Project of Eop (Balance of Payment)

BALANCE OF PAYMENT

Project:

Balance of Payments (BOP) & Balance of trade (BOT) of Pakistan

Submitted to:

Mam Farah Naz Naqvi

Submitted by:

Mehwish Batool M10MBA009 Aroosh Mehmood M10MBA026 Naveen Saba M10MBA010

Hailey College of Banking & Finance

Hailey College Of Banking And Finance Page 1

BALANCE OF PAYMENT

TABLE OF CONTENTS Concept of Balance Of Payment DefinitionsBalance Of Payment EquilibriumDifferentiation Between BOT And BOPSignificance of BOPPurpose of BOPWorking of BOP

Credit Side Items Debit Side Items

Components Of Balance Of PaymentCurrent AccountCapital And Financial AccountOfficial Reserve Account

Types Of EquilibriumPakistan’s Balance Of PaymentHistoryCauses Of Adverse Balance Of PaymentProcedures To Correct Balance Of PaymentCurrent PositionSummary Of BOP FY-11Exports & Imports with Different CountriesImprovementsComparison Between Imports And ExportsReal GDP of Some CountriesConclusion


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BALANCE OF PAYMENT

BALANCE OF PAYMENT

Concept Of Balance Of Payment

When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter-balanced in other ways – such as by


BALANCE OF PAYMENT

funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countriesThat why it is known as balance of payment.

DEFINITIONS

GENERAL DEFINITION:

Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world for a specified period, usually a year.These transactions include payments for the country's exports and imports of Goods, Services, Financial capital, and Financial transfers.

GENUINE DEFINITION:

According to the IMF publication ‘BALANCE OF PAYMENT MANUAL’ describes the concept in the following terms:“The Balance of Payment is a statistical statement for a given period showing:

1. Transactions in goods and services and income between an economy and the rest of the world;

2. Changes of ownership and other changes in that country’s monetary gold and claims on liabilities to the rest of the world; and

3. Unrequited transfers and counterpart entries that are needed to balance, in the, any entries for the forgoing transactions and charges which are not mutually offsetting”.

BALANCE OF PAYMENT EQUILIBRIUM

The “balance of payment equilibrium” (bpe) is defined as, the situation when trading among different countries is such that the trading partners remain debt free from each other over a reasonable number of years. In other words, the value of a country’s imports is equal to the value of its exports.In order to put the bpe model into practice, the trading partners would have to establish and meet numerical goals for their exports and imports. The U.S., for example, should have exported $726 billion


BALANCE OF PAYMENT

dollars worth of products more in 2005 to bring its balance of trade and payment deficits to zero.

“Equilibrium is that state of balance of payment over the relevant time period which makes it possible to sustain an open economy without severe unemployment on a continuing basis.”

DIFFERENTIATION BETWEEN BOT & BOP

Balance of trade refers only to the merchandise balance or balance on ‘visible transactions’ alone.

Visible items refer to the commodity exports and imports entering the balance of trade. They are visible because they are recorded at thecustoms barriers of the country.

On the other hand, the balance of payments refers to the sum of both the balance on ‘visible transactions’ as well as‘invisible items’

It also includes capital and financial accounts. Invisible items refer to the imports and exports of services. Such services may be of various kinds for which payments have

to be made or received,

For Example:

1. transport charges, 2. shipping freight, 3. passenger fares,4. harbour and canal dues, 5. commercial services (fees and commissions), 6. financial services (brokers’ fees) and7. services connected with the tourist traffic and8. Payment of interest on external debt. As against the commodity or

merchandise transactions, which are visible, these services are called invisible items of the balance of payments as they are not recorded at the customs barriers

SIGNIFICANCE OF BALANCE OF PAYMENT

It is the basic instrument that measures the international transaction of acountry during specific period.

Bop is one of the major indicator of a country’s status in the international market.

Bop depict the true picture of a country.


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The rise of global financial transactions and trade in the late-20th century spurred bop and macroeconomic liberalization in many developing nations.

Bop is very important in the regard that it tell us about our short term and long term asset.

Bop tell us about the surplus and deficit regarding our transaction

The rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations

If it is deficit the sum is counterbalanced by an accumulation of official net liabilities, so the country sees its official reserve assets decline.

So throuh the information of deficit and surplus we can make The corrective measures which Is very important for a country

BOP state the intenational economic relation of a country. A guide to its monetary, fiscal and xchange rate. Inform gov about the international economic position of a country to

assist in reaching the correct decision. To know the influence of foreign trade on national economy Is currency becomer weaker or stronger? How effective are monetary and fiscal policies?

