Project of eop (balance of payment)


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Project of eop (balance of payment)

  1. 1. BALANCE OF PAYMENTProject: Balance of Payments (BOP) & Balance of trade (BOT) of PakistanSubmitted to: Mam Farah Naz NaqviSubmitted by: Mehwish Batool M10MBA009 Aroosh Mehmood M10MBA026 Naveen Saba M10MBA010 Hailey College of Banking & FinanceHailey College Of Banking And Finance Page 1
  2. 2. BALANCE OF PAYMENT TABLE OF CONTENTSConcept of Balance Of Payment 4Definitions 4Balance Of Payment Equilibrium 5Differentiation Between BOT And BOP 5Significance of BOP 6Purpose of BOP 6Working of BOP 6 Credit Side Items 7 Debit Side Items 7Components Of Balance Of Payment 7 Current Account 7 Capital And Financial Account 8 Official Reserve Account 9Types Of Equilibrium 9Pakistan’s Balance Of Payment 13History 14Causes Of Adverse Balance Of Payment 17Procedures To Correct Balance Of Payment 19Current Position 21Summary Of BOP FY-11 24Exports & Imports with Different Countries 25Improvements 27Comparison Between Imports And Exports 29Real GDP of Some Countries 30Conclusion 31 Hailey College Of Banking And Finance Page 2
  3. 3. BALANCE OF PAYMENT BALANCE OF PAYMENTHailey College Of Banking And Finance Page 3
  4. 4. BALANCE OF PAYMENTConcept Of Balance Of PaymentWhen all components of the BOP accounts are included they must sumto zero with no overall surplus or deficit. For example, if a country isimporting more than it exports, its trade balance will be in deficit, but theshortfall will have to be counter-balanced in other ways – such as byfunds earned from its foreign investments, by running down central bankreserves or by receiving loans from other countriesThat why it is known as balance of payment. DEFINITIONSGENERAL DEFINITION:Balance of payments (BOP) accounts are an accounting record of allmonetary transactions between a country and the rest of the world for aspecified period, usually a year.These transactions include payments for the countrys exports andimports of Goods, Services, Financial capital, and Financial transfers.GENUINE DEFINITION:According to the IMF publication ‘BALANCE OF PAYMENT MANUAL’describes the concept in the following terms:“The Balance of Payment is a statistical statement for a given periodshowing: 1. Transactions in goods and services and income between an economy and the rest of the world; 2. Changes of ownership and other changes in that country‟s monetary gold and claims on liabilities to the rest of the world; and 3. Unrequited transfers and counterpart entries that are needed to balance, in the, any entries for the forgoing transactions and charges which are not mutually offsetting”.BALANCE OF PAYMENT EQUILIBRIUMThe “balance of payment equilibrium” (bpe) is defined as,Hailey College Of Banking And Finance Page 4
  5. 5. BALANCE OF PAYMENT the situation when trading among different countries is such that thetrading partners remain debt free from each other over a reasonablenumber of years.In other words, the value of a country‟s imports is equal to the value of itsexports.In order to put the bpe model into practice, the trading partnerswould have to establish and meet numerical goals for their exports andimports. The U.S., for example, should have exported $726 billiondollars worth of products more in 2005 to bring its balance of trade andpayment deficits to zero.“Equilibrium is that state of balance of payment over the relevant timeperiod which makes it possible to sustain an open economy withoutsevere unemployment on a continuing basis.”DIFFERENTIATION BETWEEN BOT & BOPBalance of trade refers only to the merchandise balance or balance on„visible transactions‟ alone. Visible items refer to the commodity exports and imports entering the balance of trade. They are visible because they are recorded at thecustoms barriers of the country.On the other hand, the balance of payments refers to the sum of both thebalance on „visible transactions‟ as well as„invisible items‟  It also includes capital and financial accounts.  Invisible items refer to the imports and exports of services.  Such services may be of various kinds for which payments have to be made or received, For Example: 1. transport charges, 2. shipping freight, 3. passenger fares, 4. harbour and canal dues, 5. commercial services (fees and commissions), 6. financial services (brokers‟ fees) and 7. services connected with the tourist traffic and 8. Payment of interest on external debt. As against the commodity or merchandise transactions, which are visible, these services are called invisible items of the balance of payments as they are not recorded at the customs barriersSIGNIFICANCE OF BALANCE OF PAYMENT It is the basic instrument that measures the international transaction of acountry during specific period.Hailey College Of Banking And Finance Page 5
