International Financial Management

BALANCE OF PAYMENTCURRENT ACCOUNT OF PAKISTAN

MUAZZAM IMTIAZROLL NO. 22MBA 4th (Morning) – A

Department of Management SciencesThe Islamia University of Bahawalpur Rahim Yar Khan Campus

Balance of Payment

“It is a systematic record of all the economic transactions between domestic country and rest of the world is known as Balance of Payment.”

It includes the payments and receipts during exports, imports, foreign remittances, inward or outward investments etc…

Balance of Payment is the difference between Current Account and Capital account of a country.

The Current Account further includes Trading Account, Service Account, Income Account and unilateral transfers and other related items.

The Capital account includes Loan transactions, inward or outward investments, short-term capital and other related items.

The actual figures for balance of payment can be obtained at the year end therefore it is projected based on the previous data and assisting facts and figures.

Pakistan’s current account balance in the fiscal year 2008-2009 was USD 8,547 unfavorable, debit or negative. In the same year the capital and financial account balance was USD 3,608 favorable or positive which lead to the Balance of payment to be USD 4,939 deficit.

In fiscal year 2009-10, current account balance is projected to be USD 4,911 unfavorable or negative. This means that we are going to face deficit balance of payment this year as well.

Why Pakistan is facing deficit balance of payment?

The major reason is and has always been the imports of luxurious and high cost goods for the elite class of the country that increases the import bill to the dangerous level where as on the other hand the exports are on decreasing day by day. The textile industry was the backbone of our exports but now it’s suffering from various crises among them the power crisis is the major issue.

Apart from import bill, the global recession in the recent year has severely affected the business and trade all over the world which also affected Pakistan.

The investments in the country have declined to the lowest and the major reason is the law and order situation prevailing in the country. The self-imposed war against terrorism has made our situation worse as no one is

willing to make investments in the country.

The local industry is facing hard times as we don’t have sufficient energy resources available. It has decreased the production of goods and ultimately we have to buy them from other countries which add to our import bill and increase the supply of our currency.

Pakistan is agriculture based country and we have one of the finest and largest canal system. But would you believe that we need to import sugar, wheat and other basic crops to meet the demand in the country? In recent year Pakistan needed to import tons of sugar and wheat just because of the mismanagement of resources and water shortage created by India by building dams on rivers which are flowing towards Pakistan.

Energy crisis needs to be separately mentioned because it not only affected the Textile industry but overall the economic activities in the country are paralyzed. And we need to put some serious efforts to eliminate it otherwise the consequences will be dangerous.

Political instability in the country has always affected the growth of the country and it does affect the trade and ultimately the current account of the country.

The government policies are the tools to take corrective actions to make the things stable and on the track but wrong policies may lead to adverse affects. We have been lacking in good policies regarding the economy of the country.

Inflation, as we’ve discussed in class is a factor which affect not only the trade but the foreign exchange as well. The increasing rate of inflation will lead to the surplus supply of the currency and it would depreciate the currency value. Once the currency is depreciated our current account will suffer as we have to pay more to buy the same commodities and our import bill will rise.

Conclusion:

When we look at the figures of Balance of Payment, we observe that the Exports are decreasing and Imports are increasing. The income from service sector has also declined in recent times for some reasons. The foreign remittances or unilateral transfers has also decreased as the people have no more trust on the Pakistan and increasing rates of taxes are also a reason for people to avoid sending money back to Pakistan instead invest it in foreign country. The FDI has trembled down as the law and order condition is getting worse day by day. Our current account balance is apparently better than the previous year but we should not ignore that fact that it is projected data and real figures could shuffle around due to several reasons.

References:

Wikipediahttp://en.wikipedia.org/wiki/Balance_of_payments

State Bank of Pakistan websitehttp://www.sbp.org.pk/publications/bop/index.htm

Planning and Development Commission of Pakistanhttp://www.planningcommission.gov.pk/