PURPOSE OF BOP:

The main purpose is to provide the government information about the international economic position of the country and to help make decisions about monetary and fiscal issues and about trade and payments.

WORKING OF BOP : It is a nature of a balance of payment system that it should operate similarly to the balance sheet of a company. So,

Receipts from a country credit side Payments to a country debit side

CREDIT SIDE ITEMS ARE;

Exports of goods and services,


BALANCE OF PAYMENT

Un requited or transfer receipts in the form of gifts etc,from foreigners,

Borrowings from abroad , Foreigners direct investment, and Official sale of reserve assets including gold to foreigner countries

and international agencies.

DEBIT SIDE ITEMS ARE;

Imports of goods and services, Transfer payments to foreigners, Lending to foreigners countries Investments by residents in foreign countries, and

Official purchase of reserve assets or gold from foreign countries and international agencies.

COMPONENTS OF BOPs ACCOUNT

The Balance of Payment for a country is the sum of the;1. Current account2. Capital and financial account3. Official reserve assets account

1. CURRENT ACCOUNT

The current account is the sum of Net Sales from trade in goods and services, Net Factor Income (such as interest payments from

abroad),and Net Unilateral Transfers from abroad (such as gifts and

foreign aid).

RESULTS:

Positive Net Sales corresponds to a Current Account Surplus. Negative Net Sales corresponds to a Current Account Deficit.


BALANCE OF PAYMENT

WHAT SHOULD WE DO TO IMPROVE CURRENT ACCOUNT:

The current account should increase if;1. The domestic currency depreciates,2. Domestic GDP decreases, or3. Foreign GDP increases.

EFFECTS :

1. Domestic currency depreciation makes domestic goods relatively cheaper, boosting exports relative to imports.

2. A decrease in domestic GDP reduces domestic demand for foreign goods, lowering imports without affecting exports.

3. An increase in foreign GDP increases foreign demand for domestic goods, increasing exports without affecting imports.

FORMULA:

Current Account = Trade Balance+ Net Factor Income from Abroad+ net Unilateral Transfers from Abroad

2. CAPITAL ACCOUNT

The capital account records the net change in ownership of foreign ownership of domestic assets. Capital account is now also known as the financial account .It includes;

Loans and investments between the country and the rest of world (but not the future regular repayments/dividends that the loans and investments yield; those are earnings and will be recorded in the current account).

All international trade transactions( of goods and services), All international unilateral transfers (gifts and foreign aid).

FORMULA:

Financial Account = Increase in foreign ownership of domestic assets-Increase of domestic ownership of foreign assets


BALANCE OF PAYMENT

3. OFFICIAL RESERVE ASSETS ACCOUNT

The official reserve account records the governments’ current stock of reserves.

Official reserve transactions consist of movements of international reserves by government and official agencies to accommodate imbalances arising from the current and capital accounts.

Reserves include; Official Gold Reserves, Foreign Exchange Reserves, and IMF Special Drawings Rights.

Countries who try to control the price of their currency will have large net changes in their official reserve accounts.

Some of the most extreme examples include CHINA and JAPAN. In 2003 and 2004, Japan had an outflow of reserves, yen, by more than equivalently one third of one trillion US dollars.

TYPES OF BOPs EQUILIBRIUMThere are two types of BOP equilibrium, i.e, Static equilibrium and dynamic equilibrium Static Equilibrium

Static Equilibrium

The distinction between static and dynamic equilibrium depends upon the time period. In static equilibrium, exports equal imports including ; Exports and imports of services as well as goods The other items on the bops – short term capital, long term

capital and monetary gold are on balance, zero. Not only should the bops be in equilibrium. The foreign exchange rate must also be in equilibrium.

Dynamic Equilibrium


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The condition of dynamic equilibrium for short periods of time is that exports and imports differ by the amount of short-term capital movements and gold (net) and there are no large de stabilizing short-term capital movements.

The condition for dynamic equilibrium in the long run is that exports and imports differ by the amount of long term autonomous capital movements made in a normal direction, i.e. From the low-interest rate country to those with high rates. When the BOP of a country is in equilibrium, the demand for domestic currency is equal to its supply.

CAUSES OF DISEQUILIBRIUM IN BOP

Though the credit and debit are written and balanced in the balance of payment account, it may not remain balanced always.

Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account.

Such an imbalance is called the disequilibrium.

Disequilibrium may take place either in the form of deficit or in the form of surplusDisequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an 'unfavorable balance'.Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as 'favourable balance.

