Balance of Payment

Ghulam Abbas (Pakistan)
GAsad_sa@hotmail.com +92 300 9001533

Balance of
Payment
Of Pakistan
Table of Contents
 Introduction
 Balance of payment in last few years

 Balance of Payment-current situation
 Reason for Un-favorable B.O.P.
 B.O.P. and foreign Remittances
 B.O.P. and Services Sector
 SBP Governor’s statement
 Suggestions
 Conclusion
Introduction
1. Balance of payments is a statistical statement designed to provide for
a specific
period of time a systematic record of an economy’s transactions with
the rest of the world.
It is a Systematic Statement of all the economic transactions between the

country and the rest of the world.
Its major components are the Current Account and

the Financial Account.
 Debit: The spending of foreign currency is Debit

and it is a negative item.

 Credit: If a transaction earns foreign exchange for the nation, It is recorded
as a plus item and it is a Credit.
 Generally Imports are debits and exports are credits
 If credits are more i.e. exports are more, than it is a positive sign for the
economy and it is known as Favorable B.O.P.
 If debits are more i.e. imports are more, than it is a negative sign for the
economy and it is known as UN Favorable B.O.P.
 Pakistan has a Un Favorable B.O.P. for many years due to dependency

on imports.
 B.O.P. Comprises of:

Current Account and Financial Account.
 Current Account includes: Merchandise (Import/Export), Services,

Investment Income and Unilateral Transfers (Foreign Aid etc)
 Financial Account Includes Loan transactions, Investment Flows, Short

term capital and other related items.
 Pakistan is ranked 19 out of 31 countries in the Asia Pacific region.
China, India, Bangladesh and Iran are much better placed than Pakistan.
Despite some success in achieving steady economic growth and reducing

poverty, Pakistan lags significantly behind
other countries in the region.
B.O.P. in the last few years
Current Account: ($ Million)
Current Account 2006- 2007- 2007- 2008-09

07 08 08
Balance -6878 -13735 -11173 -8547
Financial Capital Account: ($ Millions)
July-June July-April
Financial & Capital 2006-07 2007-08 2007-08 2008-09
Account
Balance 10276 8303 6290 3608
CURRENT SITUATION OF
B.O.P.
Today, Pakistan faces a severe balance-of payments crisis and can cover
only about four-six weeks, worth of imports.

The Current account deficit has improved by $ 2.6 billion and stood at $ 8.547
billion during July-April 2008-09 as against $
11.173 billion in the corresponding period of last
year, thereby showing an improvement of 23.5
percent.
The Financial and Capital account stood at $ 3608

million during July-April 2008-09 as against $6290
million in the corresponding period of last year which shows a decline of $
2682 million.
1999 2006 2008

US $ 39 B US $ 36 B US $ 45 B
The Government paid nearly $ 3 B in annual debt servicing payments in

the last FY, this year it will be even more. Together the debt servicing
payments amount to nearly 13.8% of the entire budget of $ 29 Billion.
Reason for Un-favorable

B.O.P.
Following are the main causes of Un favorable BOP with reference to
Pakistan:
1) Revenue oriented tariffs:

The import and export tariffs of Pakistan are by and large revenue oriented.
The balance of payment reasons are no doubt taken into account in the
determination of import and export duties. However, there are numerous
anomalies in these tariffs. There are cases where the raw materials for a
finished article are taxed at such a high rate that it is cheaper to import the
finished articles rather than import the raw materials and produce the finished
articles locally. In cases like this, there can be no possibility for producing
such articles for export.
The import and export tariffs need a thorough revision from the point of view
of minimizing the tax element in the cost of production. The approach should
be to tax consumption but not production.
2) Adverse terms of trade:

The TOT has a tendency to move against us. This is because of this fact that
prices of our exports decreasing the world market while the prices of our
imports are constantly rising. The prices of our
exports fall because we export raw materials and
semi-manufactured goods which cannot be stored
for a long time. Our cotton and leather are facing
the competition of artificial and synthetic fiber from
China, Malaysia, Korea, etc. On the other hand,
the prices of our import commodities are rising
because they are finished and final products and
can be disposed in the market very quickly. In
such state of affairs, our international receipts go on falling while our
payments go on increasing. Accordingly, the deficit is sure to occur.
3) Import substitution policy of Pakistan:

