.These members also noted that India had attracted "large inflows of

foreign direct and portfolio investment, leading to a substantial increase of India's

foreign exchange reserves.

Finally, these members pointed out that, according to the IMF, India's medium-

term balance of payments prospects appeared sound. Consequently, these members

felt that India's continued use of quantitative restrictions was not justified under

Article XVIII. By the time the Committee issued its next report on India in March

of 1997, disagreement over India's maintenance of quantitative restrictions had

intensified. India argued that their position required continued caution, especially

given the volatility of the capital markets.

The Committee consulted the IMF, which asserted that, based on its foreign

reserves position, India could no longer justify quantitative restrictions on balance-

of-payments grounds s0 The Committee, however, remained undecided and chose

not to make any recommendations to the General Council.

In May of 1997, India notified the Committee of its plan to remove its remaining

quantitative restrictions in a three-step, nine-year phase-out. The Committee did

not approve this plan, and in October of 1997, the United States requested a WTO

panel to consider whether India's regime complied with GATT/WTO law.

15


CHAPTER.08

BALANCE OF PAYMENT PROBLEM IN PAKISTAN

Balance of Payments problem in developing countries, especially in

Pakistan has been very important and burning issue of the recent days. It tells how

many goods and services a country has been exporting and importing and how

much a country is borrowing or lending. In this way BOP accounts are the

statistical record of all transactions taking place between its residents and rest of

the world and would help to formulate a country’s future strategy.

This is the time of competition and technology. The one who will opt new

methods of living, new methods of economic stability will get his share from the

rest of the world, otherwise will remain behind. Pakistan being a developing

country should go forward to enter in the circle of developed countries. For this

purpose we have to correct our BOP situation.

Many problems are common in almost all developing countries but some are

area specific and are especially meant for Pakistan. This study has been divided in

three sections. Section 1 relates to concept of BOP, discussing the methodology,

causes and methods for improvement of BOP, profile of developing countries and

the problems of BOP have been discussed in section 2. In section 3 two ways of

presentation of BOP in Pakistan are presented. BOP situation in Pakistan has been

discussed with the help of supporting data, and then in the final section the BOP

problems and measures to improve imbalance have been discussed.

16


CHAPTER.09

BALANCE OF PAYMENT SITUATION OF PAKISTAN

The balance of payment of any country is a crucial issue. Different countries

of the world solve this issue by determining the volume of trade and investment

between them. Similarly, Pakistan does the same. Surplus and deficit are two

major determinants for the BOP of Pakistan. The figures of the table at Annexure-

A show that Pakistan has been experiencing a consistently deficit in BOP from the

date of independence. On the one hand, its foreign exchange earnings are very

small and is limited to primary products, the market for which is unstable. On the

other hand, the developmental programmes of Pakistan require imports of

equipments, machinery and so the burden of interest on foreign capital exerts

pressure on BOP. Pakistan’s exports mainly depend on agriculture for which the

natural conditions and environment in most of the time is not favorable. At the

time of draught and other circumstances the exports of Pakistan fall sharply. As

earlier told that developing countries usually export their raw material and import

the finished goods, so Pakistan’s export mostly include raw materials, or primary

goods, which being cheaper, fetch less foreign exchange. In Pakistan major source

for financing the balance of payments deficit continued to be foreign loans. The

situation will be more clear when we will have a look on Pakistan’s trade from

1947 uptil now (Annex-A).

When analyzing the value of trade of Pakistan starting from 1947-48 we see

that there is almost trade deficit except at three places during the last 50 years;

1947-48, 1950-51 and 1972-73. The reason for surplus in 1947-48 was that the

exports of the newly Pakistan were quite high and non-devaluation decision in

1948.