Population Growth

Most countries experience an increase in the population and in some like India and China the population is not only large but increases at a faster rate. To meet their needs, imports become essential and the quantity of imports may increase as population increases

Development Programmes

Developing countries which have embarked upon planned development programmes require to import capital goods, some raw materials which are not available at home and highly skilled and specialized manpower. Since development is a continuous process, imports of these items


BALANCE OF PAYMENT

continue for the long time landing these countries in a balance of payment deficit.

Demonstration Effect

When the people in the less developed countries imitate the consumption pattern of the people in the developed countries, their import will increase. Their export may remain constant or decline causing disequilibrium in the balance of payments.

Natural Factors Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of payments by adversely affecting agriculture and industrial production in the country. The exports may decline while the imports may go up causing a discrepancy in the country's balance of payments.

Cyclical Fluctuations

Business fluctuations introduced by the operations of the trade cycles may also cause disequilibrium in the country's balance of payments. For example, if there occurs a business recession in foreign countries, it may easily cause a fall in the exports and exchange earning of the country concerned, resulting in a disequilibrium in the balance of payments.

Inflation

An increase in income and price level owing to rapid economic development in developing countries, will increase imports and reduce exports causing a deficit in balance of payments.

Poor Marketing Strategies

The superior marketing of the developed countries have increased their surplus. The poor marketing facilities of the developing countries have pushed them into huge deficits.

Flight Of Capital

Due to speculative reasons, countries may lose foreign exchange or gold stocks People in developing countries may also shift their capital to developed countries to safeguard against political uncertainties. These capital movements adversely affect the balance of payments position


BALANCE OF PAYMENT

Globalization

Due to globalization there has been more liberal and open atmosphere for international movement of goods, services and capital. Competition has been increased due to the globalization of international economic relations. The emerging new global economic order has brought in certain problems for some countries which have resulted in the balance of payments disequilibrium.

There are three main types of BOP Disequilibrium which are ;

Cyclical disequilibrium, Secular disequilibrium, Structural Disequilibrium

1.Cyclical Disequilibrium

Cyclical disequilibrium occurs because of two reasons. First, two countries may be passing through different paths

of business cycle. Second, the countries may be following the same path but the

income elasticities of demand or price elasticities of demand are different.

2.Secular Disequilibrium

The secular or long-run disequilibrium in BOP occur because of long-run and deep seated changes in an economy as it advances from one stage of growth to another.

The current account follows a varying pattern from one state to another.

Disequilibrium arises owing to lack of sufficient funds available to finance the import surplus, or the import surplus is not covered by available capital from abroad. Then comes a stage when domestic savings tend to exceed domestic investment and exports outrun imports.

Disequilibrium may result, because the long-term capital outflow falls short of the surplus savings or because surplus savings exceed the amount of investment opportunities abroad.

3.Structural Disequilibrium Hailey College Of Banking And Finance Page 12

BALANCE OF PAYMENT

Structural disequilibrium has two sub types into:

(i) Structural Disequilibrium at Goods Level:

Structural disequilibrium at goods level occurs when a change in demand or supply of exports or imports alters a previously existing equilibrium, or

when a change occurs in the basic circumstances under which income is earned or spent abroad, in both Causes without the requisite parallel changes elsewhere in the economy.

(ii) Structural Disequilibrium at Factors Level:

Structural disequilibrium at the factor level results from factor prices which fall to reflect accurately factor endowments, i.e., when factor prices are out of line with factor endowments, distort the structure of production from the allocation of resources which appropriate factor prices would have indicated.

General Measures to Correct BOP Disequilibrium

To correct the different types of disequilibrium in BOP the following general measures are used:

(a) Exchange depreciation (price effect),(b) devaluation (by government)(c)Tariffs,(d) Import quotas, and(e) Export duties

PAKISTAN’S BALANCE OF PAYMENT

BOP provides the government information about the international economic position of the country and to help make decisions about monetary and fiscal issues and about trade and payments.BOP position of a country serves as an index of its economic position.


BALANCE OF PAYMENT

HISTORY

Pakistan’ Balance of payments situation has not been satisfactory since independence. The country with the exception of three years i.e.1947-48, 1950-51, and 1972-73.Excluding the three years stated above, Pakistan has been facing a deficit in its balance of payments since 1970 to date. The resource gap is being met through loans and grants from various international agencies, by increasing exports, minimizing imports etc.

