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Group ³D2´
Mehreen Kanwal Mudassar Shahid Khadija Rafiq (04) (04) (08) (08) (28) (28)


What is Balance of payment ?
³Balance of payments is a record of economic transactions between the residents of one country and the rest of the world during the course of one year.´ year.

The balance of payments like all balance sheets must balance. The balance. 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 out flow of foreign currency are placed on the debit side. side.

Deficit & surplus: surplus:
Deficit = Debit > Credit Surplus = Debit < Credit The deficit in the current account is met from reserves of gold and foreign Currencies and borrowing from the rest of the world. world.

Purpose of BOP: urpose BOP:
Its main purpose is to provide the govt. govt. information about the international economic position of the country and to help make decisions about monetary and fiscal issues, on the one hand, and about trade and payments on the other. other.

Main items OF BOP: BOP:
The main items which are included in the balance of payments are: are: 1) The Current account 2) The Capital account 3) The official reserve assets account

1). The Current account:
The current account is composed of: of: A). A). Imports and exports of visible goods B). B). Services such as expenses on travel, transport, insurance, fees, commissions C). C). Unrequited transfers, donations, pensions grants etc. etc.

2). Capital account: account:
Capital account is made up of a variety of capital movements between one country and the rest of world during a given period of time which is a year. The capital year. movements of short and long term loans between the countries are carried out by Government, firms and Households. Households.

3). The official reserve assets account: account:
Official reserve transactions consist of movements of international reserves by governments and official agencies to accommodate imbalances arising from the current and capital accounts. accounts.

Pakistan¶s Balance of Payments:
Pakistan¶s balance of payments situation has not been satisfactory since independence. The country independence. with the exception of five years i.e. (1950-51, 1954-55, 1955-56, 1958-59, 1950-51, 1954-55, 1955-56, 1958-59, and 1959-60) has been running a 1959-60) persistent deficit in its balance of payments on current account. account.

The five years in which Pakistan¶s current account showed surplus are as follows: follows: 

Surplus of Rs. 578.o crore in 1950 ± 51 Rs. 578. Surplus of Rs. 09.9 crore in 1954 ± 55 Rs. 09. Surplus in 1958 ± 60  

Current situation:
Currently Pakistan¶s balance of payments showed a deficit in its current account balance during following years. years. year 20042004-05 20052005-06 BOP (million dollars) - 1,534 - 4,990

Factors contributing towards adverse balance of payments: payments:
1). Import of capital goods. goods. The heavy import of machinery, technocrats etc, has considerably increased the import bill and has adversely affected the balance of payment on current account. account.

2). Rise in oil prices. prices.
The sharp rise in the prices of oil particularly in 70,s and also in the 70,s beginning of 1980,s and 1990,s and 1980,s 1990,s from 2003 onward is taking a big chunk of the foreign exchange earnings. earnings.

3. Increase in import payments for fertilizers etc. etc.
Due to increase in the prices of fertilizers, machinery, petroleum, edible oil etc., there is a sharp etc. increase in the import payments to the outside world. The balance of world. payment has, therefore, been adversely affected. affected.

4) . Consumption society: society:


The Pakistanis as a whole are consumption oriented. The import oriented. of consumer goods is about 16% of 16% the total imports. Most of the imports. consumers goods imported from abroad can be easily manufactured in the country and can ease the situation in the balance of payments .

5). Import material: material:



Most of the industries which were established for achieving the twin objective of earning and saving foreign exchange have been eating away roughly 3% of the aggregate import bill. The bill. excessive import of industrial inputs is a strain on the balance of payments on current account. account.

6). Deterioration in terms of
trade: trade:
In Pakistan, the import unit values are higher than the export unit values for the last over three decades. A decline in term decades. of trade causes imbalance in the balance of payments. payments.

7). Higher payments freight insurance. insurance.


Pakistan has to make higher payments for non factors services such as freight, insurance, transports, travel etc. etc.

8. cotton-rice led growth: cottongrowth:
Pakistan is heavily depending on the exports of two primary commodities cotton and rice and textile manufactures. manufactures. If there is any natural disaster, decline in exports causes an imbalance on the current account. account.

9). Domestic developments. developments.
A number of Domestic developments like political uncertainty, floods, nationalization of industries, shortage in availability of credit to private sector, labor, inefficient handling of vessels and cargo at Karachi airport, have cut down industrial production, reduced exports and have enlarged the import bills. All bills. these have contributed in making a persistent deficit in the balance of payments .

10) 10). International factors: factors:
The sluggish growth in world market imposition of anti dumping duties, propaganda about child labor, fall in the production of large scale manufacturing, over valuation of Pak. Pak. rupee etc. have reduced the etc. export earnings of Pakistan. Pakistan.

Measures for correcting the adverse balance of payments:
The adverse balance of payments can be decreased in three ways: ways: (A). (A). Export led growth. growth. (B). (B). Reduction in imports (C). (C). Reduction in invisible growth. growth.

A). Export led growth
The following measures should be adopt for increasing exports alleviating the balance of payments problems. problems. 

Diversification of exports Restoration of sick industries Production of high quality goods Attractive packing Reduction in export duties Creation of export agencies

B). Reduction in imports: imports:
The decline in the import of consumer goods and industrial raw material which we can produce within the country can greatly reduce the deficit gap. gap.

C). Reduction in invisible imports: imports:
The payments on invisible imports like shipping, insurance, banking services, expenses on diplomats etc. etc. has been on increase. It has to be increase. curtailed down. down.


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