17


In 1950-51 the surplus figure was due to the Korean War when excess export of

cotton and jute [from East Pakistan which is now Bangladesh] turned the deficit

into a surplus. After the Korean war our imports exceeds exports so there was a

continuous deficit in trade for many years. In 1948-71, 99 percent of United

Pakistan’s foreign trade comprised of five primary commodities: raw jute, raw

cotton, raw wool, hides and skins, and tea. All jute and tea was exported from East

Pakistan. In 1971-72 again we had surplus trade balance of Rs.124 million. The

reason behind this was the massive currency devaluation in 1972 when rupee was

depreciated from Rs.4.76 to Rs.11 per dollar. The exports increased significantly

and share of exports in the GD rose to 14.9 percent. A deep analysis has been done

after 1972 i.e. after separation of East Pakistan in 1971. Starting from 1972 we see

that the most important contribution to the BOP has been the worker’s remittances,

mainly from the Middle East countries. In fact, for many years Pakistan’s trade and

economy have been highly dependent on money from the Gulf. This situation

continues uptill 1981-82. Exports have shown a healthy trend after 1982 but

workers remittances have fallen. We can see the worker’s remittances from 1972-

73 onward at Annex-B. The huge gap in the deficit in BOP of Pakistan was also

due to the sharp decrease in the remittances of the Pakistan’s working abroad

which is very clear from the Annex B. Pakistan had relied for a number of years on

this highly unstable source for financing its growing imports and sizeable

underlying deficit in external payments. From the peak year of remittances that is

1982-83 when the total remittances from abroad were US $2886 million, it

decreases to US$ 2279.00 in 1986-87, US $1468 in 1991-92, US $9846 million in

1999-2000 and still have a decreasing trend.

Pakistan’s BOP balancing depends mainly on the export of agricultural

crops. The production of main crops in Pakistan can be seen at Annexure –C

18


where production of wheat, rice and cotton has been given from the year 1990-91

to 2000-2001. The only purpose to see, if some thing happens with these products

the BOP situation of Pakistan would be deteriorated. The deficit reached at the

level of Rs.33212 million in 1981-82 from Rs.24,264 million in 1980-81 as the

international market prices of Pakistan’s main export, cotton, crashed. We can see

that deficit increased from Rs.32, 832 million in 1990-91 to Rs.81,685 in 1992-93

while the production of cotton and rice was also declined during the same years. In

1993-94 the deficit figure came to Rs.52,751 million from the last yeas figure of

Rs.81,686 million while the production of rice grew upto 3995 thousands tons for

the year 1993-94 from 3116 thousands tons for the last year.

In the same way the deficit figure is oscilating around 80,000 million rupees

in 2000-2001 and we can see the decrease in production of wheat, rice and cotton

during the same year and this was due to the highly dry season and shortage of

water in Pakistan. In 1998-99 there was again a decrease in the production of

cotton help to bring deficit upto Rs.75622 million. This was also due to the

decrease in cotton prices at world level.

In Pakistan BOP deficit is also due to the heavy import of food grain. We

have to import foodstuff to feed our growing population. Our domestic production

of food grains is not matching our population growth. Imports during 1988-89

increased as a result of import of food grains. If we see the import figure in 1997-

98 that was decreased to Rs.436,338 million from the level of Rs.465,001 million

was due to the bumper increase in the production of wheat and sugarcane. This

decline in import bill was also due to decline in oil prices because of slow down of

global economic situation. This was also due to the completion of power project in

the country, which starts power generation resulting reduction in import of power

generation machinery.

19


CHAPTER.10

CAUSES OF BALANCE OF PAYMENT PROBLEM FOR

PAKISTAN

As stated earlier Pakistan has been facing BOP problem since the

independence. Therefore, it has been under deficit since then. Some statistical

work has been done in the previous section. to see the real picture. A brief

description of BOP problems of Pakistan are given as under:

Pakistan is an agro-based economy and its exports mainly depend on rice

and raw cotton. Whenever there is an international price shock or internal draught

situation the export situation of these agricultural products are affected badly

increasing the deficit gap.

The overall BOP deficit in Pakistan is being financed largely by foreign

credits, which increase our future debt, services liabilities and which would cause

strains on the future balance of payments.