TREND, VOLUME AND VALUE OF FOREIGN TRADE SINCE 1947:

FIRST PHASE (1948 TO 1950)

The special features of this phase were, Devaluation of pound sterling in 1948, Decrease in external value of Indian rupee a major importer of

Pakistan’s jute, Non-devaluation of Pakistani rupee, Decrease in volume of trade (open general license scheme) Korean war

Pakistan just after the independence faced problem of shortage of essential commodities. in 1948, government of Pakistan lifted ban on imports be on imports which resulted in increase in the volume of imports.In September, 1949, British government devalued her currency by 30% to correct her balance of payments position. in response to this devaluation , common wealth member countries including India devalued their currency but Pakistani did not devalues its currency because of greater demand of exports .India who was the bigger importer of Pakistani jute and cotton ceased to import and also restricted exports to Pakistan. Pakistan had to face a difficult situation because Pakistan’s60% foreign trade was with India, however, Pakistan successfully faced this challenge and efforts were made to divert its trade with other countries of the world. it reduced dependence on India.In mid-1950, Korean War started. The demand for our exports increased sharply, Pakistan earned a lot of foreign exchange due to increased quantity of exports of jute and cotton.

SECOND PHASE (1951 TO 1955)

The special features of this phase were: Import policy was liberalized.


BALANCE OF PAYMENT

End of Korean war, Reduction of imports by advanced countries, Abolished open general license(OGL)

As a result Korean War, the industrial developed countries stated increasing the imports of raw material; the import policy was liberalized through OGL. India also started importing jute from Pakistan. This made balance of payment position favorable. The Korean War soon ends and export prices of jute and cotton feel sharply. The industrially developed countries which had stockpiled raw material for years reduced imports. Therefore, balance of payments position again became unfavorable government of Pakistan again adopted the import control policy and abolished OGL. Under stringent conditions all imports ere made licensable from 1952.

THIRD PHASE (1955 TO 1960)

Special features of this phase were. Devaluation of currency, Import of food grain, New export promotion schemes.

In 1950’spakistan started the policy o industrialization and import substitution. Besides this due to bad weather conditions and poor exports Pakistan was forced to devalue its currency to boost exports. Due to industrial development, home industry started consuming jute and cotton which decreased the quantity of exportable surplus. To increase exports earnings various schemes were started. In 1958 martial law government initiated new schemes for export promotion;

Export promotion schemes Industrial development Indo-pak war Low exchange import

FOURTH PHASE (1960-1965)

Period from 1960 to 1965 can be treated as a period of higher rate of economic development and export incentives. During this period foreign trade expanded bit volume and value of imports was greater than exports. This increased trade deficit yet industrial performance remained satisfactory.Martial law government took many steps to boost exports. Export promotion council was established and export credit guarantee scheme was stared. In this period composition of exports changed from export of agriculture raw material to semi manufactured goods and manufactured goods. Pakistan trade relations with east European countries are improved.

FIFTH PHASE (1965-1970);


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THE PERIOD FROM 1965 TO 1970 was a period of disaster for Pakistan .In September 1965 indo–pak war started and Pakistan had to spend huge amount of its foreign exchange on import of defence armaments. During 1966-1967, there was a serious food shortage and Pakistan had to import wheat. The inflow of foreign aid remained below the target. The export targets could not be achieved. The political instability from 1968-1970 also effected trade and balance of payments remained unfavorable.

SIXTH PHASE (1971-1977)

East Pakistan separated from West Pakistan in 1977.import structure was distributed. There was an export shortage.however, effortswere made to accelerated exports and these efforts proved fruitful. Pakistan faced a serious shortage of foreign exchange, to overcome this problem in 1972, Pakistan devalued its currency by 131%, multiple exchange rate policy and export bonus scheme were abolished. The exports fell short of target due to the following reasons,

Nationalization of industries, Monetary and fiscal changes, Floods in 1973-1974, Unorganized efforts to increase export.

SEVENTH PHASE (1978-1983):

The period from 1978 to 1983 is treated as a period of economic prosperity and stability. There was an increase in exports. Exports grew at a reasonable rate, imports along with exports showed an upward trend. In January, 1981, one rupee note was declined from dollar which accelerated the exports. Although it was not devaluation but our currency demonstrated a decline in external value. In 1979.afghan refugees entered in Pakistan which increased burden on imports and decreased exports.

EIGTHTH PHASE (1983 TO 1991):

In this period wheat, sugar and food grain shortage appeared .foreign remittances stared declining and foreign debt washout up to 16 billion dollars. During the period of 1985-1986, exports increased than imports but at the same time foreign remittances started declining due to coming back of Pakistani workers after completion of projects and development programs and decrease in oil prices. Due to decrease in oil prices, Pakistan import bill decreased by Rs.6 billion. Foreign debt increased from 12 billion dollars in1984 to 16 billion dollars in 1991.

