Economy of PakistanEconomy of PakistanBalance of Payments

Balance of Payments Balance of Payments “The balance of payments of a

country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time”

Balance of Payments Balance of Payments The balance of payment record is

maintained in a standard double-entry book-keeping method.

International transactions enter in to the record as credit or debit.

The payments received from foreign countries enter as credit and payments made to other countries as debit.

Balance of Payments Balance of Payments

Balance of Payment is a record

pertaining to a period of time;

Usually it is an Annual statement.

All the transactions entering the

balance of payments can be grouped

under three broad accounts.

Structure of Balance of Structure of Balance of Payment (BOP) Payment (BOP)

The Current Account

The Capital Account

The Financial Account

The Current Account (CA)The Current Account (CA)Current Account transactions

that usually transactions in goods and services.

A positive value for the current account is called a current account surplus.

A negative value is called a current account deficit.

The Current AccountThe Current Account

The current account mainly consists of 4 types of transactions:

1. Exports and imports of goodsExports of goods are credits (+)

to the current accountImports of goods are debits (-) to

the current account

The Current AccountThe Current AccountThe difference between exports

and imports of goods is called ' Trade Balance' or 'Balance of Merchandise Trade'.

Since the 1947's, Pakistan has a merchandise trade deficit except for one year.

The Current account (CA)The Current account (CA)

2. Exports and Imports of servicesExports of services are credits to

the current account (+)Imports of services are debits to

the current account (-).Pakistan has a net debit ($-

2,347mill) in services balance

The Current accountThe Current account

2. Exports and Imports of servicesThis category consists of items

such as ◦Tuition paid to universities by

international students,◦ Money spent on travel by tourists, ◦Banking, Insurance, Freight, Medical

services, Consulting Services etc.

The Current accountThe Current account3. Interest payments on international

investments Interest, dividends and other

income received on Pakistani assets held abroad are credits (+)

Interest, dividends and payments made on foreign assets held in the Pakistani are debits (-).

Pakistan has a net debit ($-2,655 mill) in the investment income account; more payments are made to foreigners than foreigners make to Pakistani investors.

The Current accountThe Current account4. Current transfers Remittances by Pakistani working

abroad, pensions paid by foreign countries to their citizens living in the Pakistan count as credits (+).

Remittances by foreigners working in the Pakistan, pensions paid by the Pakistan to its citizens living abroad, count as debits (-).

Pakistani has the only surplus in current transfers i.e. US$10.8 bill. (July-April 2011-12)

2. The Financial Account 2. The Financial Account (FA)(FA)It includes the purchase and sale of

financial assets.

Also includes government-owned assets such as ◦ Foreign reserves, ◦ Gold, ◦ Special drawing rights (SDRs) held with the

international monetary fund,◦ Private assets held abroad, and direct foreign

investment. Assets owned by foreigners, private and official, are also recorded in the financial account.

2. The Financial Account 2. The Financial Account (FA)(FA)The financial account consists primarily of 4

types of transactions:1. Foreign Direct InvestmentPurchases of Pakistani capital assets

(factories, machines, companies) by foreigners are credits (+)

Purchases of foreign capital assets (factories, machines, companies) by Pakistani residents are debits (-)

Sales of Pakistani capital assets by foreigners count as debits to the financial account (-)

Sales of foreign capital assets by Pakistani residents count as credits to the financial account (+)

2. The Financial Account 2. The Financial Account (FA)(FA)2. Portfolio InvestmentPurchases of Pakistani securities

(stocks, bonds, CDs, money-market accounts) by foreigners are credits (+)

Purchases of foreign securities (stocks, bonds, CDs, money-market accounts) by Pakistani residents are debits (-)

Sales of Pakistani securities by foreigners count as debits to the financial account (-)

Sales of foreign securities by Pakistani residents count as credits to the financial account (+)

2. The Financial Account 2. The Financial Account (FA)(FA)3. Other InvestmentsOther investment covers short-

and long-term trade credits; Loans;Currency and deposits; And other accounts receivable

and payable. Transactions covered under

direct investment are excluded.

2. The Financial Account 2. The Financial Account (FA)(FA)3. Other Investments Increases in loans & trade credits to

Pakistani residents by foreigners count as credits (+)

Increases in loans & trade credits to foreigners by Pakistani residents counts as debits (-)

Repayments of loans & trade credits to Pakistani residents by foreigners count as credits(+)

Repayments of loans & trade credits to foreigners by Pakistani residents counts as debits (-)

2. The Financial Account 2. The Financial Account (FA)(FA)4. Reserve AssetsIncreases in Foreign

Currency/Gold reserves held by central bank count as credits (+)

Decreases Foreign Currency/Gold reserves held by central bank count as debits (-)

Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments

3. The Capital Account 3. The Capital Account (KA)(KA)The major components of the

capital account are 1. Acquisition or disposal of non-

financial assets (for example, a physical asset such as land)

And non-produced assets, which are needed for production but have not been produced, like a mine

3. The Capital Account 3. The Capital Account (KA)(KA)2. One-sided Financial Transactions,

i.e. It includes transactions in which one country gifts financial assets to another country with no expectation of receiving anything in kind.

