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Deficit Balance of Payment of Pakistan, Causes and Control

DIFFERENTIATE BETWEEN BALANCE OF TRADE AND BALANCE OF PAYMENT. GIVE
THE CAUSES OF ADVERSE BALANCE OF PAYMENT. ALSO SUGGEST MEASURES TO
IMPROVE IT?
Introduction:
Balance of payments (BOP) is a record of economic transitions between the residents of one
country and the rest of the world during one year. The balance of payment like all balance sheets
must balance. The items, which lead to, an inflow of foreign earnings are placed on the credit side of
the balance sheet, whereas the items, which give, rise to an outflow of foreign currency are placed
on the debit side.
Definition:
“Balance of payment is a systematic record of a nation’s total payments to foreign countries,
including the price of imports, the outflow of capital and gold, and the total receipts from abroad,
including the price of exports and the inflow of capital and gold.”
According to Pas Taylor:

“Balance of payment refers to the difference between the total payments out of a country during a
given period of time. These payments are of visible and invisible items.”

DIFFERENCE BETWEEN BOT & BOP
1- Definition
Balance of Trade (BOT) Balance of Payment (BOP)
BOT is the difference between the values BOP is the difference between the values
of exports and imports of only physical of exports and imports of both visible and
items (goods) of a country during a given invisible items (goods and services) of a
period of time (usually one year). country during a given period of time
(usually one year).
2- Surplus or Deficit
Balance of Trade Balance of Payment
If the value of visible exports is greater If the value of the total receipts is greater
than value of visible imports, the balance than the total payments, the BOP is termed
of trade is said to be favourable and vice as favourable and vice versa.
versa.
3- Goods and Services
Balance of Trade Balance of Payment
It includes only (visible) goods. It includes both (visible and
invisible) goods and services.
4- Revenue and Capital
Balance of Trade Balance of Payment
It includes all revenue receipts and The BOP includes all revenue and
payments on account of imports and capital items.
exports.
5- Relationship

In 1965-66.0 Crore) 1954-55 Favourable Due to Devaluation and restrictions on imports (Rs. Accordingly. e. c) Reserve Accounts It shows the foreign exchange position of a country. Explanation: Balance of payments of a country has three types of account: a) Current Account b) Capital Account c) Official Reserve Account a) Current Account It includes export and import of all goods and services and transfer payments on receipts and payments sides respectively. since independence.Economic Position Balance of Trade Balance of Payment It does not show the actual economic Balance of payment shows the real position of a country. economic position of a country. it is equal to the BOT plus import & export of services. Same items are written in payment side while making payment. 1954-55.3 billion) Up to date Situation: . on receipts side..72 billion) 2009-10 Unfavourable Deficit ($ 10. the balance of payment was highly deficit due to war against India. short term and long-term capital inflow receipts of foreign direct investment and foreign debts are posted.9 Crore) 1955-56 Favourable Due to 20% increase in exports 1958-59 Favourable Bonus Vouchers Scheme and Restrictions on Imports 1959-60 Favourable Bonus Vouchers Scheme and Restrictions on Imports 1965-66 Unfavourable Deficit due to war against India 2007-08 Unfavourable Deficit ($ 16. 1955-56.8 billion) 2008-09 Unfavourable Deficit ($ 12. has been experiencing deficit (un-favourable) in its balance of payment except the following five years i. 1950-51. and 1959-60. Official reserve account has the records of foreign official holding and increase reserves of gold and foreign currencies. 578. b) Capital Account In capital account. 6.945 billion) 2010-11 Unfavourable Deficit ($ 8. REPRESENTATION BY SCHEDULE Situation Reason Fiscal Year 1950-51 Favourable Due to the Korean War (Rs. Balance of Trade Balance of Payment The BOT does not include the BOP. the part of BOP. 09. Situation in Pakistan: Pakistan. It is The BOP includes BOT also. 1958-59.

