Balance of Payments Jawed Final

1

Balance of PaymentsSeminar in Economic Policy

Jawaid AlamMBA (R)

28th June 2014

2

• What is the BoP?• IMF definition• BoP identity according to IMF• Components of BoP• Components of Current Account• Components of Capital Account• Balance of Trade• Terms of Trade• Foreign Exchange Reserves• Pakistan’s Balance of Payments Prospects & Policy Proposals• Causes of BoP difficulties• Factors affecting exports• Policy Proposals

Agenda

3

What is BOP ?Balance of payments is a statistical statement designed to provide for a specific period of time a systematic record of an economy’s transactions with the rest of the world.

An “economy” is comprised of economic entities (residents) that have closer association with that specific economy than with any other. Economic entities that have closer association with other economies are nonresidents.

4

CONCEPTUAL FRAMEWORK OF BOP

• BOP registers transactions between residents and non-residents.

• BOP deals with flows.• BOP uses double entry accounting system. • BOP adopts the principal of accrual accounting (time

of recording).• BOP are normally expressed in domestic currency or

in stable unit of account.

5

Principles and Concepts

• Double-entry System The basic convention of a BOP statement is the

DOUBLE ENTRY ACCOUNTING SYSTEM in which every transaction is represented by two entries of equal values. If for example an exporter receives foreign

6

currency in payment for goods, a credit entry would be recorded in the BOP accounts for export of goods and offsetting debit entry would be recorded for exports increase in foreign currency bank balance. In BOP these entries would be recorded as:

Credit DebitMerchandise 100 ..Foreign Currency Assets .. 100

7

The balance of payments statistics are used for a number of reasons within a country and worldwide. The most frequent users are:

Domestic Economic PolicyGovernment 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.

Why is it important ?

8

International UsesRegional 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.

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

Why is it important ?

9

Who does it compile

• Statistics Department of State Bank of Pakistan is responsible to compile Pakistan’s Balance of Payments Statistics (BOP) as per IMF format (BPM5)

10

Periodicity and Timeliness• Monthly (highly provisional), Quarterly

and Annually.

• Monthly: By the time lag of 36 days after the reference Month.

• Quarterly: By the time lag of one quarter after the reference period.

11

Standard Components of BOP• I. Current Account • Goods• Services• Income• Current Transfers

II. Capital & Financial A/C Capital Account Financial Account

Direct InvestmentPortfolio InvestmentFinancial DerivativesOther InvestmentReserve Assets

III. Errors and Omissions

12

Standard Components of BOP

Goods FOB• General merchandise.• Goods for processing. • Repairs on goods. • Goods procured in ports by carriers • Non-monetary gold.

13

Services Transportation. Travel. Communication Construction Insurance Financial Computer and information Royalties and license fees Other business services Entertainment & Cultural and

recreational Government services

Standard Components of BOP

14

Services

Standard Components of BOP- Contd…

15

Income Compensation of employees Investment income ► Direct investment ► Portfolio investment ► Other investment Monetary authority General govt. Banks Others


16

IV. Current transfers Credit Debit Net General government Other sectors ► Workers’ remittance . ► Resident FCAs . ► Others .


17

Capital account

Capital transfers General government Debt forgiveness Others Other sectors Debt forgiveness Others Acquisition/disposal of non-produced non-financial assets


18

Financial account Direct investment Direct investment abroad Direct investment in reporting economy

Portfolio investment Portfolio investment – Asset Portfolio investment – Liability

Financial Derivatives


19

Other investment Assets Trade Creditors Loan Currency and Deposits Other assets

Liabilities Trade Creditors Loan Currency and Deposits Other assets


20

Reserves Assets Monetary gold SDRs Reserve position in the Fund. Foreign exchange Other claimsErrors and omissions –Net

Exceptional financing.


Table 7.2: Summary of Balance of PaymentsBillion US$

FY10 FY11 FY12 FY13

Current Account Balance -3.5 0.2 -4.6 -2.5

Trade Balance -11.5 -10.5 -15.5 -15.4

Exports 19.7 25.4 24.7 24.8

Imports 31.2 35.9 40.1 40.2

Services Balance -1.7 -1.9 -3 -1.5

Income Account Balance -3.3 -3 -3.4 -3.7

Workers‘ Remittances 8.9 11.2 13.2 13.9

Financial Account Balance 5.1 2.1 1.5 0.3

Foreign Direct Investment 2.2 1.6 0.8 1.3

Portfolio Investment -0.1 0.3 -0.2 0

Disbursement Of Loans 4.1 2.8 2.5 -0.5

Amortization Of Loans 1.9 2 1.9 -0.5

Overall Balance 1.3 2.5 -3.3 -2

• In FY11, there was improvement in the current account witnessed during the past two years continued in FY11 as well, with the current account posting a small surplus of US$ 0.3 billion

• In FY12, the current account recorded a deficit of US$ 4.6 billion due to a sharp increase in oil imports, and a temporary slowdown in remittances that led to a billion Dollar deficit in the month of September alone.

