Lecture Macroeconomics: Lecture 31 - Prof. Dr. Qaisar Abbas

Lecture 31

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


Lecture Outline

1. Composition of BOP
2. Pakistan’s BOP
3. Causes of BOP imbalance


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)

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.


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.


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 interestbearing 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.


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)


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%


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.


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.


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.


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.


Trade and Payments Growth (%)
Average (Annual)
1980s

1990s

2000s

1999-00

2006-07

200910(R)

Exports
(fob)

8.5

5.6

9.9

8.8

4.5

2.9

Imports
(fob)

4.5

3.2

13.7

-0.1

8.0

-1.7

Trade
Deficit

0.9

--0.6

6.2

-32.3

15.0

-8.6

Workers
Remittan
ces

1.9

-5.3

26.8

-7.2

19.4

14.0

12.2

-4.6

-52.9

-30.3

-57.4

Current
21.2
A/c deficit


Trade and Payments Growth (%)
Average (Annual) (%) of GDP (MP)
1980s

1990s

2000s

1999-00

2006-07

200910(R)

Exports
(fob)

9.8

13.0

12.4

11.2

11.9

11.1

Imports
(fob)

18.7

17.4

16.7

13.1

18.5

17.6

Trade
Deficit

8.9

4.4

4.0

1.9

6.6

6.5

Current
3.9
A/c deficit

4.5

1.5

1.6

5.1

2.2


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.


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.


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:


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.


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.


Recommended Books
•
•

Ishrat Husain, “Pakistan: The economy of an
University Press.

elitist state”, Oxford

•

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