The reason is that our export base is narrow. are remaining around $ 15 billion to $ 20 billion. The production of value added goods is at basic stage in Pakistan that leads to adverse BOP. exchange rates etc. Technical Barriers . As such. The costs of both imported capital goods and industrial raw material. leather.LIMITED EXPORT CAPACITY 1. Increase in Prices of Inputs The increase in the prices of fuel. has borne up. on which domestic industry is heavily dependent the inflationary impact of the rise in the prices of inputs are not helping in achieving the export targets set in each financial year. 8. there have been less modernization. Such types of duties on our exportable goods are also a big hurdle in the way of our exports. balancing and replacement of machinery in the private industrial sector. 6.BOT: These are the permanent problem of deficit in BOP: A. It causes reduction in exports. cotton. It has made the imported inputs more costly. Our exports. have inflated. 4. 7.8 %. imports of Pakistan are $ 32. 2. due to devaluation. According to the Economic Survey of Pakistan 2010-11. It is on record that the performance of most of the industries in the public sector is not satisfactory. The exportable surplus is going on decline. which result in deficit in BOP.0 million tones of wheat and heavy amounts of sugar. pulses and tea in 2005-06. 3.3 billion. Tough Competition Stiff competition in the foreign market particularly of our value added goods has reduced the volume of foreign trade in Pakistan. Narrow Export Base Pakistan basically is an agricultural country. The demand for our goods in the international market is elastic. high capital costs of imported machinery. fish etc. The decline in production of semi-manufactured and manufactured goods reduces the exportable surplus and adversely affects the volume of trade. fabric and bed linen. Less Modernization of Machinery Since 1970’s. mainly due to nationalization of industries. Hong Kong and some other nations imposed antidumping duties on our cotton yarn. 9. Value of exports during 2010-11 is $ 24 billion. The share of value added goods must increase to earn over many years. raw wool. as tool for boosting. The share of value added goods must increase to earn foreign exchange and turn the trend of adverse balance of payment. exports are not effective. Above situation is showing that Pakistan faces a continuous deficit in its balance of payment CAUSES OF UNFAVOURABLE BOP -OR. Devaluation The repeated devaluation of rupee against US dollar has not helped in the increase of exports. It is showing a deficit of $ 8. being an agrarian country. 5. 10. Due to rapid rise in population and increased consumption habits. It is concentrated in relatively low value added products. Consumption Oriented Society People of Pakistan are mostly consumption oriented. the domestic manufactured goods are mostly consumed in the country. Anti-dumping Duties Japan. electricity.3 billion and its exports are $ 24 billion. during the last five years. The fall in production and decline in the quality of products has adversely affected exports. Its major exports are rice. has to import 4. Increase in the Sick Industrial Units The number of sick industrial units. Govt. Less Production of Value Added Goods The share of industry in the GDP is 25. There is availability of higher standard goods at lower prices in international market.