The net private transfer in Pakistan consists of the home remittances of

Pakistani nationals abroad and this is a temporary phenomenon. Our economy is

dependent on this factor, which is external and uncontrolled.

Whenever there is some natural disaster such as floods etc. our economy is

badly affected and we cannot meet the requirement of improving the BOP. Further

more, law and order situation of our country is discouraging for the foreign

investors to invest in Pakistan. This situation has stopped inflow of capital in

Pakistan.

20


High population growth has been a hurdle and main problem in BOP of

Pakistan as this has been increasing the import bill of Pakistan for importing

foodstuff. On the other hand, we are not increasing our agricultural products more

than the population growth rate.

There is a lack of continuity in the government policies that is also

discouraging the foreign as well as local investors to start new projects or to do

new investment, which is stopping inflow of capital as well as increase the

domestic production.

Political instability is also one of the major hurdles to improve the BOP

situation of the country. This situation is very much disappointing internationally

as well as internally.

Pakistan is always exporting raw material, which is giving very low price as

compared to manufactured goods that would be a little help to improve the deficit

in BOP. In addition to this the market for primary products is very unstable. While

importing of equipments and machinery for its developmental programmes causes

a burden of interest on foreign capital, thus exerts pressure on BOP.

Pakistan being a developing country is not able to get different types of big

grants or aids from developed countries to start its developmental programme. The

developed countries and international financial institutions helped Pakistan in

small quantity and in pieces, which is not at all helpful to improve the BOP

situation of the country.

21


Proper pricing policies play an important role in the production and export

of agricultural commodities and Pakistan is very weak on this side. Here the

farmer is not covering his cost of production and remains in the situation of

uncertainty.

During recent years there is a substantial increase in the exports of primary

commodities, particularly rice and cotton and still there is a potential for future

increase and production of these commodities. In addition there is a wide scope for

increase the production of food grains, livestock, fruit and vegetables. But the

potential for increasing the production and exports of these products is not being

utilized properly.

Developed countries put restrictions on our exports in one-way or the other.

After the atomic explosion they have put us on trial. Some times they put a

restriction on our export due to under standard, then quota system or child labour

etc. which affect BOP situation badly.

Implementation of Fiscal and Monetary policies and Pakistani Tariffs on

exports and imports are not being implemented properly and with proper

knowledge, which is not improving the BOP situation in Pakistan.

The emphasis of Pakistan’s industrial policy has been more on import

substitution than on export expansion. This situation can increase the prices for

consumers and make these industries an inefficient. Unless this kind of situation is

not finished there will be a threat for BOP.

Reducing the BOP deficit depends on our rapid industrial production and

quality of our products. In Pakistan we are under-utilizing the idle capacity of our

industrial production. Lack of knowledge about this situation is not in favour of

improving the BOP.

Pakistan is suffering from acute external and internal debt problems, which is

also one cause of deteriorating the BOP situation of Pakistan.

22


CHAPTER.11

POLICY MEASURES FOR REDUCING BOP DEFICIT IN PAKISTAN

Various measures may be taken for improving the different components of

the BOP which are listed below:

1. Appropriate use of Fiscal and Monetary Policies, income and wage

policies, and exchange rate policies

2. Improving the domestic political environment and law and order

situation.

3. Measures to increase agricultural productivities and to maintain

appropriate price for agricultural produce and setting up of agriculture

based industries.

4. Facilitating the foreign investors in Pakistan with improved

infrastructural to increase export.

5. Encouraging the setting up of fruit processing industries

6. Encouraging the competitive behaviour of Pakistani investors with

rest of the world.

7. Improvement of R&D facilities and level of education in the country.

8. Encourage Pakistanis to use domestic products, which will reduce the

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import bill.

9. Exemption for exporters and domestic investors from excise duties

and sales taxes and encouraging the high value added industries.

10. Arrangement of provision of credit to small and medium size

investors and farmers.

11. Allowing duty-free import of textile machinery and duty-free import

of other old machinery.

12. Setting up of more export processing zones in the country and

supplying infrastructural facilities for the investors.

