PRESENTED TO:PRESENTED TO: PROF. AZMAT AZIZPROF. AZMAT AZIZ

PRESENTED BY:PRESENTED BY:

RUBAB RIAZ (1251)RUBAB RIAZ (1251) HIRA JABEEN (1264)HIRA JABEEN (1264) MARYAM SHAHID (1249)MARYAM SHAHID (1249) HAROON KASI (1252)HAROON KASI (1252)

CONTENTS

Definition Importance of BOP Causes of deficits Measures to correct deficit BOP of Pakistan Causes of disequilibrium in BOP Measures to correct disequilibrium

DEFINITION

“ Balance Of Payments of a country is the annual record of economic relations of the country with the rest of the world.”

What Does Balance Of Payments - BOP Mean?

A record of all transactions made between one particular country and other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports.

Negative BOP It means that more money is flowing out of the country than coming in, and vice versa. Positive BOP It means that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency.

Types of Balance of Payments The BOP is divided into three main categories:

The current account. The capital account. The financial account.

The Current Account

The current account is used to mark the inflow and outflow of goods and services into a

country. Earnings on investments, both public and private, are also put into the current

account.

The Capital Account

The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets

(for example, a physical asset such as land) and non-produced assets, which are needed for

production but have not been produced, like a mine used for the extraction of diamonds.

The Financial Account

In the financial account, international monetary flows related to investment in

business, real estate, bonds and stocks are documented.

Importance

It is used to summarize all international economic transactions for that country during a specific time period, usually a year.

The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers.

Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow.

It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

The BOP is an important indicator of pressure on a country’s foreign exchange rate.

The BOP helps to forecast a country’s market potential, especially in short run.

Deficit

“A deficit is the opposite of a surplus. If a country imports more than it exports, it is

said to have a deficit.”

Factors which cause a Deficit in the balance of Payments

Economic Growth Decline in Competitiveness Higher inflation Recession in other countries Borrowing money Deterioration in the current account

Fixed Exchange Rate: If the currency is overvalued, imports will be cheaper and therefore there will be a higher Q of imports. Exports will become uncompetitive and therefore there will be a fall in the Quantity of exports.

Economic Growth: If there is an increase in AD and National Income increases, people will have more disposable income to consume goods. If domestic producers can not meet the domestic AD, consumers will have to imports goods from abroad.

Higher inflation: This makes exports less competitive and imports more competitive. However this factor may be offset by a decline in the value of sterling.

Recession in other countries: If the Pakistan’s main trading partners experience negative economic growth then they will buy less of our exports, worsening the current account.

Deterioration in the current account: This means that the value of exports has increased at a slower rate than the value of imports. Therefore there could have been an increase in the deficit or the surplus could have changed into a deficit.

Borrowing money: If countries are borrowing money to invest e.g. third world countries.

Measures to correct the balance of payments

The balance of payments can be decreased in three ways: The foreign earnings should be increased by export led growth.

The imports should be curtailed to essential items only.

The expenditure on invisible imports should be minimized.

Highest priority to improvements in export

The measures which government should adopt are:

Comprehensive system of export compensation.

Change in export quota policy

Access to imported raw materials

Access to credit for exporters

BOP in Pakistan Pakistan's payments problems have been chronic since the 1970s, with the cost of oil imports primarily responsible for the trade imbalance. The growth of exports and of remittances from Pakistanis working abroad (mostly in the Middle East) helped Pakistan to keep the payments deficit in check. Since the oil sector boom began subsiding in the early 1980s, however, remittances declined.

The US Central Intelligence Agency reports in 2001 the purchasing power of Pakistan's exports was $8.8 billion while imports totaled $9.2 billion resulting in a trade deficit of $399.9 million.

The International Monetary Fund reports that in 2001 Pakistan had exports of goods totaling $9.13 billion and imports totaling $9.74 billion. The services credit totaled $1.46 billion and debit $2.33 billion.

BALANCE OF PAYMENT – PRE BUDGET

SCENARIO / CURRENT SITUATION

• Today, Pakistan faces a severe balance-of-payments crisis and can cover only about four-six weeks' worth of imports.

• The Current account deficit has improved by $ 2.6 billion and stood at $ 8.547 billion during July- April 2008-09 as against $ 11.173 billion in the corresponding period of last year, thereby showing an improvement of 23.5 percent.

• The Financial and Capital account stood at $ 3608 million during July-April 2008- 09 as against $ 6290 million in the corresponding period of last year which shows a decline of $

2682 million. Source : State Bank of Pakistan

BALANCE OF PAYMENT IN THE LAST FEW YEARS

•Current Account:($Million)

Current Account 2006-07 2007-08 2008-09 2008-09

Balance -6878 -13735 -11173 -8547

•Financial & Capital Account ($ Million)

Financial & Capital Account

2006-07 2007-08 2008-09 2008-09

Balance 10276 8303 6290 3608

source: SBP

• Pakistan is ranked 19 out of 31 countries in the Pakistan is ranked 19 out of 31 countries in the Asia Pacific regionAsia Pacific region .

Balance of Payment Equilibrium

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.

Disequilibrium in balance of payment

“ The balance of payment is in disequilibrium when there is either a surplus or deficit in the balance of payments. When there is deficit in the balance of payments, the demand for foreign exchange exceeds the demand for it. ”

A number of factors may cause disequilibrium in the balance of payments.

1. Economic factors

2. Political factors

3. Sociological factors

Causes of Disequilibrium in BOP with Reference to Pakistan:

(a)  Revenue oriented tariffs(b)  Adverse terms of trade(c)  Import substitution policy of Pakistan (d)  Export of primary commodities (e)  Capital account problem(f)   Trade restrictions of developed countries(g)  Inflation(h)  Ever-increasing demand for imports

Measures to Correct Disequilibrium in BOP

a)  Exports: The enhancing of exports will result in increasing the supply of foreign exchange in the country. In order to promote exports following steps should be taken:

(i)   The proportion of manufactured goods be increased

(ii) In addition to manufactured exports, the non traditional exports like food processing, vegetables, dry fruits be promoted.

(iii) The exporters be provided with compensatory and concessionary finance along with rebates, tax holidays and bonuses, etc.  Export processing zones be increased and expanded in all the major cities.

(iv)  The quality and cost of the export goods be improved. 

(v)    More and more delegates be sent abroad

(b) Imports: Our imports need proper check.  Imports of only those goods should be allowed duty-free that are used in the production of export goods.  Following steps should be taken:

(i)   The imports of luxurious items should be restricted. 

(ii)   The imports of capital goods and engineering goods should be allowed.

(c)  Exchange Depreciation or Devaluation Exchange depreciation means a reduction in the value of a currency in terms of gold or other currencies under ‘free market’ conditions and coming about through a decline in the demand for that currency in relation to the supply. 

(d)  Deflate the Currency: According to this method, the currency is deflated.  As the currency contracts, prices will fall, which will stimulate exports and check imports. 

(e)  Tariffs: Tariff is a tax levied on imports.  It is synonymous with import duties or custom duties.  Tariffs are used for two different purposes; for revenue and for protection.  (f)  Explore new vistas: The disequilibrium in BOP can also be corrected by exploring new vistas and diverting the resources to the production and sale of such new exportable goods and services.