The emphasis of Pakistan’s industrial policy has been more on import
substitution than on export promotion. The position of domestic industries
results in higher prices for the consumer. But what is worse is that industries
having a sheltered domestic market tend to become inefficient, because, in
the absence of foreign competition, there is no incentive to reduce their
production costs. The export industries, on the other hand, have to be very

efficient in order to be able to compete in the world market, for they don’t
have the luxury of a sheltered market at home, in which they can thrive at the
cost of the consumer. Besides, some of the export industries are much more
labor intensive than the import substitution industries.
4) Export of primary commodities:

The main factor for the disturbing export performances is the adverse trend in
the terms of trade. But the vulnerability to the TOT shock is the result of
heavy dependence of the country’s export earnings on primary commodities
like cotton, rice, and semi-manufactured goods, which are subject to frequent
price fluctuations in the world market. To import stability to the country’s
export trade, it has been suggested times and again that the export of
manufactured goods, for example, textiles, automobiles, heavy engineering
goods, etc., should be increased.
5) Capital account problem: The deficit in Current Account of

BOP may be washed out by a surplus in capital account. But this is not the
case with Pakistan. We have to face the following problems relating to capital
account:
 The foreign official loans are specific and tied in nature and are
attached with political interference and heavy rates of interest.
 A lot of amount is spent on repayment of loans and debt servicing.
 The private investors are still hesitant in making investment in our

country because of several reasons, like political instability, lack of
proper infra-structure, lack of energy generation plants, involvement of
official procedures, and the element of stubbornness in the country.
6) Trade restrictions of developed countries:

The trade barriers raised by developed countries against the import of

manufactures especially on agricultural products by the developing countries
is one of the important factors preventing greater production and export by
some industries in Pakistan, particularly the cotton textile industry. The
dismantling of these barriers through negotiations can go a long way in
increasing Pakistan’s exports of manufactured goods.
7) Inflation:
Inflationary conditions are a serious obstacle to the promotion of exports.
Inflation results in a rise in the domestic cost of production so that the goods
produced cannot compete in the world market, if the rate of exchange is not
suitably adjusted. So the control of inflation is essential for keeping Pakistani
goods competitive and for promoting exports. It has not been possible to
control inflation in Pakistan even in recent years.
8) Ever-increasing demand for imports:

Our socio-economic set-up is import and ultra import biased. People have
craze to purchase imported goods. Accordingly, the demand for imported
vehicles, consumer durables, electronics, etc. is increasing day by day.
Moreover, the increased population, urbanization and demonstration effect
has necessitated the increase in demand for imported goods.
9) Political instability:
The development of the economy depends on the political circumstances of
that country. Pakistan has been chronically suffered from different political
shocks since her independence. Our exports and BOP are the clear reflection
of these political instabilities. For example, during 1988-89, exports were
affected by the political uncertainty and disturbances during the greater part
of the year. The events starting from the dissolution of National Assembly on
29th May 1988 made a deep imprint on the psychology of business
communities.
B.O.P. AND FOREIGN

REMITTANCES
How They Have Declined
FY 2007-08 FY 2008-09 FY 2009-10

(July – Nov.)
US $ 5.49 B US $ 6.5 B US $ 2.97 B
Problem
Pakistan will face a serious B.O.P. problem next year partly because:
The United States has not reimbursed over $ 1.2 billion the country spent on
the war on terror.
Under the Coalition Support Fund the U.S. reimburses Pakistan for terrorism
related operations.
The govt. has received $ 447 million since Sep. 2008 leaving a balance of
over $ 1billion.
FY 2005-06 FY 2006-07 FY 2007-08

