Measures for correcting the Adverse Balance of Payments: Pakistan cannot afford to run a persistent deficit in the balance

of payments on current account as it does not have unlimited reserves of gold and foreign currencies. It can neither persistently borrow from the rest of the world. There is, after all, a limit of accumulation of debt which may be for the development purpose. The adverse balance of payments can be decreased in three ways: (i) The foreign earnings should be increased by export led growth.
(ii)

The imports should be curtailed to essential items only.

(iii) The expenditure on invisible imports should be minimized.

Export Led Growth: Export plays an important role in the growth of the economy. It is regarded a key factor in the economic development. As regards Pakistan, it has rich manpower and real resources. If they are properly exploited and utilized, there can be significant improvement in exports and foreign exchange earnings. The

following measures need to be adopted for increasing exports and alleviating the balance of payments problems: (1) Promotion of labor-intensive industries. Pakistan has to give priority to the development of those industries which are labor intensive. The cheap labour compared to many other developing and developed countries of the world can give a comparative advantage in the production and export of commodities. The export earnings, therefore, can increase and help in restoring equilibrium in the persistent adverse balance of payments of the country.

(2) Diversification of exports. Pakistan's exports since Independence have been showing heavy concentration on a few primary commodities. If there is a recession in the international' market for cotton and rice or Nature is not kind, the production declines and exports are greatly reduced and have a damaging effect on the balance of payments. We shall, therefore, have to diversify our exports and produce value added goods for gaining competitive strength in the international market. (3) Development of industries having low capital output ratio. Pakistan with low foreign exchange earnings cannot afford to import heavy machinery. If Pakistan like China, Korea, Taiwan;

Hong Kong, Singapore, takes up lines of production having a low capital output ratio, it can lead to fast growing export. The exports of carpet and rug industry, cigarettes industry, sports industry, leather industry, etc., have considerably increased the export earnings of Pakistan in the past few years and have decreased strain on the balance of payments. (4) Decrease in consumption. In spite of rapid rise in prices, there is a greater increase in national consumption 6f various commodities product at home and imported from abroad. The higher consumption of locally manufactured goods is reducing the exportable surplus and consequently the foreign earnings to the country. People shall have to be motivated to adopt simple living and austerity for bridging the resource gap. (5) Restoration of sick industries. The sick industries in the nationalized public sector should be transferred to their owners. The private sector has the capacity to reactivate the dying industrial units and increase production for use at home. It can thus increase exports to earn the much needed foreign exchange. (6) Reduction in export duties. Reduction in export duties, publicity of locally manufactured goods in the foreign markets and adequate provision of credit to the private sector for development of industries can greatly help in increasing export

earnings and relieving the pressure on balance of payments. (7) High quality goods. In order to capture foreign markets, it is necessary that high quality goods at minimum cost should be produced in the country. (8) Pricing of goods. For increasing exports, it is necessary that goods should be produced under optimal conditions and offered at competitive prices in the international market. (9) Packing. For promoting exports, high quality packing is essential. If packing is not attractive and durable, it will not capture foreign markets. (10) Creation of export agencies. For break through in exports; export agencies should also be created in the private sector, following suit of China and other recently industrialized countries.

(11) Joint ventures. The exports can also be pushed up by establishing industries with joint ventures of foreign investors. The products of these industries can be sold in the foreign markets and the country can earn sizeable foreign exchange.

Current Account Balance 4000

3000

2000

1000

0 1974-75 -1000

1979-80

1984-85

1989-90

1994-95

1999-2000

2004-05

-2000

-3000

-4000

-5000
Y ears

The only reason the current account balance has come into the positive is because of the role of remittances after 9/11. The level of remittances rose sharply due to the insecurity of non-resident Pakistanis in keeping their hard-earned money abroad. So, this increased the amount of remittances entering into the country. This is why there is a steep curve in the years after 2001. However, the

increase in the level of imports and the huge rise in the trade deficit offset this increase in remittances in the recent years. The increase in imports has largely been due to the imports of machinery and oil for the country.

Trade Balance
0 1974-75 -500 1979-80 1984-85 1989-90 1994-95 1999-2000 2004-05

Trade Balance(US $ Million)

-1000

-1500

-2000

-2500

-3000

-3500

-4000

Years

The trade balance has remained negative in the past 32 years. Byand-large, it is due the factors already highlighted above such as the narrow export base, export in primary products, concentration in exports, and reliance on foreign products in the technologyoriented products.

Suggestions to improve the BOP Position: Reaffirming the efficient export-led growth can make a significant contribution to reducing Pakistan’s trade deficit and external financing needs, the measures which government should adopt are: 1. Highest priority to improvements in export unit values and export quality through enhanced fiscal concessions, the development of technology institutions, and trade houses; 2. a more effective and comprehensive system of export compensation; 3. a fundamental change in export quota policy for textiles so as to maximize value addition; 4. a significant casing of access to imported raw materials and modern machinery to facilitate quick modernization and technical upgrading of export industry, as well as improving quality standards; 5. improve access to credit for exporters through the establishment of an Export Credit Wing in the State Bank of Pakistan, greater emphasis of product design and marketing strategies by enhancing financial resources of the Export Market Development Fund; 6. Special steps to accelerate the development and modernization of power-loom sector; simulating export competition through

the induction of the private sector in the export of rice and cotton; 7. Removal of all restrictions on the textile sector including permission for the free import of high quality yarn; 8. Forging a closer link between export and import flows through trade diplomacy and special incentives for the export of engineering goods; 9. Establishment of efficient mechanisms for implementing and monitoring export-specific measures.