The present report is a result of the project assigned by our teacher

as a curricular requirement by the university towards the

completion of course International Trade.

First of all we would like to thank Almighty Allah for blessing us

with the necessary mental and physical abilities. We owe
innumerable thanks for His grace, who gave us a bit of knowledge
from the ocean of knowledge.

We are greatly indebted to our teacher and mentor Sir Shahid

Hameed who has guided us throughout in every difficulty and
provided us with the best solution through his professional
approach and experience. We really salute them for their
knowledge.

The project team hopes that this report will provide comprehensive
information to the students of BBA (hons.). Any comments,
identification of errors or suggestions will be highly appreciated.
 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

Shahbaz Khan*
Executive Summary:
Pakistan’s negative trade balance is a constant problem since Pakistan has
been established and it harms the economy cash inflows. Pakistan is ranked
19 out of 31 countries in the Asia Pacific region .China, India, Bangladesh
and Iran are much better placed than Pakistan. Despite some success in
achieving steady economic growth and reducing poverty, Pakistan lags
significantly behind other countries in the region. Now Pakistan is facing
high inflation and budget deficit and on other hand it has low economic
growth. Now we can see our balance of payment is really very negative and
we haven’t seen a positive trend for so many years. Our foreign exchange
reserves are shrinking day by day we can see how dollar is going up in all
other countries the value of U.S dollar is depreciating but Pakistan has seen
a high appreciation in dollar. As we can see there is no borrowing trend in
market because of this deficit and worst situation of country. Pakistan’s
current trade deficit is 14 Million US $.

Pakistan has always taken terrible decisions in international trade and it also
did not make the things perfect to attract foreign buyers, that is why Pakistan
dint not seen a trade surplus in its history except of two years (1952 & 1972)
this happened not because of Pakistan’s efficiency or effectiveness decisions
but some circumstances made to see us trade surplus in 1952 due to Korean
War our demand for jute and cotton increase and it was a rapid export
growth and in 1972 Pakistan due to International force devalued Pakistani
Rupees so it attract the foreign buyers but these steps were for short term
and again after 1972 Pakistan till now haven’t seen a trade surplus even it
has comparative advantage in lots of commodities but Pakistan in lacking in
its international trade decisions and it is not paying a serious attention
towards its trade.

Pakistan since 1947 is crossing through critical situation and did not even
get trade surplus in continuity of years, and Pakistan have to take loan from
IMF to fulfill its country requirements.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

Balance of Trade History, Analysis & Problem

Identification

What is Balance Of Trade?

BOT is the difference between a country's imports and its exports. Balance
of trade is the largest component of a country's balance of payments. Debit
items include imports, foreign aid, domestic spending abroad and domestic
investments abroad. Credit items include exports, foreign spending in the
domestic economy and foreign investments in the domestic economy. A
country has a trade deficit if it imports more than it exports; the opposite
scenario is a trade surplus.

Early (1947-1951)
Pakistan as a new born country faced lots of problem it does not have
industries to manufacture and export goods. Pakistan had surgical industry at
that time which was the basis of the major revenue. Agriculture was also
supporting Pakistan’s international trade because East Pakistan was
producing 75% of worlds Jute and cotton was also producing in country so
there was no as such problem in trade and it was seemed that Pakistan could
do well in future but Pakistan instead of going up just went down year by
year.
To improve industrial sector and to attract manufacturers’ government
decided to make plans for the industrial development. Till then Pakistan’s
trade balance remain negative. Then in 1950’s all the other countries
devalued their currency but Pakistan did not devalued its currency as it
thought that the demand for its product in foreign countries is inelastic but it
was a dream bubble which was burst when all the other countries stop doing
trade with Pakistan and Pakistan was about to be bankrupt because of his
foolish decision……

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

(1952-The Korean War)

There are many events which held in 1952 in the favor of Pakistan’s
economy. First the plan to develop the industrial sector was implemented
and PIDC (Pakistan Industrial Development Corporation) was formed. PIDC
was working to attract the industrial businessman. As whole world stopped
doing trading with us because we did not devalue our currency fortunately
Korean War began and the demand for our jute and cotton increase rapidly.
There was a steep increase in prices of jute and cotton during the Korean
War, formed the basis for investment in a wide range of industries,
especially in textile. This was the first year in Pakistan’s history when our
exports were in surplus and our balance of payment was positive.
So as whole the year 1952 was good for Pakistan’s economy but
unfortunately we couldn’t sustain it.