13. Making arrangements for export of skilled manpower rather than

unskilled ones on high wages and setting up of polytechnic colleges

or institutes and training centers for the manpower going abroad.

14. Opening up of saving schemes for low-income groups to encourage

savings out of their income.

15. Making arrangement to strengthen oil and gas and technology sectors.

16. Financing the educational activities and improving the quality of

higher education.

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17. Policies may be made to facilitate indirect exports and small and

medium enterprises and ban on any type of export may be lifted.

18. Exporter of all level may be educated about the latest international

rules and regulations to compete the international market.

19. Free import of high tech. Machinery such as computers may be

allowed.

20. Policy measures to face the debt problems of Pakistan, e.g., to

improve external debt, policy to increase country’s export may be

strengthened by developing the domestic production.

21. Restoring the donor’s and investor’s (both external and internal)

confidence.

22. Most of the producers, exporters and policy makers are not aware of

Uruguay Round Trade Agreement on Agriculture. There is an urgent

need to pursue public awareness program on the impact of trade

liberalization on agriculture, including trade policy developments,

priorities and strategies of the major trading partners of Pakistan.

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CHAPTER.12

CONCLUSION

This study is conducted to examine the balance of payment of Pakistan through

monetary approach and tested whether this approach applies to Pakistan’s balance

of payment situation. The main objective is to find out that excess money supply

can play an important role in the disturbance of the balance of payments in

Pakistan.

The study also identifies the role of excess money supply and its role on balance

of payment interruption. Moreover, the study also helped to analyze the

relationship of monetary variables and balance of payment.

One of the main finding of this study is that Central bank requires policies for

sustainable balance of payments with stable exchange rate. The empirical

investigation emphasizes that the balance of payments in

Pakistan is not solely a monetary phenomenon, although but exchange rate, net

foreign assets and inflation has a significant association with balance of payment

with respect to MABP prediction. Additionally, excessive money supply is the

loss of reserves, if real assets of a country do not change, which is also a fact for

policy makers in case of Pakistan.

So, monetary authorities should control money supply. Sustainable economic

growth is necessary through money demand to get rid of the balance of payment

deficit. The government of Pakistan must also decrease and control its internal

borrowing specially deficit financing, which is mostly from the state bank of

Pakistan.

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The paper suggests that balance of payments is a self-adjusting mechanism; but the

central bank has also a key role to play especially formulating the monetary policy,

balance of payment will be kept under consideration. As Pakistan, already faces

continuous deficit in their balance of payment, therefore making of policies the

authorities should concentrate on some other factors and policy measures too

rather than solely on monetary tools to achieve stability in the country’s balance of

payments to correct the disequilibrium. The results show that disequilibrium in the

balance of payment of Pakistan is not merely a monetary phenomenon: the

variables – namely net foreign assets, inflation and exchange rate seems to have a

significant relationship with balance of payment. Although it is some what

according of the predictions of Monetary Approach to Balance Payment, but the

entire results of this study do not observe the strong assumptions of the latter

approach.

The study finds that monetary variables are not the only cause of deficit in the

balance of payment of Pakistan, but some other factors are also responsible for it

like export which mainly consists of raw materials, agriculture products, cotton and

rice etc. The second factor is that, the growth of industrial sector in Pakistan are

very slow, which hardly fulfill the domestic requirements. Third the domestic and

foreign investments are also very low.Further the study suggests that Pakistan

should take steps of antiinflation (control inflation) increase the net foreign assets,

improve the quality of their products which should compete with the international

market products, increase the local production,(agriculture as well that of industrial

sector), like textile, machinery, plants, garments, and construction sectors etc.

Fluctuation in the exchange rate needs to be removed and a sustained exchange

rate is required for minimizing the deficit in balance of payment in economy.

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CHAPTER.13

BIBLIOGRAPHY

INTERNET / WEBSITE

www.google.com

www.businessweek.com

www.yahoo.com

www.wikipedia.com

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http://www.yahoo.com/

http://www.businessweek.com/

Documents

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