  6. 6. BALANCE OF PAYMENT Bop is one of the major indicator of a country‟s status in the international market. Bop depict the true picture of a country. The rise of global financial transactions and trade in the late-20th century spurred bop and macroeconomic liberalization in many developing nations. Bop is very important in the regard that it tell us about our short term and long term asset. Bop tell us about the surplus and deficit regarding our transaction  The rise of global financial transactions and trade in the late- 20th century spurred BOP and macroeconomic liberalization in many developing nations  If it is deficit the sum is counterbalanced by an accumulation of official net liabilities, so the country sees its official reserve assets decline.So throuh the information of deficit and surplus we can make Thecorrective measures which Is very important for a country BOP state the intenational economic relation of a country. A guide to its monetary, fiscal and xchange rate. Inform gov about the international economic position of a country to assist in reaching the correct decision. To know the influence of foreign trade on national economy Is currency becomer weaker or stronger? How effective are monetary and fiscal policies?PURPOSE OF BOP:The main purpose is to provide the government information about theinternational economic position of the country and to help makedecisions about monetary and fiscal issues and about trade andpayments.WORKING OF BOP:It is a nature of a balance of payment system that it should operatesimilarly to the balance sheet of a company. So,  Receipts from a country credit side  Payments to a country debit sideCREDIT SIDE ITEMS ARE;Hailey College Of Banking And Finance Page 6
  7. 7. BALANCE OF PAYMENT  Exports of goods and services,  Un requited or transfer receipts in the form of gifts etc,from foreigners,  Borrowings from abroad ,  Foreigners direct investment, and  Official sale of reserve assets including gold to foreigner countries and international agencies. DEBIT SIDE ITEMS ARE;  Imports of goods and services,  Transfer payments to foreigners,  Lending to foreigners countries  Investments by residents in foreign countries, andOfficial purchase of reserve assets or gold from foreign countries andinternational agencies.COMPONENTS OF BOPs ACCOUNT The Balance of Payment for a country is the sum of the; 1. Current account 2. Capital and financial account 3. Official reserve assets account1. CURRENT ACCOUNT The current account is the sum of  Net Sales from trade in goods and services,  Net Factor Income (such as interest payments from abroad),and  Net Unilateral Transfers from abroad (such as gifts and foreign aid). RESULTS: Positive Net Sales corresponds to a Current Account Surplus. Negative Net Sales corresponds to a Current Account Deficit.Hailey College Of Banking And Finance Page 7
  8. 8. BALANCE OF PAYMENTWHAT SHOULD WE DO TO IMPROVE CURRENTACCOUNT:The current account should increase if; 1. The domestic currency depreciates, 2. Domestic GDP decreases, or 3. Foreign GDP increases.EFFECTS: 1. Domestic currency depreciation makes domestic goods relatively cheaper, boosting exports relative to imports. 2. A decrease in domestic GDP reduces domestic demand for foreign goods, lowering imports without affecting exports. 3. An increase in foreign GDP increases foreign demand for domestic goods, increasing exports without affecting imports.FORMULA:Current Account = Trade Balance+ Net Factor Income from Abroad+ net Unilateral Transfers from Abroad2. CAPITAL ACCOUNTThe capital account records the net change in ownership of foreignownership of domestic assets.Capital account is now also known as the financial account .It includes; Loans and investments between the country and the rest of world (but not the future regular repayments/dividends that the loans and investments yield; those are earnings and will be recorded in the current account). All international trade transactions( of goods and services), All international unilateral transfers (gifts and foreign aid).FORMULA:Financial Account = Increase in foreign ownership of domestic assets-Increase of domestic ownership of foreign assetsHailey College Of Banking And Finance Page 8
  9. 9. BALANCE OF PAYMENT3. OFFICIAL RESERVE ASSETS ACCOUNTThe official reserve account records the governments’ current stockof reserves.Official reserve transactions consist of movements of internationalreserves by government and official agencies to accommodateimbalances arising from the current and capital accounts.Reserves include; Official Gold Reserves, Foreign Exchange Reserves, and IMF Special Drawings Rights.Countries who try to control the price of their currency will have large netchanges in their official reserve accounts.Some of the most extreme examples include CHINA and JAPAN.In 2003 and 2004, Japan had an outflow of reserves, yen, by morethan equivalently one third of one trillion US dollars. TYPES OF BOPs EQUILIBRIUMThere are two types of BOP equilibrium, i.e, Static equilibrium anddynamic equilibrium Static EquilibriumStatic Equilibrium The distinction between static and dynamic equilibrium depends upon the time period. In static equilibrium, exports equal imports including ; Exports and imports of services as well as goods The other items on the bops – short term capital, long term capital and monetary gold are on balance, zero.Not only should the bops be in equilibrium. The foreign exchange ratemust also be in equilibrium.Dynamic Equilibrium The condition of dynamic equilibrium for short periods of time is that exports and imports differ by the amount of short-term capital movements and gold (net) and there are no large de stabilizing short-term capital movements.Hailey College Of Banking And Finance Page 9