• In FY13, improvement can be traced to the CSF inflows of US$ 1.8 billion.

FY11 FY12 FY130.2

-4.6

-2.5

Current account balance Billion US$

• In FY11, although imports have also increased by 14.7 percent, the growth in exports outpaced the growth in imports.

• In FY12, a slowdown in external demand, and domestic supply-side constraints contributed to a decline in the country‘s exports.

• In FY13, Trade deficit narrowed slightly mainly due to a decline in imports, as exports remained more or less unchanged.

FY11 FY12 FY13

-10.5

-15.5 -15.4

Trade balanceBillion US$

• In FY11, better unit prices of textile related products supported textile exporters. Apart from textiles, exports of engineering goods, chemicals & pharmaceuticals, leather products, fruits and fish also posted positive growth.

• In FY12, with exports continuing to perform poorly, the easing trade deficit was entirely on account of international oil prices.

• In FY13, exports remained more or less unchanged.

FY11 FY12 FY13

25.4

24.7 24.8

ExportsBillion US$

• In FY11, both petroleum and non-petroleum imports increased. As with exports, the prominent factor in inflating the import bill was the rise in the prices of international commodities, especially the rise in the prices of petroleum products, palm oil and sugar.

• In FY12, the increase in imports, as mentioned earlier, was mainly a function of higher oil prices. In addition, fertilizer imports also contributed to the increase in the import bill

• In FY13, imports remained more or less the same.

FY11 FY12 FY13

35.9

40.1 40.2

ImportsBillion US$

• The financial account surplus declined for the fourth consecutive year in FY11. In absolute terms, the financial account surplus decreased by US$ 3.0 billion in FY11 – the highest fall recorded during the past four years. While foreign direct investment declined due to lingering issues such as terrorism, energy shortages, corruption etc., portfolio investment registered a relative improvement.

• In FY12, the capital and financial account surplus contracted for the fifth consecutive year, as both non-debt flows (investment) and debt flows (loans) continued to decline.

• In FY13, the surplus in the financial account declined substantially. This decline can be traced to net repayments of external debts, which offset nominal increase in foreign investments during the year.

FY11 FY12 FY13

2.11.5

0.3

Financial account balanceBillion US$

FY11 FY12 FY13

2.5

-3.3

-2

Overall balanceBillion US$

• Pakistan‘s external account posted a deficit of US$ 3.3 billion in FY12, against a surplus of US$ 2.5 billion in FY11.

• Pakistan’s balance of payments remained under stress throughout FY13. Similar to FY12, this stress can be traced to heavy repayments to the IMF, net outflows to other IFIs, and anemic foreign investments.

• In FY11 of 26.8 percent in foreign direct investment was contributed to by a decline in both equity capital and in reinvested earnings.

• In FY 12, Foreign direct investment (FDI) fell by two large cellular companies was the major reason for this decline in FDI.

• Foreign investments picked up in FY13 to reach US$ 1.3 billion, compared with just US$ 0.6 billion last year. This is a welcome increase, but the level of FDI remains glaringly low due to: election-related political uncertainty; security concerns; and the vulnerability of Pakistan’s external account.

FY11 FY12 FY13

1.6

0.81.3

Foreign direct investmentBillion US$

Balance of Trade

Exports• Overall exports recorded a growth of 4.24 percent during first ten months

of FY14 (Jul-Apr) against a growth of 4.23 percent in the same period last year. In absolute terms, exports have increased from $20,143 million to $ 20,997 million.

• Broad categories of exports suggest that textile group and petroleum group & coal performed well during current year whereas other manufactures group could not performed and showed a negative growth.

• This sector mainly suffered due to sharp decline of more than 72 percent in the export of jewelry.

• The export of raw cotton increased handsomely during current year due to favorable prices.

• The monthly export for the period July-April, 2013-14 remained consistently above the corresponding months of last year, with the exception of October and November, 2013 and April 2014 period, averaging $2,102 million per month as against an average of $2,014 million same period last year.

•

Imports• The imports target for current financial year was set at $43.3 billion for

FY14. Pakistan imports were up by only 1.2 percent in the first ten months of the current fiscal year, rising from $36,664.94 million during FY13(Jul-Apr) to 37,104.50 million during first ten months of current financial year, showing an increase of 439.56million in absolute term.

• The major contributors to this additional import bill have been alone the machinery group ($463.6 million or 9.8 percent) followed by Agriculture and Chemicals ($291.5 million or 5.6 percent) and Textile group ($52.2 million or 2.4 percent).