(1953-1960)

Pakistan had a reasonable Balance of Trade up to 1954-55. The year 1955-

56 was the last year in which Pakistan had an encouraging balance of trade.
After that it ran into BOP problems due to an overvalued exchange rate and
so our exports became uncompetitive. Since that time, Pakistan has been
facing a serious problem of deficit in its Balance of Trade and Balance of
Payment.

The main policies pursued by the government in early years were

unfavorable to agriculture, reflecting the power of urban and industrial based
interests. Due to neglect of agricultural sector an annual food grain export
surplus of Rs.14 million in 1552-54 was turned into a deficit of Rs.220
million by 1957-1959 and the value-added in agriculture rose by only 1.3
percent per year. Despite all this the domestic production of consumer goods
risen in 1960’s.
The value added in industry rose by 8.1% per year, the GDP increase by
only 2.5% which was quiet insufficient for the country to grow and stable.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
Pakistan’s population was also increasing thus the per capita income failed
to rise.

As in 1958 when government realize that Pakistan need to be given priority

in agriculture sector then the government had a little time to see the shift of

its overall policy put into practice. In Oct 1958 a military coup came as
government.

(1960-1970)

In 1958 the government changed and the political instability also affects the
country’s international trade now the country was under General Ayub
Khan. The Second (1960-1965) and third (1965-1970) plans placed major
emphasis on self sufficiency in food grains a little improvement in balance
of payment, and a minor increase in per capita income the plan had just the
concern for agriculture and a heavy investment made in irrigation system
because the analyst know that Pakistan is a agricultural based country and
the exports of our country will depend upon the agriculture.

For the betterment of country’s Balance of trade government introduce

Export Bonus Scheme ( a kind of selective Devaluation) it encourages
industrial exports and other benefit was the consumer imports had largely be
replaced by domestic production.

Even after all these arrangements and planning a number of problems

emerged which indicated that growth was not as firmly established as the
government hoped. Pakistan’s export began to experience serious
difficulties, even after Export Bonus Scheme we could not compete in
international market because of over valued rate of exchange. There was a
slowdown in private investment. Over all investment declines from 23% in
1964-65 which affect out trade balance indirectly.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

(The Separation 1971)

1971 is the year of Pakistan’s breakup which leads to so many problems in
which trade deficit was the major problem a tremendous amount of money
was spends in war. In 1971, Pakistan's exports decreased considerably and
its imports surged, especially of capital goods, thus creating a trade deficit.
A number of Pakistanis during this time migrated to the Middle East.

Workers’ remittances, especially from the Middle East countries, increased

tremendously which helped a great in stabilizing the BoP. The deficit in
Balance of Trade was $836 million on an average while current account
deficit in BoP was $699 million on an average 1971-72.

(1972-Trade Surplus)
In 1972 thirty-one heavy industries were nationalized life insurance and
petroleum distribution companies were also nationalized. In 1972 the
Pakistan rupee was devalued from 4.76 US Dollar to Rs. 11.00 to One US
dollar and adjusted to 9.91 to one US dollars so our export becomes 31%
cheaper and our export increased by 130% that was a highest trade surplus in
history of Pakistan.
Only two years 1952 & 1972 were the year of trade surplus but 1972 were
the best after that Pakistan never seen a trade surplus its now almost 38
years.
On other hand or exports goods were become expensive for us so this was
also for the short time of period.
Soon after 1972’s trade surplus Pakistan again in 1973 stand in the same old
worse position. The devaluation was not a long term arrangement for
Pakistan.