  10. 10. BALANCE OF PAYMENT The condition for dynamic equilibrium in the long run is that exports and imports differ by the amount of long term autonomous capital movements made in a normal direction, i.e. From the low-interest rate country to those with high rates. When the BOP of a country is in equilibrium, the demand for domestic currency is equal to its supply.CAUSES OF DISEQUILIBRIUM IN BOP Though the credit and debit are written and balanced in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium.Disequilibrium may take place either in the form of deficit or in the formof surplusDisequilibrium of Deficit arises when our receipts from the foreigners fallbelow our payment to foreigners. It arises when the effective demand forforeign exchange of the country exceeds its supply at a given rate ofexchange. This is called an unfavorable balance.Disequilibrium of Surplus arises when the receipts of the country exceedits payments. Such a situation arises when the effective demand forforeign exchange is less than its supply. Such a surplus disequilibrium istermed as favourable balance.Population GrowthMost countries experience an increase in the population and in some likeIndia and China the population is not only large but increases at a fasterrate. To meet their needs, imports become essential and the quantity ofimports may increase as population increasesDevelopment ProgrammesDeveloping countries which have embarked upon planned developmentprogrammes require to import capital goods, some raw materials whichare not available at home and highly skilled and specialized manpower.Since development is a continuous process, imports of these itemscontinue for the long time landing these countries in a balance ofpayment deficit.Demonstration EffectHailey College Of Banking And Finance Page 10
  11. 11. BALANCE OF PAYMENTWhen the people in the less developed countries imitate theconsumption pattern of the people in the developed countries, theirimport will increase. Their export may remain constant or decline causingdisequilibrium in the balance of payments.Natural FactorsNatural calamities such as the failure of rains or the coming floods mayeasily cause disequilibrium in the balance of payments by adverselyaffecting agriculture and industrial production in the country. The exportsmay decline while the imports may go up causing a discrepancy in thecountrys balance of payments.Cyclical FluctuationsBusiness fluctuations introduced by the operations of the trade cyclesmay also cause disequilibrium in the countrys balance of payments. Forexample, if there occurs a business recession in foreign countries, it mayeasily cause a fall in the exports and exchange earning of the countryconcerned, resulting in a disequilibrium in the balance of payments.InflationAn increase in income and price level owing to rapid economicdevelopment in developing countries, will increase imports and reduceexports causing a deficit in balance of payments.Poor Marketing StrategiesThe superior marketing of the developed countries have increased theirsurplus. The poor marketing facilities of the developing countries havepushed them into huge deficits.Flight Of CapitalDue to speculative reasons, countries may lose foreign exchange or goldstocks People in developing countries may also shift their capital todeveloped countries to safeguard against political uncertainties. Thesecapital movements adversely affect the balance of payments positionGlobalizationDue to globalization there has been more liberal and open atmospherefor international movement of goods, services and capital. Competitionhas been increased due to the globalization of international economicrelations. The emerging new global economic order has brought inHailey College Of Banking And Finance Page 11
  12. 12. BALANCE OF PAYMENTcertain problems for some countries which have resulted in the balanceof payments disequilibrium.There are three main types of BOP Disequilibriumwhich are ;  Cyclical disequilibrium,  Secular disequilibrium,  Structural Disequilibrium1.Cyclical DisequilibriumCyclical disequilibrium occurs because of two reasons. First, two countries may be passing through different paths of business cycle. Second, the countries may be following the same path but the income elasticities of demand or price elasticities of demand are different.2.Secular Disequilibrium The secular or long-run disequilibrium in BOP occur because of long-run and deep seated changes in an economy as it advances from one stage of growth to another. The current account follows a varying pattern from one state to another. Disequilibrium arises owing to lack of sufficient funds available to finance the import surplus, or the import surplus is not covered by available capital from abroad. Then comes a stage when domestic savings tend to exceed domestic investment and exports outrun imports. Disequilibrium may result, because the long-term capital outflow falls short of the surplus savings or because surplus savings exceed the amount of investment opportunities abroad.3.Structural DisequilibriumStructural disequilibrium has two sub types into: (i) Structural Disequilibrium at Goods Level:Hailey College Of Banking And Finance Page 12