NINTH PHASE (1992 TO 2009):


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Many political changes appeared in the country. There was a fall of government by Nawaz Sharif, then Benzir Bhutto and then again Nawaz Sharif government in 1999 and gen. Musharaf took over the government. Total exports which were 16 billion dollars reached in2008-2009.percentage share of exports of primary commodities, 11%, manufactured goods 61.4% .total imports declined to 26.7 billion dollars

in 2008-2009. YEAR TRADE

SURPLUSREASONS

1947-48 Rs.125 M Exports of newly Pakistan were high

1950-51 Rs.176 M KOREAN WAR, exports of cotton &jute were high

1972-73 Rs.153 M In1972, devaluation of currency by 131% of Pakistani rupee.

CAUSES OF ADVERSE BALANCE OF

PAYMENTS

1. FISCAL POLICES: Pakistan’s fiscal policy has been a serious obstacle to the expansion of its exports. The import duties on the raw material required for the production of certain goods which have an export potential are so high that the production costs make the goods uncompetitive in the world market.


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2. EXPORT OF PRIMARY COMMODITIES

The main factor for unsatisfactory export performance is stated to be the adverse trend in the terms of trade. but this is the result of heavy dependence of the country’s export earnings on primary commodities like cotton and rice and semi-manufactured goods, which are subject to frequent price fluctuations in the world market.

3. 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 compte in the world market.BOP were also affected by the impact of inflationary pressures.

4. CONSUMTION ORIENTED SOCIETY

Pakistanis are mostly consumption oriented. Due to rapid rise in population and increased consumption habits, the manufactured goods are mostly consumed in the country, so, a smaller portion is left for exports.

5. TRADE BARRIERS OF DEVELOPED COUNTRIES

The trade barriers raised by developed countries against the import of manufactures from the developing countries is one of the important factor preventing greater production and export by some industries in Pakistan, particularly the cotton textile industry.

6. IMPORT SUSTITUTION POLICY OF PAKISTAN

The emphasis of Pakistan’s industrial policy has been more substitution than on exports expansion .the position of domestic industries results in higher prices for the consumer. In Pakistan, industries have a sheltered domestic market tend to become inefficient due to absence of foreign competition


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7. SLUGGISH GROWTH OF PRODUCTION

Pakistan’s major exports comprise of agriculture goods i.e. cotton, its products and rice. Pakistan has a large area of cultivation but it is not utilized properly. Mostly the cultivatable area is affected through poor drainage system. Another reason is climate conditions .if the whether condions are unfavorable, the production of these commodities goes down and the production of the commodities is affected heavily and causes reduction in exports.

8. OBSOLETED TECHNIQUES OF PRODUCTION

The industrial sector as well as agriculture sector in our country are still operating on the machinery manufactured before 1980.especiaaly in the public sector modernization, balancing and replacement of machinery is out of question since 1972 which results a fall in production and the quality of products, also remains low and it is not possible to increase exports and to compete even with developing countries.

9. UNBALANCED PRICES

The frequent changes in the fiscal and monetary polices of Pakistan in the past years had disturbed the level of investment, the volume of imports and exports.

PROCEDURES TO CORRECT BALANCE OF PAYMENTS

Export of manufactured goods

Pakistan should export manufactured goods (leather goods, electrical goods etc.) instead of primary goods.

Quality products

Many of our goods can not be exported because of poor quality. Quality products should be manufactured for increasing the exports in international market.


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Import of fundamental items:

Only essential items should be imported which are needed for our industrial production. Import of luxurious should be banned.

Import Alternative

Import substitutes should be manufactured in the country to save the foreign exchange on imports.

Terms of trade

Terms of trade of Pakistan are unfavorable which increasing deficit in our balance of payments is so there is a need to improve terms for trade by exporting finished goods instead of raw material and primary goods.

Special Schemes

In order to improve balance of payment, government should introduce special schemes for the exporter and importer. Through these schemes exporters should be encouraged and importers should be asked to minimize imports.

Self-Sufficiency:

Pakistan’s balance of payments is now worsening due to repayment of debt and debt servicing.to avoid further deficit we must follow the self reliance policy.

Exploring export markets:

More emphasis should be laid on export survey and export market entry. it is paramount importance that our exporters should know more about operating in a foreign market. it must also be our export policy to make preparations for organizing our efforts to secure more export orders from abroad. There is need to survey foreign markets, opening of display centers and information offices abroad and exploring the foreign markets by our manufactures for sale of Pakistani goods.