(1972-1979)

In 1971 Pakistan lost its east wing which became Bangladesh. It greatly
affected our economy because East Pakistan was the major producer of Jute.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
Bhutto became the Prime Minister of Pakistan and he nationalized all the
major industries of the country. This act of Bhutto discouraged the private
sector and industrialists were no longer interested in investing in Pakistan. In
1972 GPD fell to just 1.2%. This occurred mainly because of war with India
and also because Pakistan lost revenue which it used to earn from
Bangladesh. Then Bhutto devalued the Rupee by 131% which boasted our
exports by 153%. He introduced several reforms and public development
projects because of which Pakistan was able to achieve the average growth
rate of 7.5 till 1974. 1975, the height of Bhutto’s nationalization program,
private sector investment was only 15% of the total. Cotton crop was also
destroyed and there were several floods during his last years of rule. 1976
saw Pakistan’s worst floods, devastating large areas of cultivated land. All
these factors caused Pakistan’s GDP to fall significantly and from 1974-
1977, the average GDP was just 3.6%.

(1980’s Position of countries trade):

As all above in whole decade of 1980 Pakistan again face difficulties in

trade and saw trade deficit whole decade. This was all because of Pakistan
needs a structural transform. Pakistan also face very low government savings
with an excessive budget deficit, a narrow and inelastic revenue base overly
dependent on trade taxes high consumption expenditure and inadequate
development expenditures. So it leads to an inefficient financial sector.
Because of no trade we face bad financial crises in year 1988 and noticeable
thing is our budget reached to 8.5% of or GDP. It was also the Era of
structural adjustment reacting to crisis the government of Pakistan
committed it self to reforms design to restore the resources balances at
sustainable levels and to improve efficiency of economy. The medium term
loans were taken from IMF, World Bank, The Asian Development Bank and
some bilateral donors. In late 1980’s Pakistan with greatly depleted foreign
exchange reserves had to resort to these IMF stabilization programs. IMF’s
structural adjustment program is politically very unpopular because it strikes
at the heart of development efforts by disproportionately hurting the lower
and middle income groups.

(1990-2000 Country’s Economic Position):

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
The structural adjustment programs have adversely affected Pakistan’s
Economy in the 1990. At that time Pakistan was in desperate financial
straits. The external debt in mid 1990 amounted to more than $20 billion.
A. 1994-98

• Exports were stagnant. Structural problems persisted.

• Import growth led to widening of trade deficit

• Debt servicing burden was rising

• Current account deficit hovered around $ 3-3.5 billion or 4-5% of GDP.

• Financing was unsustainable as Foreign Current Accounts and FE 45

swaps with banks were used.

May 1998 aftermath

• An exogenous shock exposed the weakness of the balance of payments

situation and the non-viability of the trade and financing.
• Freezing of FCAs, Hub Power Dispute and Political uncertainty eroded
the confidence in the economy.

• Extraordinary restrictive measures had to be put in place which included

administrative controls on foreign exchange and introduction of multiple
exchange rates.

• Debt rescheduling and new inflows from IMF, World Bank and Asian
Development Bank in January, 1999

• Helped build up the reserve situation to comfortable levels by end June,

1999.

• A unified exchange rate was re-introduced in May, 1999.

• Underlying structural problems were not attacked during the breathing

period to enable the country to exit from rescheduling.

(October 1999 Onwards)

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

• Foreign exchange regime was liberalised and all restrictions on foreign

investment outflows removed.

• Stable exchange rate maintained until June, 2000 and the premium over
open market rate was stable – 4 to 5%.

• Current account deficit has been reduced from 3.8% to

1.6%. Export growth recovered to 10% in 1999-2000 after a long time.

• As inflows from international financial institutions almost dried up,

purchases from open market enabled the country to meet its payment
obligations. $ 1.3 billion of debt relief under Paris Club was eroded by
increase in oil prices.

• Since June 2000, rupee has been put on free float and there has been
depreciation of almost 12% with greater volatility and fluctuations.