According to Economic Survey of Pakistan 2010-11. because labour is cheaper in Pakistan. 17. these industries can be set up at lower cost. The interest payment has adversely affected the balance of payment. TOT = [(Export Price Index ¸ Import Price Index) ´ 100] TOT = (296. edible oil and petroleum. Fall in Terms of Trade The import unit values are higher than the export unit values for the last over three decades in Pakistan.4 million in 2007-08. barriers like child labour. Pakistan will have to upgrade the standard of purity and quality to compete for its products in the international market. Import of Capital Goods Pakistan has to import capital goods for rapid industrialization of the country in order to build up the economy. It paid $ 7. particularly in the manufacturing value added sector has reduced export earnings. The advanced countries of the world have imposed technical barriers such as patents. The products of these industries can be exported. which increases burden on our BOP and it becomes adverse. ISO 14000 etc.5 billion from different countries and it pays interest on these loans regularly. has adversely affected our exports for the last years. terms of trade are 59. while it was $ 530 million in 1978-79. B. oil and petroleum etc. copyrights. EXPORT LED GROWTH 1.10 ¸ 446.3 indices. Rise in Oil Prices The sharp rise in the prices of oil particularly in 70’s and also in the beginning of 1980’s and 1990’s is taking a big amount of the foreign exchange earnings. MEASURES TO CORRECT ADVERSE BOP Measures to correct the deficit balance are of three types: A.. The heavy import of machinery has considerable increased the import bill and has adversely affected balance of payment. Expenditure on defense is Rs. 275 billion. Imposition of non-tariff. Our import bill of petroleum group is increased to $ 8670. on their imports. 13.8 billion as debts services charges during 2010-11. trade-marks and designs etc.61 % of our export earnings in 2005-06.. our BOP is unfavourable. The fall in the volume of production. A decline in terms of trade causes imbalance in the balance of payment. Increases in Import Payment for Fertilizer There is sharp increase in the import payments to the outside world due to increase in prices of fertilizers. Import Oriented Industry Some of our industries are based on the imported inputs and raw material e. Foreign Debts Servicing Pakistan has obtained about $ 59. 16. . Most of industries.UN-RESTRICTED IMPORT NEEDS 14. which were established for achieving the twin objective of earning and saving foreign exchange. 11. 12. 15.01) ´ 100] = 66. Defense Needs We have to purchase modern weapons for our defense at a very high cost from different countries. Our balance of payment shows debit due to high payments. 18.g. Political Uncertainty The political uncertainties in the industrial units have considerably affected the efficiency of the industries. Due to reduction in export earning. have been eating away roughly 30 % of aggregate import bill. Labour Intensive Industries Labour intensive industries should be established.39 indices Above computation is showing that we lost about 33.

3. 12. B. Manufactured Goods Instead of exporting primary goods like raw cotton. People should be educated to come out from the complex of foreign goods. Packing High quality packing is essential for promoting exports. ball pens. Population Control . Control of Smuggling Bara markets should be eliminated. Exchange control should be followed. Export Marketing Agencies should be made more active. the Govt. 5. 15. 7. 11. crockery etc. After atomic explosion. food products and electrical goods. electric fans. All these are playing their effective role to increase export and to correct the BOP. shoes. paper. steel. Foreigners will prefer to import from Pakistan because of low prices. Import of luxuries should be banned. edible oil and electrical goods are increased. Reduction in Export Duties This step will make our export competitive in the international market. cannot be sold abroad. 4. Rich people in our country are spending freely on unnecessary imported consumer items. Exchange Control Exchange control is also an important step to minimize the imports. leather goods. foreign exchange reserves are wasted. cycles. Joint Venture Establishing industries with joint venture of foreign investors can also push up the export. Thus. Export Development Fund and Export Processing Zones etc. Pakistan has already done this. There are Export Promotion Bureau. MISCELLANEOUS 13. Decrease in Consumption Taxes should be imposed to reduce the consumption of many items. So.2. The products of these industries can be sold in the foreign market. If home production of fertilizer. 8. is taking strict measures to eliminate markets of smuggled goods. all this should be restricted. 6. Quality Products Many of our goods cannot be exported because of poor quality. 9. it will not capture foreign market. there will be less need for such imports. electric motors. Pricing of Goods It is necessary for increasing exports that goods should be produced under optimal conditions and offered at competitive prices in international market. C. Immoral Practices Many Pakistanis have brought bad name to our trade because they export commodities of inferior quality than specified in agreements. Pakistan is needed to improve the quality of its products according to international standard. Pakistan should export manufactured goods like textiles and garments. Substitutes for Imported Items Import substitutes should be manufactured in the country. Import of Only Essential Items Only essential items should be imported which are needed for our industrial production. So. so that there is no wastage of foreign exchange to import of un-necessary and luxuries. If packing is not attractive and durable. REDUCTION IN IMPORTS 10. 14.

Sincere efforts should be made to decrease growth rate of population. . Conclusion: Achievement of surplus in balance of payment is difficult but not impossible. Many of our problems are arising due to fast increase in population. Government should control the forex and check the import of luxuries. It can achieve through installing import substitution and export promoting industries. People should be educated in this regard.