BALANCE OF PAYMENT

Reducing the balance of payments deficit depends on our rapid industrial production and the quality of our products. We need to fully utilize the idle capacity of our industries.

We can import advanced technology for increasing home production.

The tax element in the cost of production of export commodities needed to be eliminated except where it was desired to tax export

of specified commodities.

CURRENT POSITION

Balance of payment’s surplus or deficit is mainly the combination of current and capital account. So,During July- April 2010-2011 the country witnessed a surplus of $ 1,210 million.

ITEMS Cr. Dr. Net

1. Current Account A. Goods and services a. Goods 1. General merchandise 2. Goods for processing 3. Repairs on goods 4. Goods procured in ports by carriers 5. Nonmonetary gold b. Services 1. Transportation 1.1 Passenger 1.2 Freight 1.3 Other 2. Travel 2.1 Business 2.2 Personal 3. Communications services 4. Construction services 5. Insurance services 6. Financial services 7. Computer and information services 8. Royalties and license fees 9. Other business services 10. Personal, cultural, and recreational services 11. Government services, n.i.e. B. Income 1. Compensation of employees 2. Investment income 2.1 Direct investment 2.1.1 Income on equity

883,383 542,599 450,896 447,043 - - 3,853 - 91,703 30,653 13,614 2,483 14,556 6,507 86 6,422 4,110 514 514 2,141 3,939 - 15,755 -

27,571 15,840 514 15,327 1,456 1,456

929,791 854,442 706,997 700,147 - 1,712 5,137 - 147,445 81,600 9,847 61,392 10,361 15,241 514 14,727 3,425 342 3,682 2,226 2,740 1,969 22,005 342

13,871 71,325 171 71,154 40,928 40,928

-46,408 311,843 256,101 253,105 - -1,712 -1,284 - -55,741 -50,946 3,767 -58,909 4,196 -8,734 -428 -8,306 685 171 -3,168 -86 1,199 -1,969 -6,251 -342

13,700 -55,484 342 -55,827 -39,473 -39,473


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2.1.2 Income on debt (interest) 2.2 Portfolio investment 2.2.1 Income on equity (dividends) 2.2.2 Income on debt (interest) 2.3 Other investment 2.3.1 Monetary authorities 2.3.2 General government 2.3.3 Banks 2.3.4 Other sectors C. Current transfers 1. General government 2. Other sectors 2. Capital and Financial Account A. Capital account 1. Capital transfers 1.1 General government 1.1.1 Debt forgiveness 1.1.2 Other 1.2 Other sectors 2. Acquisitions/disposal of non- produced non financial assets

B. Financial account 1. Direct investment 1.1 Abroad 1.2 In reporting economy 2. Portfolio investment 2.1 Assets 2.2 Liabilities 3. Other investment 3.1 Assets 3.1.1 Trade credits 3.1.2 Loans 3.1.2.1 Long-term 3.1.2.1 Short-term 3.1.3 Currency and deposits 3.1.3.1 Monetary authorities 3.1.3.2 General government 3.1.3.3 Banks 3.1.3.4 Other sectors 3.1.4 Other assets 3.1.4.1 Monetary authorities 3.1.4.2 General government 3.1.4.3 Banks 3.1.4.4 Other sectors 3.2 Liabilities 3.2.1 Trade credits 3.2.2 Loans 3.2.2.1 Use of Fund credit

- 11,645 -

11,645 2,226 856 - 1,370 - 324,943 16,954 307,990 137,769 1,712 1,712 1,712 - 1,712 - -

136,057 34,078 - 34,078 5,651 - 5,651 93,073 4,624 - - - - 4,624 - 86 - 4,538 - - - - - 88,450 - 67,814 -

- 12,330 1,798

10,532 17,895 2,740 13,015 342 1,798 4,024 86 3,939 82,456 - - - - - - -

82,456 171 171 - - - - 76,034 16,782 3,082 - - - 9,076 - - 9,076 - 4,624 - - 4,624 - 59,252 - 52,573 4,452

- -685 -1,798

1,113 -15,669 -1,884 -13,015 1,027 -1,798 320,919 16,868 304,051 55,313 1,712 1,712 1,712 - 1,712 - -

53,601 33,907 -171 34,078 5,651 - 5,651 17,039 -12,159 -3,082 - - - -4,452 - 86 -9,076 4,538 -4,624 - - -4,624 - 29,198 - 15,241 -4,452