• In 1999-2000 cash payments of $ 3.6 billion were paid on external debt

servicing in addition to rescheduling of debt

• External Cash outflows exceeded inflows during 1999-2000 despite

purchases from the market and exceptional financing putting pressure on
foreign reserves. There was a draw down of almost $ 400 million from the
reserves by end – June 2000

• The present government has initiated a number of key structural reforms

which had been postponed for a long time. Introduction of agriculture
income tax, extension of GST on Retail Trade and Services, aligning prices
of gas, petroleum products to international prices, documentation and survey
to widen tax base will reduce fiscal deficit and hence further narrow the
current account deficit and external borrowing requirements in future.

• Current account deficit is likely to narrow further in 2000-

2001 as exports are projected to rise by 14% and imports by 8%.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
• Exceptional financing requirements are expected to be reduced from 4
billion annually in 1998-99 and 1999-2000 to $ 2.2 billion in 2000-
2001.Reserve target for end June 2001 is $ 1.7 billion.

• Workers’ remittances are down by $ 400 million, and Foreign Investment

by $ 500 million -–compared to the pre-1998 trends. If these flows are
reinstated, oil prices decline, and export growth is further accelerated the gap
between inflows and outflows will narrow and the need for further
rescheduling will be reduced.

(2001-2004):
In 2001 the purchasing power parity 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 (IMF) 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. The
following table summarizes Pakistan's balance of payments as reported by
the IMF for 2001 in millions of US dollars.

There was a sharp decline in trade deficit in FY01-02. The trade deficit fell
by 75.5 per cent to $286 million over the level of $ 1338 million of FY00-
01. The current account deficit in balance of payment emerged with a
surplus of $913 million in FY01-02.

This year it seems to be improvement in BoP because of event of September

11 FY01 it help great deal in ameliorating Pakistan’s chronic external deficit
in balance of payment. It shows the significant reduction in trade deficit
more than doubling of foreign remittances and budgetary support from
coalition partners in war against terror enabled Pakistan to run current
account surplus for the first time since 1956-57. It seems a sharp decline in
trade deficit in FY01-02. The trade deficit fell by the 75.5 % to $286million

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
over the level of $1338 million from 2000-01. The current account deficit in
balance of payment emerged with surplus of $913 million in 2001-02. In
2003 Pakistan’s trade deficit was -1208Million $and -4352 million $ in
2004.

(2005-2006)
Pakistan’s exports during July-February 2005-2006 were US$10.6 billion,
which reflects an increase of 19.7 per cent over the corresponding period of
2004-2005. These are the best export figures for an eight months period in
the history of Pakistan. The 20 per cent increase is higher than the 18 per
cent target growth target for the year 2005-2006. It is expected that Pakistan
will not only achieve its export target of US$17 billion; but is likely to
exceed it as historically exports have been proportionately higher in the last
quarter of the financial year i.e., between April and June.

• The encouraging performance in exports is despite the decline in the

prices of textiles and clothing as a result of intensified price
competition in the international market.
• It may be noted that export growth is driven mainly by a rise in
volume during July-January, 2005-2006.
• Another positive trend is that even when a month to month
comparison is made; i.e. February, 2006 is compared to February,
2005, there has been a 9.3 per cent export increase.
• Pakistani exporters were able to substantially benefit in the post textile quota era.
Textile sector exports increased by 23%. The diversification achieved last year
further consolidated as non-textile exports accounted for 60% against traditional
67% share in Pakistan's total exports. The primary commodities also showed a
growth of 29.4 per cent during July-January, 2005-2006 as compared to the
corresponding period in 2004-05.

IMPORTS
Value in Million US$

Years Exports Imports Trade Balance

2004-05 14,391 20,598 -6,207

2004-05 (July-Feb) 8,836 12,311 -3,475
2005-06 (July-Feb) 10,578 18,010 -7,432

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
Imports for the fiscal year 2005-06 were projected at US$ 21.8 billion.
Actual imports during July - February 2005-06 are US$ 18.0 billion showing
an increase of US$ 5.7 billion (46.3%) over the corresponding period in the
last fiscal year (US$ 12.3 billion).