  13. 13. BALANCE OF PAYMENT Structural disequilibrium at goods level occurs when a change in demand or supply of exports or imports alters a previously existing equilibrium, or when a change occurs in the basic circumstances under which income is earned or spent abroad, in both Causes without the requisite parallel changes elsewhere in the economy. (ii) Structural Disequilibrium at Factors Level: Structural disequilibrium at the factor level results from factor prices which fall to reflect accurately factor endowments, i.e., when factor prices are out of line with factor endowments, distort the structure of production from the allocation of resources which appropriate factor prices would have indicated.General Measures to Correct BOP DisequilibriumTo correct the different types of disequilibrium in BOP the followinggeneral measures are used: (a) Exchange depreciation (price effect), (b) devaluation (by government) (c)Tariffs, (d) Import quotas, and (e) Export dutiesPAKISTAN’S BALANCE OF PAYMENTBOP provides the government information about the internationaleconomic position of the country and to help make decisions aboutmonetary and fiscal issues and about trade and payments.BOP position of a country serves as an index of its economicposition.HISTORYPakistan‟ Balance of payments situation has not been satisfactory sinceindependence. The country with the exception of three years i.e.1947-48, 1950-51, and 1972-73.Excluding the three years stated above,Pakistan has been facing a deficit in its balance of payments since 1970to date. The resource gap is being met through loans and grantsHailey College Of Banking And Finance Page 13
  14. 14. BALANCE OF PAYMENTfrom various international agencies, by increasing exports,minimizing imports etc.TREND, VOLUME AND VALUE OF FOREIGNTRADE SINCE 1947:FIRST PHASE (1948 TO 1950)The special features of this phase were, Devaluation of pound sterling in 1948, Decrease in external value of Indian rupee a major importer of Pakistan‟s jute, Non-devaluation of Pakistani rupee, Decrease in volume of trade (open general license scheme) Korean warPakistan just after the independence faced problem of shortage ofessential commodities. in 1948, government of Pakistan lifted ban onimports be on imports which resulted in increase in the volume ofimports.In September, 1949, British government devalued her currency by 30%to correct her balance of payments position. in response to thisdevaluation , common wealth member countries including India devaluedtheir currency but Pakistani did not devalues its currency because ofgreater demand of exports .India who was the bigger importer ofPakistani jute and cotton ceased to import and also restricted exports toPakistan. Pakistan had to face a difficult situation becausePakistan‟s60% foreign trade was with India, however, Pakistansuccessfully faced this challenge and efforts were made to divert itstrade with other countries of the world. it reduced dependence on India.In mid-1950, Korean War started. The demand for our exports increasedsharply, Pakistan earned a lot of foreign exchange due to increasedquantity of exports of jute and cotton.SECOND PHASE (1951 TO 1955)The special features of this phase were: Import policy was liberalized. End of Korean war, Reduction of imports by advanced countries, Abolished open general license(OGL)As a result Korean War, the industrial developed countries statedincreasing the imports of raw material; the import policy was liberalizedthrough OGL. India also started importing jute from Pakistan. This madebalance of payment position favorable. The Korean War soon ends andHailey College Of Banking And Finance Page 14
  15. 15. BALANCE OF PAYMENTexport prices of jute and cotton feel sharply. The industrially developedcountries which had stockpiled raw material for years reduced imports.Therefore, balance of payments position again became unfavorablegovernment of Pakistan again adopted the import control policy andabolished OGL. Under stringent conditions all imports ere madelicensable from 1952.THIRD PHASE (1955 TO 1960)Special features of this phase were. Devaluation of currency, Import of food grain, New export promotion schemes. In 1950‟spakistan started the policy o industrialization and import substitution. Besides this due to bad weather conditions and poor exports Pakistan was forced to devalue its currency to boost exports. Due to industrial development, home industry started consuming jute and cotton which decreased the quantity of exportable surplus. To increase exports earnings various schemes were started. In 1958 martial law government initiated new schemes for export promotion; Export promotion schemes Industrial development Indo-pak war Low exchange importFOURTH PHASE (1960-1965)Period from 1960 to 1965 can be treated as a period of higher rate ofeconomic development