Balance of payments Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400

1. Lecture 31 Balance of payments Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400

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

3. Some theoretical Aspects • It’s a comprehensive record of eco 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. • 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. Why is it important ? 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.

6. Composition of BOP Current Account: deals with the trade transactions of goods and services, international services (tourism, transportation) and unilateral transfers (gifts and foreign aid). Capital Account: consists of direct investment and purchases of interest-bearing financial instruments, non-interest bearing demand deposits, gold. Official Reserve Asset Account: measures the change in the nation’s liquid and non liquid liabilities to foreign official holders and the change in the official reserve assets during a year.

7. Pakistan’s BOP • 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)

8. 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%

9. Pakistan’s BOP 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 balance of payments 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.

10. Pakistan’s BOP Problem Merchandise and services account has been showing poor performance over the years since 1972-73. Combined deficit over the years are. 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 sind and disturbances in karachi.

11. 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.

12. 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.

13. Trade and Payments Growth (%) Average (Annual)

14. Trade and Payments Growth (%)Average (Annual) (%) of GDP (MP)

15. 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 prod 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.

16. 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.

17. 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 Pricing policy Foreign exchange remittances:

18. 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.

19. 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.

20. 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