In today's world, this implies one major type of transaction - debt forgiveness and relief.

Forgiveness of Pakistani debt by foreigners count as credits (+)

Forgiveness of foreign debt by Pakistan entities count as debits (-)

Balance of Payments Balance of Payments EquilibriumEquilibriumBalance of Payments Equilibrium

Is defined as a condition where the sum of debits and credits from the Current Account and the Financial and Capital Account equal zero;

Current A/c + Financial A/c+ Capital A/c = 0

Static EquilibriumStatic Equilibrium In static equilibrium, exports

equal imports including exports and imports of services as well as goods.

Dynamic EquilibriumDynamic Equilibrium The condition for dynamic

equilibrium is that exports and imports differ by the amount of autonomous capital movements.

Types of BOP Types of BOP DisequilibriumDisequilibrium(a)    Cyclical disequilibrium,

(b)   Secular disequilibrium, and

(c)    Structural Disequilibrium

Structural Structural DisequilibriumDisequilibrium

It takes place due to structural changes in the economy affecting

demand and supply relations in commodity and factor market.

Structural disequilibrium in balance of payments persists for relatively longer

periods; as it is not easy to remove structural imbalance in the economy.

Important Causes Of Important Causes Of Structural DisequilibriumStructural DisequilibriumIf the foreign demand for a country's

products decline due to the discovery of cheaper substitutes abroad, then the country's export will decline causing a deficit.

If the supply position of a country is affected due to factors like crop failure, shortage of raw-materials, strikes, political instability, etc, then there would be the deficit in the balance of payments

Important Causes Of Important Causes Of Structural DisequilibriumStructural DisequilibriumA shift in demand due to the changes in

tastes, fashions, income, etc, would increase or decrease the demand for imported goods causing a disequilibrium in the balance of payments.

Changes in the rate of international capital movements may also cause structural disequilibrium

A war also results in structural changes which may affect not only goods but also factor of production causing disequilibrium in balance of payments.

CyclicaCyclical Disequilibriuml DisequilibriumWhen disequilibrium is caused due

to the changes in trade cycles, it is termed as cyclical disequilibrium.

It is possible that different phases of trade cycles like depression, boom, recession, etc, may disturb terms of trade and cause disequilibrium in balance of payments.

Important Causes Of Important Causes Of CyclicaCyclical l DisequilibriumDisequilibriumFor instance, during boom period, imports

may increase considerably due to increase in demand for imported goods.

During recession and depression, imports may be reduced due to fall in demand on account of reduced income.

During recession exports may increase due to fall in price.

During boom period, a country may face deficit in its BOP position on account increase in imports.

However, during recession its export may increase, and as such BOP position may show surplus.

Secular or Fundamental Secular or Fundamental DisequilibriumDisequilibriumSecular or fundamental

disequilibrium refers to a persistent and long-term deficit or a surplus in the balance of payments of a country

It occurs when there is a continuous increase in the stock of gold and foreign exchange reserves. There is a persistent surplus & vice-versa.

Pakistan’s BOPs positionPakistan’s BOPs positionCurrent account deteriorationIncreased importsLess exports Power shortagesFlood Problems

Current Account deficit:Current Account deficit:The current account deficit stood

at $ 3,394 million during July-April 2011-12

Mainly caused by trade and services account deficit

Current transfers (workers’ remittances) helped to avoid further deficit.

Current Account deficitCurrent Account deficitThe trade deficit expanded due to

the 14.5% growth in importsAnd the 0.1 percent increase in

exports;Thus widening the trade deficit by

49.2%.The major factor behind the

widening of the trade deficit was the sharp rise in the import bill due to the higher prices of crude oil.

Current Account deficitCurrent Account deficitThe services account deficit recorded

an expansion of $ 1,122 million.This deterioration in the services

account was primarily due to the 16.6 percent fall in services exports.

Pakistan witnessed a strong growth of 25.8% in 2011 and become the 5th largest remittances recipient developing country in 2011

Financial AccountFinancial AccountThe financial account posted a

surplus of $ 1,200 million.Foreign direct investment declined

in the telecommunication, financial business and power sector during the period due to energy crises and circular debt

However, the Oil & Gas Exploration remained the major attraction during current fiscal year as its share in overall FDI stood at 69.8 percent.

Factors Influencing Factors Influencing Pakistan’s BopPakistan’s BopConcentration of Exports The major share of Pakistan’s export is

still concentrated in a only three items (cotton manufactures, leather and rice).

Due to unfavorable natural conditions, decline in Agricultural products badly effects textile manufacturing

Concentration of Imports Pakistan’s exports are mainly

concentrated in 8 commodities. Major import items are Machinery,

petroleum & petroleum products, Edible oil, chemicals and Transport equipment.