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and loans from the Fund 3.2.2.2 General Govt 3.2.2.2.1 Long-term 3.2.2.2.2 Short-term 3.2.2.3 Banks 3.2.2.3.1 Long-term 3.2.2.3.2 Short-term 3.2.2.4 Other Sectors 3.2.2.4.1 Long-term 3.2.2.4.2 Short-term 3.2.3 Currency and deposits 3.2.3.1 Monetary authorities 3.2.3.2 General govt. 3.2.3.3 Banks 3.2.3.4 Other Sectors 3.2.4 Other liabilities 3.2.4.1 Monetary authorities 3.2.4.1.1 Long-term 3.2.4.1.2 Short-term 3.2.4.2 General govt. 3.2.4.2.1 Long-term 3.2.4.2.2 Short-term 3.2.4.3 Banks 3.2.4.3.1 Long-term 3.2.4.3.2 Short-term 3.2.4.4 Other Sectors 3.2.4.4.1 Long-term 3.2.4.4.2 Short-term 4. Official reserve assets 4.1 Monetary gold 4.2 SDRs 4.3 Reserve position in the Fund 4.4 Foreign currency reserves 3. Errors and Omissions 4. Exceptional Financing

53,258 53,258 - - - - 14,556 14,556 - 14,470 - - 4,281 10,189 6,165 - - - - - - - - - 6,165 6,165 - 3,254 - 3,254 - - - -

37,503 37,503 - - - - 10,617 9,247 1,370 942 942 - - - 5,737 - - - 1,884 1,884 - 3,082 599 2,483 771 - 771 6,251 - - - 6,251 8,905 -

15,755 15,755 - - - - 3,939 5,309 -1,370 13,529 -942 - 4,281 10,189 428 - - - -1,884 -1,884 - -3,082 -599 -2,483 5,394 6,165 -771 -2,997 - 3,254 - -6,251 -8,905 -

CURRENT ACCOUNT BALANCE:

Pakistan has long suffered a current account deficit which is regarded as an important indicator to gauge the pressures on a country’s external sector.During July-April 2010-11, the current account deficit turned to surplus of $748 million from deficit of $3,456 million in the comparable period of last year. This year’s improvement in current account is broad based as improvement witnessed across the broad in all sub-components including balance


BALANCE OF PAYMENT

of goods, services and income account while buoyancy in current account to turn it into surplus in the form of,

higher export growth, strong and sustained inflows of workers’ remittances, logistic support related receipts and Grants received for flood relief.

SUMMARY OF BOP FY-11:

Current account balance turned positive with $214 million as surplus during FY11 with massive deficit of $3,946 million in the previous year. Exports fetched $25,356 million with an increase of $5,683 million (29 percent) over the last year. Imports also increased by $4,663 million (15 percent) to $35,872 million from $31,209 million.Services account deficit increased by $250 million to $1,940 million from $1,690 million in the preceding year.Income account deficit, however, narrowed to $3,017 million from $3,282 million in the previous year reflecting a decrease of 8 percent.Net current transfers with an impressive growth of 25 percent touched $15,687 million in FY11.Capital account balance slashed to $161 million from $175 million in FY10. Financial account surplus with a drastic cut of $2,996 million shrunk to $2,101 million (59 percent) from $5,097 million.The overall balance, however, tremendously improved to $2,492 million with a massive 97% increase from $1,266 million in FY10.

2010-11 Millions(US$)Items Jul-Sep Oct-Dec Jan-Mar Apr-Jun FY11 FY10Current Account balanceTrade balance (Goods) Exports f.o.b. Imports f.o.b.Services (net)Income (net)Current transfers (net) General govt. Other sectorsCapital Account (net)Financial Account(net)Errors and Omissions (net)Overall balanceReserves and r elated itemsReserves assetsUse of Fund Credits & LoansExceptional financing

-542-2,9915,2668,257-651-6483,748197

3,55120713-10487-87-35-52-

5642,7815,8468,627303-8493,891119

3,7721526643888-888-809-79-

-322,3856,7809,165-716-7103,779168

3,6114773595845-845-791-54-

224-2,359 -7,4649,823-876-8104,269340

3,92979387-18672-672-590-82-

214-10,51625,35635,872-1,940-3,01715,687

82414,863

1612,101

162,492-2,492-2,225-267

-

-3,946-11,53619,67331,209-1,690-3,28212,562

55612,006

1755,097-60

1,266-1,266-4,0632,174623


BALANCE OF PAYMENT

Graphical Representation

COMPARISON OF BOP OF PAKISTAN

WITH OTHER COUNTRIESPakistan is a developing country and is undergoing severe problems of political and economic nature due to which our balance of payment with regard to other countries is not satisfactory.