• Other groups witnessed decline in import during first ten months of current year led by Metal Group (8.4 percent) and food group (5.8 percent). The Petroleum Group, the largest group in the Pakistan import bill has witnessed a decline of 1.3 percent ($157 million) during Jul-Apr, FY14.

The monthly imports during July-Apr, 2013-14 witnessed some monthly fluctuations especially during January and April, 2014 mostly due to higher imports of construction, mining and textile machinery. Imports averaged $ 3,711 million per month during this period as against $ 3,667 million for the comparable period last year. Thus, on average, imports have risen only by $ 44 million per month during the period.

Foreign Exchange Reserves

• Pakistan’s foreign exchange reserves improved by US$ 3.0 billion since July, 2013 and remained around $13.6 billion as on 2ist May, 2014, a change of more than 28 percent. Of the overall increase in reserves, SBP reserves increased by $3.2 billion, while that of the scheduled banks decreased by 0.2 billion. This improvement in reserve position was due to inflows from the IMF under the current program, coalition support fund (CSF), 3G/4G licenses, Issuance of Sovereign Bond, multilateral/bilateral institutions and inflows from friendly countries. This improvement has been achieved despite the fact that Pakistan has so far repaid $2,708 million during current year to the IMF and other institutions.

Pakistan’s Balance of Payments Prospects & Policy Proposals

By. Sir Ashraf Janjuain Pakistan Business Review July 2010

41

• Trade balance in goods deficit is increasing since FY03• Reached US$14970 mn in FY08 due to increase in oil

prices.• World economic slowdown and reduction in oil prices

decrease trade deficit but it was still high compared to potential of economy

• Decreasing deficit in services account is due to lower payments for transportation b/c of lower imports and lower payments for other business services

42

Analysis of Current A/c Bal of Pak

• Debt burden in income account (negative income a/c)

• Investors want return on portfolio• Only surplus component is current transfers

from workers abroad to families at home• Result: Current a/c deficit leads to low

productivity, low exportable surplus, low reserves for payment, low investment from abroad, low capacity to borrow on soft terms

43

44

Inability to increase value addition to raw materials exported due to high cost of energy for production of tradables, poor infrastructure, low capital inv. In modernization of machinery to enhance competitiveness

Due to low production, low quality, income inelastic demand for products and weak image of Pak. traders in global market, Pak has not been able to utilize quota in EU and US markets (70%)

45

Causes of BoP difficulties

• Services need little inv. and is the fastest growing sector in global economy, constituting more than 60% of GDP and employment in many countries (telecomm, banking, insurance, transportation)

• Training & develop. is needed for HR optimum utilization of workers, technology transfer, faster innovations

46

1. Law and order and “War on terror” affects inflow of FDI (Global Enabling Trade Report 2010, Pak ranked 123 out of 125 countries in terms of business costs of terrorism)

2. Power shortages affect investment flows3. Erosion of competitiveness b/c unit prices of imports are

increasing and they are used as inputs for the exportables4. Demand side constraints:a) Recession in world economy b) Dependence on RM exports of low valuec) Other countries are more competitive in no. of

commodities & servicesd) No diversification of export mix

47

Factors affecting exports

30-35% of imports are of crude/furnace oil. We need to spend on import of edible oil, wheat, sugar, chemical products for manufacturing, fertilizers

Worker’s remittances plus pvt and official transfers is helping the BoP

Problems in financing current a/c deficit – Budget deficit is expanding due to war on terror increase in cost of borrowing, drying up of FDI inflows, pressures on cost of external financing

48

1. Efforts should be made to conclude war on terrorism increase in production, exports, FDI and tourism inflows

2. Increase in FDI would lead to inflow of advanced technology & growth in services

3. Inflow of FDI would lead to capacity building of HR sector

4. Good governance is needed: timely decision making, setting up effective accountability mechanisms

49

Policy Proposals

5. Control of law and order would boost stock exchange leading to foreign portfolio investment6. Improve quality of social/physical infrastructure7. Alternative energy resources should be developed which would enhance production and exportable surplus8. Inflation should be contained to modest level and Pak rupee should be kept competitive (REER)9. Efforts should be made to diversify exports with emphasis on service sector, dairy products, fruit and vegetables and labour intensive segments of small scale industry10. Exploit untapped markets for trade: Africa & Latin America

50

Depends on 1. Ratio of foreign savings to investment2. Growth in foreign exchange earnings from

exports of goods/services, remittances, pvt transfers

If this happens, current a/c balance would be 2-3% of GDP

51

Sustainability of BoP

Thank you

Documents

Balance of Payments Jawed Final