(July – Dec)
US $ 15.18 B US $ 10.83 B US $ 9. 34 B
The B.O.P. and Services

Sector
FY 2011
(Millions US $)
Period Goods Services Income Current Total

Transfers
Cred Deb Cred Deb Cred Deb Cred Deb Cred Deb Net
it it it it it it it it it it
July-10 1657 2918 296 560 55 286 1133 3 3141 3767 -626
Aug-10 1808 2922 319 556 60 256 1174 5 3361 3739 -378
Sep-10 1776 2366 377 588 70 284 1435 3 3658 3241 417
Oct-10 1835 2609 395 662 61 256 1274 9 3565 3536 29
Nov-10 1955 2804 526 585 59 506 1342 4 3882 3899 -17
Dec-10 2094 3091 1199 656 56 259 1264 6 4613 4012 601
FY 2010
(Millions US $)
Transfers
July-09 1554 2811 249 566 46 291 1177 3 3062 3671 -645
Aug-09 1467 2171 313 477 28 261 1117 6 2925 2915 10
Sep-09 1599 2447 276 513 32 233 1364 30 3271 3223 48
Oct-09 1627 2748 348 681 59 259 1068 4 3102 3692 -590
Nov-09 1431 2191 322 553 26 290 1002 3 2781 3037 -256
Dec-09 1620 2717 351 618 54 483 1098 7 3123 3825 -702
Jan-10 1627 2526 305 491 67 275 782 5 2781 3297 -516
Feb-10 1544 2333 648 525 51 251 887 5 3130 3114 16
Mar-10 1854 2508 281 587 69 362 1028 5 3232 3462 -230
Apr-10 1815 2892 603 602 41 352 1158 23 3617 3869 -252
May-10 1716 2646 1065 579 45 468 943 13 3769 3706 63
Jun-10 1778 3065 387 633 44 306 1360 6 3569 4010 -441

FY 2009
(Millions US $)
Transfers
July-08 1980 3373 261 743 65 405 1017 8 3323 4529 -
1207
Aug-08 1773 3162 203 816 53 391 833 4 2862 4373 -
1511
Sep-08 1958 3694 669 833 92 539 858 6 3577 5072 -
1495
Oct-08 1365 3243 328 839 97 448 374 8 2164 4538 -
2374
Nov-08 1576 2233 250 577 106 675 926 31 2858 3516 -658
Dec-08 1438 2601 363 605 95 435 1157 5 3053 3646 -593
Jan-09 1280 2141 349 448 85 354 1019 12 2733 2955 -222
Feb-09 1500 1884 198 458 53 358 1046 3 2797 2703 94
Mar-09 1451 2251 230 483 47 440 1045 16 2773 3190 -417
Apr-09 1496 2370 275 542 66 381 859 2 2696 3295 -599
May-09 1496 2002 682 523 51 486 1090 5 3319 3016 303
Jun-09 1808 2793 298 620 64 369 1032 2 3202 3784 -582
ITEM 2006-07 2007-08

Credi Debit Net Credi Debi Net
t t t
Services 4140 8310 -4170 3769 8199 -4430
Transportation 1102 3177 -2075 1080 2863 -1783
Passenger 646 521 125 656 453 203
Freight 127 2224 -2097 124 2083 -1959

Travel 277 1625 -1348 216 1411 -1195
Business 15 62 -47 8 57 -49
Personal 262 1563 -1301 208 1354 -1146
Communication Services 123 98 25 198 101 97
Insurance Services 30 126 -96 29 131 -102
Financial Services 74 135 -61 70 133 -63
Computer and Information 104 90 14 72 44 28
services
Royalties 41 115 -74 33 99 -66
Other Business Services 459 2557 -2098 391 2953 -2562
SBP Governor’s Statement
The Governor State Bank of Pakistan recently said that Pakistan was not
facing any balance of payments (BOP) difficulties during
the current fiscal year as the IMF, world Banks and Asian
Development Bank would soon release their loans for the
country.
 Foreign Direct Investment may increase if there is

political stability and continuation of policies.
 If the IMF, World Bank and Asian promised, than our B.O.P. may show
some improvement.
 Furthermore, if the U.S reimburses $ 1.2 billion to Pakistan regarding

War on terror, it will certainly boost our B.O.P.

 Friends of Pakistan have promised significant monetary support. If it
realizes than it will have a positive effect.
 Imports are expected to decrease by 15%. If it happens it will have a

positive effect on B.O.P;
 Pakistan’s B.O.P. is relying on foreign element and support. If it

realizes than B.O.P. deficit would decrease otherwise its future looks
bleak.
Suggestions
The following steps should be taken in order to

remove the deficit or disequilibrium in balance of
payment of Pakistan:
1) Exports:
The enhancing of exports will result in increasing
the supply of foreign exchange in the country. In order to promote exports
following steps should be taken:
 The proportion of manufactured goods be increased and that of

primary and semi-manufactured goods be decreased.
 In addition to manufactured exports, the non-traditional exports like

food processing, dairy farming, vegetables and fruit canning, and dry
fruits be promoted.
 More and more delegates are sent abroad so that new markets could
be explored. The export exhibitions and fairs are arranged in the big
trading centers of the world. The establishment of Expo Centers in
Karachi and Lahore is a good step. Such expo centers should also be
established in Rawalpindi-Islamabad, Faisalabad, Peshawar and the
future city of Gwadar.
 The quality and cost of the export goods be improved. Management