ACCORDING TO IMPORT AND EXPORT

USA has 16.5% of exports of the total global export while the have only 4.3% of imports.Similarly UK has 1.3% of import and Germany has 2.6% import


BALANCE OF PAYMENT

Following table shows Imports and Exports of different countries:

COUNTRIES EXPORT (%) IMPORT (%)

USA 16.5 4.3

UK 5.1 1.3

GERMANY 5.1 2.6

HONG KONG

2.3 _

UAE 7.4 13.3

AFGANISTAN

9.0 _

JAPAN _ 4.1

MALAYSIA _ 5.7

KUWAIT _ 6.8

SAUDIA ARABIA

_ 11.7

OTHERS 55.0 50.2

TOTAL 100 100

ACCORDING TO GDP

India has real gdp growth rate of 8.1% while china has 9.5% in comparison Pakistan has only 5% GDP growth rate this has mainly due to

Political instability Corruption Reluctant to use tee home made products Trends toward more imports


BALANCE OF PAYMENT

USA has 7.2% GDP growth rate even Afghanistan has 9.5% GDP growth rate even this country is almost in the war situation

IMPROVEMENTS

WORKERS REMITTANCES

Workers remittances are the part of current account. In this year current account improves due to workers remittances.Remittances for the first time in the history of Pakistan crossed the one billion dollar mark in asingle month during March 2011 and remained over the one billion for second consecutive month in April 2011 which has boosted Optimism about workers’ remittances to cross the $11 billion this year. Workers’ remittances totaled $9.1 billion in July-April 2010-11 as against $7.3 billion in the comparable period last year depicting an increase of 23.8 percent.


BALANCE OF PAYMENT

Analysis of country-wise data (July-April 2010-11) shows that remittance inflows from EU, Saudi Arabia, UK and UAE recorded strong growth of 38.3 percent, 36.7 percent, 34.9 percent and 25.7 percent, respectively.

INCREASE IN IMPORTS

Heavy imports are an important cause of dis-equilibrium in balance of payments. Exports have always been than imports. Merchandise imports are $ 32.3 billion in July-April 2010-11. an increase of 14.7 percent from the last year. The overall importbill is higher by $ 4.1 billion, reflecting the impactof higher global crude oil and commodity prices.Major imports are;

food group(milk,wheat,sugar,tea,pulses etc),13.4% share of imports

machinery group(office, textile machinery etc),10.8% share of imports

petroleum group(petroleum products etc)27.2 share of imports

consumer durables(elec.mach.&app etc),5.4% share of imports

raw materials, (raw cotton,synthetic fiber),23.7% share of imports

telecom and,2.6% share of imports Others 16.9% share of imports

LOW VOLUME OF EXPORTS

Exports have always been less than imports. Merchandise exports are $20.2 billion in July-April 2010-11. The growth of 27.8 percent from the last year. The lion’s share of this year’s exports came from textile sector and food group contributing 61.8 percent and 18.1 percent. Major export items are;

Food group (rice,fish wheat,spices,oil seeds) 17.5% share of exports

Textile manufactures (raw cotton, cotton yarn,etc) 55.3% share of exports

Petroleum group (petroleum products etc) 5.4% share of exports

Other manufacturers(carpets,sports,etc) 16.1% share of exports

All other items 5.7% share of exports


BALANCE OF PAYMENT

EXCHANGE RATE:

The continued build up in foreign exchange reserves, a surplus in the current account balance and a sufficient inflow of remittances through official banking channels have strengthened Pak rupee vis-à-vis the US dollar both in the interbank and open market. Exchange rate averaged

Rs. 83.7 in fiscal year 2009-10 and Rs. 85.3 to a dollar in June 2010.

COMPOSITION OF EXPORTS &IMPORTSEXPORTS Rs.20154.2 million

IMPORTS Rs.32262.9 million

Graphical Representation:


BALANCE OF PAYMENT

REAL GDP GROWTH RATE OF SOME COUNTRIESCOUNTRIES REAL GDP

GROWTHINDIA 8.1

CHINA 9.5

BANGLADESH 7.2

USA 3.4

PAKISTAN 5

AFGANISTAN 9.5

Graphical Representation


BALANCE OF PAYMENT

CONCLUSION:

From this project we concluded that economic condition of Pakistan is on average basis. Cause of Pakistan adverse balance of payments is increase in imports and decline in exports. Pakistan is an underdeveloped country and its real GDP growth is less than other underdeveloped countries this is due to political instability conditions prevail in Pakistan. We are very thankful to Mam Farah Naz Naqvi for giving this project due to which we learn a lot about our Pakistan economic conditions and balance of payments (BOP).


Documents

Project of Eop (Balance of Payment)