(2006-2007)
Pakistan’s balance of payments showed a deficit of $ 6,878 million in
its current account balance during 2006-07 as against a deficit of $ 4,990
million during 2005-06. The deterioration of $ 1,888 million in current
account balance as compared to last year was the combined effect of
higher net payments of $ 1,270 million and $ 915 million under goods and
income accounts respectively, offset partly through lower net payment $ 260
million under services and higher net receipts by $ 37 million under current
transfer. The capital and financial account showed a net inflow of $ 10,449
million and increased by $ 4,378 million over net inflows of previous year
resulting in an increase of $ 2,396 million in overall surplus during the year
2006-07. On quarterly basis, the overall balance registered deficits of $ 670
million in first quarter while surpluses of $ 595 million, $ 502 million
and $ 3,303 million were observed in second, third and fourth quarters of
financial year 2006-07.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

(Current Scenario)
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.

Pakistan will face a serious B.O.P problem next year partly because: The
United States has not reimbursed over $ 1.2 billion the country spent on the
war on terror. Under the Coalition Support Fund the U.S reimburses
Pakistan for terrorism related operations. The govt. has received $447
million since Sep.2008 leaving a balance of over $ 1 billion.

Current Foreign Exchange Reserve

FY 06-07 FY 07-08 FY 08-09

(July _Dec)
US $ 15.18 B US $ 10.83 B US $ 9.34 B

Friends of Pakistan have promised significant monetary support. If it realizes

than it will have a positive effect. Imports are expected to decrease by 15 %.
If it happens it will have a positive effect on B.O.P. Pakistan’s B.O.P is

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
relying on foreign element and support. If it realizes than B.O.P deficit
would decrease otherwise its future looks bleak.

Causes of Negative Balance Of Payment

1. Pakistan’s balance of payment is highly dependent on workers
remittances but these remittances can not be sustained over a long
period of time.
2. One major structural problem of export is that it is based on relatively
low valued added products. Pakistan’s exports are highly
concentrated in cotton group, leather group, and rice synthetic textile
and sports goods.
3. Although Pakistan is trading with large number of countries but her
exports are highly concentrated in few countries. More than half of
Paskenta’s exports are concentrated in USA, Germany, Japan, UK,
Hong Kong, Dubai and Saudi Arabia. Such a high degree of
geographic concentration of export is dangerous as it renders the
economy vulnerable to the manipulation of importing countries.
4. Imports are concentrated on limited number of commodities namely
machineries, petroleum, chemical, transport equipment edible oil,
iron and steel and fertilizer and tea.
5. Although Pakistan is trading with a large number of countries yet
major portion of imports comes from a few selected countries.
Almost 50% of imports come from USA, Japan, Kuwait, Saudi
Arabia, Germany the U.K and Malaysia. Such a high degree of
geographic concentration of imports is undesirable and is in favor of
exporting countries.
6. Pakistani societies make heavy expenditure on their rituals and
weddings etc.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan
7. The main cause is also the political instability.
8. Sick industries in Pakistan are increasing while at the same time
Pakistan is facing tough competition in the world market.
9. Pakistan import large quantity of oil which is producing the entire
product.

Recommendations:
1. Pakistan must increase its production so that Surplus can be
exported
2. Government should formulate a strategy to be free of the
country’s dependency on workers remittance.
3. The emphasis should be on the export of the high value goods and
the services.
4. Pakistan should expand its international market.
5. The country has to expand its export base that is too narrow.
6. The industrial sector should be major sector of economy.
7. The trend of saving should be promoted.
8. Economic system has to be change.
9. Market imperfection should be removed.
10. Foreign investments should be encourage.
11. Pakistan doesn’t need to enter IMF & World Bank Programs.
12. New Water Reservoirs need to be made for power and energy.
13. Pro Active Export Policy and better marketing of Surplus goods.
14. Electricity crises need to be solved urgently so that open mills and
factories give more production and closed units open again.
15. Pakistan needs a leadership with competence, very strong nerves,
clear understanding of the issues and psyche of the other side of
the table, ability to negotiate with the super powers and come out
with a most suitable package.

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 International Trade Journal
Analysis of Trade balance of Pakistan
Annual Report 2009
By: Shahbaz Khan

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