and export incentives. During this period foreigntrade expanded bit volume and value of imports was greater thanexports. This increased trade deficit yet industrial performance remainedsatisfactory.Martial law government took many steps to boost exports. Exportpromotion council was established and export credit guarantee schemewas stared. In this period composition of exports changed from export ofagriculture raw material to semi manufactured goods and manufacturedgoods. Pakistan trade relations with east European countries areimproved.FIFTH PHASE (1965-1970);THE PERIOD FROM 1965 TO 1970 was a period of disaster forPakistan .In September 1965 indo–pak war started and Pakistan had tospend huge amount of its foreign exchange on import of defencearmaments. During 1966-1967, there was a serious food shortage andPakistan had to import wheat. The inflow of foreign aid remained belowthe target. The export targets could not be achieved. The politicalHailey College Of Banking And Finance Page 15
  16. 16. BALANCE OF PAYMENTinstability from 1968-1970 also effected trade and balance of paymentsremained unfavorable.SIXTH PHASE (1971-1977)East Pakistan separated from West Pakistan in 1977.import structurewas distributed. There was an export shortage.however, effortsweremade to accelerated exports and these efforts proved fruitful. Pakistanfaced a serious shortage of foreign exchange, to overcome this problemin 1972, Pakistan devalued its currency by 131%, multiple exchange ratepolicy and export bonus scheme were abolished. The exports fell shortof target due to the following reasons, Nationalization of industries, Monetary and fiscal changes, Floods in 1973-1974, Unorganized efforts to increase export.SEVENTH PHASE (1978-1983):The period from 1978 to 1983 is treated as a period of economicprosperity and stability. There was an increase in exports. Exports grewat a reasonable rate, imports along with exports showed an upwardtrend. In January, 1981, one rupee note was declined from dollar whichaccelerated the exports. Although it was not devaluation but our currencydemonstrated a decline in external value. In 1979.afghan refugeesentered in Pakistan which increased burden on imports and decreasedexports.EIGTHTH PHASE (1983 TO 1991):In this period wheat, sugar and food grain shortage appeared .foreignremittances stared declining and foreign debt washout up to 16 billiondollars. During the period of 1985-1986, exports increased than importsbut at the same time foreign remittances started declining due to comingback of Pakistani workers after completion of projects and developmentprograms and decrease in oil prices. Due to decrease in oil prices,Pakistan import bill decreased by Rs.6 billion. Foreign debt increasedfrom 12 billion dollars in1984 to 16 billion dollars in 1991.NINTH PHASE (1992 TO 2009):Many political changes appeared in the country. There was a fall ofgovernment by Nawaz Sharif, then Benzir Bhutto and then again NawazSharif government in 1999 and gen. Musharaf took over the government.Total exports which were 16 billion dollars reached in2008-Hailey College Of Banking And Finance Page 16
  17. 17. BALANCE OF PAYMENT2009.percentage share of exports of primary commodities, 11%,manufactured goods 61.4% .total imports declined to 26.7 billion dollarsin 2008-2009. CAUSES OF ADVERSE BALANCE OF PAYMENTS YEAR TRADE REASONS SURPLUS 1947-48 Rs.125 M Exports of newly Pakistan were high 1950-51 Rs.176 M KOREAN WAR, exports of cotton &jute were high 1972-73 Rs.153 M In1972, devaluation of currency by 131% of Pakistani rupee. 1. FISCAL POLICES:Pakistan’s fiscal policy has been a serious obstacle to the expansion ofits exports. The import duties on the raw material required for theproduction of certain goods which have an export potential are so highthat the production costs make the goods uncompetitive in the worldmarket. 2. EXPORT OF PRIMARY COMMODITIES The main factor for unsatisfactory export performance is stated to be the adverse trend in the terms of trade. but this is the result of heavyHailey College Of Banking And Finance Page 17
  18. 18. BALANCE OF PAYMENT dependence of the country‟s export earnings on primary commodities like cotton and rice and semi-manufactured goods, which are subject to frequent price fluctuations in the world market. 3. INFLATIONInflationary conditions are a serious obstacle to the promotion of exports.Inflation results in a rise in the domestic cost of production so that thegoods produced cannot compte in the world market.BOP were alsoaffected by the impact of inflationary pressures. 4. CONSUMTION ORIENTED SOCIETYPakistanis are mostly consumption oriented. Due to rapid rise inpopulation and increased consumption habits, the manufactured goodsare mostly consumed in the country, so, a smaller portion is left forexports. 5. TRADE BARRIERS OF DEVELOPED COUNTRIESThe trade barriers raised by developed countries against the import ofmanufactures from the developing countries is one of the importantfactor preventing greater production and export by some industries inPakistan, particularly the cotton textile industry. 6. IMPORT SUSTITUTION POLICY OF PAKISTANThe emphasis of Pakistan‟s industrial policy has been more substitutionthan on exports expansion .the position of domestic industries results inhigher prices for the consumer. In Pakistan, industries have a sheltereddomestic market tend to become inefficient due to absence of foreigncompetition 7. SLUGGISH GROWTH OF PRODUCTIONPakistan‟s major exports comprise of agriculture goods i.e. cotton, itsproducts and rice. Pakistan has a large area of cultivation but it is notutilized properly. Mostly the cultivatable area is affected through poordrainage system. Another reason is climate conditions .if the whethercondions are unfavorable, the production of these commodities goesHailey College Of Banking And Finance Page 18