philosophies like Continuous Improvement, TQM, Kaizen, and 3Es are
adopted.
 The exporters are provided with compensatory and concessionary

finance along with rebates, tax holidays and bonuses, etc. Export
processing zones be increased and expanded in all the major cities.
2) Imports:
Our imports need proper check. Imports of only those goods should be
allowed duty-free that are used in the production of export goods. Following
steps should be taken:
 The imports of luxurious items should be restricted. The Government

can impose heavy tariffs on foreign goods or even ban the imports of
certain foreign goods that are deteriorating the BOP situation.
 The imports of capital goods and engineering goods should be

allowed, which are necessary for the economic development.
Moreover, the Government should also allow the imports of those
goods duty-free that are used in the production of export goods.
3) Increase in Invisible Receipts and Decrease in

Invisible Payments:

The efforts be made to reduce the invisible expenditures. In this respect, the
expenditures faced in respect of foreign embassies and foreign tours be
decreased. The facilities of higher education regarding science and
technology, medicine and surgery, business and economics, performing arts,
etc. be provided for foreign students, especially from India, Afghanistan, Iran,
Sri Lanka, Saudi Arabia, Bangladesh, independent Muslim states of Russia
and UAE. In this way we can earn a lot of foreign exchange and remove the
deficit in balance of payment. Moreover, the domestic airlines, shipping
services, locomotives, recreational places including resorts, historical places,
shopping places, etc should be made attractive for foreign tourists. Most of
the countries are earning through their tourism and cultural sector, for
example, Sri Lanka, Maldives, Malaysia, Indonesia, Singapore, Thailand,
UAE, Egypt, Turkey, etc.
4) Industrialization and engineering:

Reduction of BOP depends on our rapid industrial production and the quality
of our products. We need to fully utilize the existing capacity of our industries,
and to promote the process of industrialization and development of
engineering sector. The Government can establish more technical and
engineering institutes and allow foreign faculties. The Government can also
reduce sales tax or even allow tax exemptions on production and sale of
machineries and heavy engineering goods including electric generators.
5) Explore new vistas:

The disequilibrium in BOP can also be corrected by exploring new vistas and
diverting the resources to the production and sale of such new exportable
goods and services. For example, the Government can find handsome export
earnings in the new fields of genetic engineering, IT, anti-terrorism
technology, computer gaming (like in South Korea), computer-based surgery,
or even in the field of fashion designing, art and culture including sports.
Conclusion
Beggars are never given choices……..

Leaders made us beggars, they have ‘Kashkool’ in their hands and now they
are begging in front of IMF, US, Saudia, China, Friends of Pakistan, Iran,
Germany, NATO……….!!
Pakistan's payments problems have been chronic since the 1970s, with the
cost of oil imports primarily responsible for the trade imbalance. The growth of
exports and of remittances from Pakistanis working abroad (mostly in the
Middle East) helped Pakistan to keep the payments deficit in check. Since the
oil sector boom began subsiding in the early 1980s, however, remittances
declined. Remittances from overseas workers peaked at $2.9 billion in
1982/83, and then dropped to $1.4 billion by 1997/98 and $1 billion from 1999
to 2001. This trend especially accelerated during the Gulf War, when nearly
80,000 Pakistanis in Kuwait and Iraq lost their jobs. Only about 25% of these
jobs had been regained a year after the end of the conflict. Increased imports
and softer demand for Pakistan's textiles and apparel in major markets also
caused the current account deficit to further increase. The balance of
payments position weakened in 1995/96 as imports grew by 16% and exports
by only 6%. The rupee was devalued by 11% during 1995 and 1996 to
encourage exports. Nevertheless, foreign reserves fell to around $800 million
by mid-1997. By 2000, foreign debt equaled 100% of GDP. The government
took steps in the early 2000s to liberalize and deregulate the exchange and
payments regime. Pakistan moved to a dual exchange rate system in 2000.
An increase in liquid foreign exchange reserves in 2001 was due in part to
outright purchases from the kerb market and inflows from international
financial institutions. Export growth in 2000/01 was primarily due to higher
exports of primary commodities such as rice, raw cotton, and fish, and other
manufactures such as leather, carpets, sporting goods, and surgical
instruments. Imports increased in 2000/01 primarily due to higher imports of
petroleum and petroleum products, and machinery.

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Ghulam Abbas (Pakistan)

GAsad_sa@hotmail.com +92 300 9001533