  19. 19. BALANCE OF PAYMENTdown and the production of the commodities is affected heavily andcauses reduction in exports. 8. OBSOLETED TECHNIQUES OF PRODUCTIONThe industrial sector as well as agriculture sector in our country are stilloperating on the machinery manufactured before 1980.especiaaly in thepublic sector modernization, balancing and replacement of machinery isout of question since 1972 which results a fall in production and thequality of products, also remains low and it is not possible to increaseexports and to compete even with developing countries. 9. UNBALANCED PRICESThe frequent changes in the fiscal and monetary polices of Pakistan inthe past years had disturbed the level of investment, the volume ofimports and exports. PROCEDURES TO CORRECT BALANCE OF PAYMENTS Export of manufactured goods Pakistan should export manufactured goods (leather goods, electrical goods etc.) instead of primary goods. Quality products Many of our goods can not be exported because of poor quality. Quality products should be manufactured for increasing the exports in international market. Import of fundamental items:Only essential items should be imported which are needed for ourindustrial production. Import of luxurious should be banned. Import AlternativeHailey College Of Banking And Finance Page 19
  20. 20. BALANCE OF PAYMENTImport substitutes should be manufactured in the country to save theforeign exchange on imports. Terms of tradeTerms of trade of Pakistan are unfavorable which increasing deficit in ourbalance of payments is so there is a need to improve terms for trade byexporting finished goods instead of raw material and primary goods. Special SchemesIn order to improve balance of payment, government should introducespecial schemes for the exporter and importer. Through these schemesexporters should be encouraged and importers should be asked tominimize imports. Self-Sufficiency:Pakistan‟s balance of payments is now worsening due to repayment ofdebt and debt avoid further deficit we must follow the selfreliance policy. Exploring export markets:More emphasis should be laid on export survey and export market is paramount importance that our exporters should know more aboutoperating in a foreign market. it must also be our export policy to makepreparations for organizing our efforts to secure more export orders fromabroad.There is need to survey foreign markets, opening of display centers andinformation offices abroad and exploring the foreign markets by ourmanufactures for sale of Pakistani goods. Reducing the balance of payments deficit depends on our rapid industrial production and the quality of our products. We need to fully utilize the idle capacity of our industries. We can import advanced technology for increasing home production. The tax element in the cost of production of export commodities needed to be eliminated except where it was desired to tax export of specified commodities. CURRENT POSITIONHailey College Of Banking And Finance Page 20
  21. 21. BALANCE OF PAYMENT Balance of payment‟s surplus or deficit is mainly the combination of current and capital account. So,During July- April 2010-2011 the country witnessed a surplus of $ 1,210 million. ITEMS Cr. Dr. Net1. Current Account 883,383 929,791 -46,408 A. Goods and services 542,599 854,442 311,843 a. Goods 450,896 706,997 256,101 1. General merchandise 447,043 700,147 253,105 2. Goods for processing - - - 3. Repairs on goods - 1,712 -1,712 4. Goods procured in ports by carriers 3,853 5,137 -1,284 5. Nonmonetary gold - - - b. Services 91,703 147,445 -55,741 1. Transportation 30,653 81,600 -50,946 1.1 Passenger 13,614 9,847 3,767 1.2 Freight 2,483 61,392 -58,909 1.3 Other 14,556 10,361 4,196 2. Travel 6,507 15,241 -8,734 2.1 Business 86 514 -428 2.2 Personal 6,422 14,727 -8,306 3. Communications services 4,110 3,425 685 4. Construction services 514 342 171 5. Insurance services 514 3,682 -3,168 6. Financial services 2,141 2,226 -86 7. Computer and information services 3,939 2,740 1,199 8. Royalties and license fees - 1,969 -1,969 9. Other business services 15,755 22,005 -6,251 10. Personal, cultural, and recreational - 342 -342 services 11. Government services, n.i.e. 27,571 13,871 13,700 B. Income 15,840 71,325 -55,484 1. Compensation of employees 514 171 342 2. Investment income 15,327 71,154 -55,827 2.1 Direct investment 1,456 40,928 -39,473 2.1.1 Income on equity 1,456 40,928 -39,473 2.1.2 Income on debt (interest) - - - 2.2 Portfolio investment 11,645 12,330 -685 2.2.1 Income on equity - 1,798 -1,798(dividends) 2.2.2 Income on debt (interest) 11,645 10,532 1,113 2.3 Other investment 2,226 17,895 -15,669 2.3.1 Monetary authorities 856 2,740 -1,884 2.3.2 General government - 13,015 -13,015 2.3.3 Banks 1,370 342 1,027 2.3.4 Other sectors - 1,798 -1,798 C. Current transfers 324,943 4,024 320,919 Hailey College Of Banking And Finance Page 21
  22. 22. BALANCE OF PAYMENT 1. General government 16,954 86 16,868 2. Other sectors 307,990 3,939 304,0512. Capital and Financial Account 137,769 82,456 55,313 A. Capital account 1,712 - 1,712 1. Capital transfers 1,712 - 1,712 1.1 General government 1,712 - 1,712 1.1.1 Debt forgiveness - - - 1.1.2 Other 1,712 - 1,712 1.2 Other sectors - - - 2. Acquisitions/disposal of non- produced - - -non financial assets B. Financial account 136,057 82,456 53,601 1. Direct investment 34,078 171 33,907 1.1 Abroad - 171 -171 1.2 In reporting economy 34,078 - 34,078 2. Portfolio investment 5,651 - 5,651 2.1 Assets - - - 2.2 Liabilities 5,651 - 5,651 3. Other investment 93,073 76,034 17,039 3.1 Assets 4,624 16,782 -12,159 3.1.1 Trade credits - 3,082 -3,082 3.1.2 Loans - - - Long-term - - - Short-term - - - 3.1.3 Currency and deposits 4,624 9,076 -4,452 Monetary authorities - - - General government 86 - 86 Banks - 9,076 -9,076 Other sectors 4,538 - 4,538 3.1.4 Other assets - 4,624 -4,624 Monetary authorities - - - General government - - - Banks - 4,624 -4,624 Other sectors - - - 3.2 Liabilities 88,450 59,252 29,198 3.2.1 Trade credits - - - 3.2.2 Loans 67,814 52,573 15,241 Use of Fund credit - 4,452 -4,452 and loans from the Fund General Govt 53,258 37,503 15,755 Long-term 53,258 37,503 15,755 Short-term - - - Banks - - - Long-term - - - Short-term - - - Other Sectors 14,556 10,617 3,939 Long-term 14,556 9,247 5,309 Short-term - 1,370 -1,370 3.2.3 Currency and deposits 14,470 942 13,529 Hailey College Of Banking And Finance Page 22
  23. 23. BALANCE OF PAYMENT Monetary authorities - 942 -942 General govt. - - - Banks 4,281 - 4,281 Other Sectors 10,189 - 10,189 3.2.4 Other liabilities 6,165 5,737 428 Monetary authorities - - - Long-term - - - Short-term - - - General govt. - 1,884 -1,884 Long-term - 1,884 -1,884 Short-term - - - Banks - 3,082 -3,082 Long-term - 599 -599 Short-term - 2,483 -2,483 Other Sectors 6,165 771 5,394 Long-term 6,165 - 6,165 Short-term - 771 -771 4. Official reserve assets 3,254 6,251 -2,997 4.1 Monetary gold - - - 4.2 SDRs 3,254 - 3,254 4.3 Reserve position in the Fund - - - 4.4 Foreign currency reserves - 6,251 -6,2513. Errors and Omissions - 8,905 -8,9054. Exceptional Financing - - - CURRENT ACCOUNT BALANCE: Pakistan has long suffered a current account deficit which is regarded as an important indicator to gauge the pressures on a country‟s external sector. During July-April 2010-11, the current account deficit turned to surplus of $748 million from deficit of $3,456 million in the comparable period of last year. This year‟s improvement in current account is broad based as improvement witnessed across the broad in all sub-components including balance of goods, services and income account while buoyancy in current account to turn it into surplus in the form of, higher export growth, strong and sustained inflows of workers‟ remittances, logistic support related receipts and Grants received for flood relief. SUMMARY OF BOP FY-11: Hailey College Of Banking And Finance Page 23
  24. 24. BALANCE OF PAYMENT Current account balance turned positive with $214 million as surplus during FY11 with massive deficit of $3,946 million in the previous year. Exports fetched $25,356 million with an increase of $5,683 million (29 percent) over the last year. Imports also increased by $4,663 million (15 percent) to $35,872 million from $31,209 million.Services account deficit increased by $250 million to $1,940 million from $1,690 million in the preceding year.Income account deficit, however, narrowed to $3,017 million from $3,282 million in the previous year reflecting a decrease of 8 percent.Net current transfers with an impressive growth of 25 percent touched $15,687 million in FY11.Capital account balance slashed to $161 million from $175 million in FY10. Financial account surplus with a drastic cut of $2,996 million shrunk to $2,101 million (59 percent) from $5,097 million.The overall balance, however, tremendously improved to $2,492 million with a massive 97% increase from $1,266 million in FY10. 2010-11 Millions(US$)Items Jul-Sep Oct-Dec Jan-Mar Apr-Jun FY11 FY10Current Account balance -542 564 -32 224 214 -3,946Trade balance (Goods) -2,991 2,781 2,385 -2,359 - -10,516 -11,536 Exports f.o.b. 5,266 5,846 6,780 7,464 25,356 19,673 Imports f.o.b. 8,257 8,627 9,165 9,823 35,872 31,209Services (net) -651 303 -716 -876 -1,940 -1,690Income (net) -648 -849 -710 -810 -3,017 -3,282Current transfers (net) 3,748 3,891 3,779 4,269 15,687 12,562 General govt. 197 119 168 340 824 556 Other sectors 3,551 3,772 3,611 3,929 14,863 12,006Capital Account (net) 20 15 47 79 161 175Financial Account(net) 713 266 735 387 2,101 5,097Errors and Omissions (net) -104 43 95 -18 16 -60Overall balance 87 888 845 672 2,492 1,266Reserves and r elated items -87 -888 -845 -672 -2,492 -1,266Reserves assets -35 -809 -791 -590 -2,225 -4,063Use of Fund Credits & Loans -52 -79 -54 -82 -267 2,174Exceptional financing - - - - - 623 Graphical Representation Hailey College Of Banking And Finance Page 24
  25. 25. BALANCE OF PAYMENT COMPARISON OF BOP OF PAKISTAN WITH OTHER COUNTRIESPakistan is a developing country and is undergoing severe problems ofpolitical and economic nature due to which our balance of payment withregard to other countries is not satisfactory.ACCORDING TO IMPORT AND EXPORTUSA has 16.5% of exports of the total global export while the have only4.3% of imports.Similarly UK has 1.3% of import and Germany has 2.6%importFollowing table shows Imports and Exports of differentcountries:COUNTRIES EXPORT (%) IMPORT (%)Hailey College Of Banking And Finance Page 25
  26. 26. BALANCE OF PAYMENTUSA 16.5 4.3UK 5.1 1.3GERMANY 5.1 2.6HONG KONG 2.3 _UAE 7.4 13.3AFGANISTAN 9.0 _JAPAN _ 4.1MALAYSIA _ 5.7KUWAIT _ 6.8SAUDIA _ 11.7ARABIAOTHERS 55.0 50.2TOTAL 100 100ACCORDING TO GDPIndia has real gdp growth rate of 8.1% while china has 9.5% incomparison Pakistan has only 5% GDP growth rate this has mainly dueto  Political instability  Corruption  Reluctant to use tee home made products  Trends toward more importsUSA has 7.2% GDP growth rate even Afghanistan has 9.5% GDPgrowth rate even this country is almost in the war situationHailey College Of Banking And Finance Page 26
  27. 27. BALANCE OF PAYMENT IMPROVEMENTS WORKERS REMITTANCESWorkers remittances are the part of current account. In this year currentaccount improves due to workers remittances.Remittances for the firsttime in the history of Pakistan crossed the one billion dollar mark in asingle month during March 2011 and remained over the one billion forsecond consecutive month in April 2011 which has boosted Optimismabout workers‟ remittances to cross the $11 billion this year. Workers‟remittances totaled $9.1 billion in July-April 2010-11 as against $7.3billion in the comparable period last year depicting an increase of 23.8percent.Analysis of country-wise data (July-April 2010-11) shows that remittanceinflows from EU, Saudi Arabia, UK and UAE recorded strong growth of38.3 percent, 36.7 percent, 34.9 percent and 25.7 percent, respectively.Hailey College Of Banking And Finance Page 27
  28. 28. BALANCE OF PAYMENT INCREASE IN IMPORTSHeavy imports are an important cause of dis-equilibrium in balance ofpayments. Exports have always been than imports. Merchandise importsare $ 32.3 billion in July-April 2010-11. an increase of 14.7 percent fromthe last year. The overall importbill is higher by $ 4.1 billion, reflecting the impactof higher global crude oil and commodity prices.Major imports are; food group(milk,wheat,sugar,tea,pulses etc), 13.4% share of imports machinery group(office, textile machinery etc), 10.8% share of imports petroleum group(petroleum products etc) 27.2 share of imports consumer durables(elec.mach.&app etc), 5.4% share of imports raw materials, (raw cotton,synthetic fiber), 23.7% share of imports telecom and,2.6% share of imports Others 16.9% share of imports LOW VOLUME OF EXPORTSExports have always been less than imports. Merchandise exports are$20.2 billion in July-April 2010-11. The growth of 27.8 percent from thelast year. The lion‟s share of this year‟s exports came from textile sectorand food group contributing 61.8 percent and 18.1 percent. Major exportitems are; Food group (rice,fish wheat,spices,oil seeds) 17.5% share of exports Textile manufactures (raw cotton, cotton yarn,etc) 55.3% share of exports Petroleum group (petroleum products etc) 5.4% share of exports Other manufacturers(carpets,sports,etc) 16.1% share of exports All other items 5.7% share of exports EXCHANGE RATE:Hailey College Of Banking And Finance Page 28
  29. 29. BALANCE OF PAYMENTThe continued build up in foreign exchange reserves, a surplus in thecurrent account balance and a sufficient inflow of remittances throughofficial banking channels have strengthened Pak rupee vis-à-vis the USdollar both in the interbank and open market. Exchange rate averagedRs. 83.7 in fiscal year 2009-10 and Rs. 85.3 to a dollar in June 2010.COMPOSITION OF EXPORTS &IMPORTSEXPORTS Rs.20154.2 millionIMPORTS Rs.32262.9 millionGraphical Representation:REAL GDP GROWTH RATE OF SOME COUNTRIESHailey College Of Banking And Finance Page 29
  30. 30. BALANCE OF PAYMENTCOUNTRIES REAL GDP GROWTHINDIA 8.1CHINA 9.5BANGLADESH 7.2USA 3.4PAKISTAN 5AFGANISTAN 9.5Graphical RepresentationCONCLUSION:Hailey College Of Banking And Finance Page 30
  31. 31. BALANCE OF PAYMENTFrom this project we concluded that economic condition of Pakistan is onaverage basis. Cause of Pakistan adverse balance of payments isincrease in imports and decline in exports. Pakistan is anunderdeveloped country and its real GDP growth is less than otherunderdeveloped countries this is due to political instability conditionsprevail in Pakistan. We are very thankful to Mam Farah Naz Naqvi forgiving this project due to which we learn a lot about our Pakistaneconomic conditions and balance of payments (BOP).Hailey College Of Banking And Finance Page 31