Balance of Payment

PRESENTED TO:
PROF. AZMAT AZIZ
PRESENTED BY:
RUBAB RIAZ (1251)

HIRA JABEEN (1264)
MARYAM SHAHID (1249)
HAROON KASI (1252)
CONTENTS
 Definition
 Importance of BOP
 Causes of deficits
 Measures to correct deficit
 BOP of Pakistan
 Causes of disequilibrium in BOP
 Measures to correct disequilibrium
DEFINITION
“ Balance Of Payments of a country

is the annual record of economic
relations of the country with the
rest of the world.”
What Does Balance Of Payments - BOP Mean?
A record of all transactions made between one

particular country and other countries during
a specified period of time. BOP compares the
dollar difference of the amount of exports and
imports, including all financial exports and
imports.
Negative BOP
It means that more money is flowing
out of the country than coming in,
and vice versa.
Positive BOP
It means that there is significant
foreign investment within that
country. It may also mean that the
country does not export much of its
currency.
Types of Balance of Payments
The BOP is divided into three main

categories:
 The current account.

 The capital account.
 The financial account.
The Current Account
The current account is used to mark the inflow
and outflow of goods and services into a
country. Earnings on investments, both public
and private, are also put into the current
account.
The Capital Account
The capital account is where all international
capital transfers are recorded. This refers to the
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 used for the extraction of diamonds.
The Financial Account
In the financial account, international
monetary flows related to investment in
business, real estate, bonds and stocks are
documented.
Importance
 Balance of payments is one of the major indicators of
a country's status in international trade, with net
capital outflow.
 It is used to summarize all international economic

transactions for that country during a specific time
period, usually a year.
 The BOP is determined by the country's exports and

imports of goods, services, and financial capital, as
well as financial transfers.
 It reflects all payments and liabilities to foreigners
(debits) and all payments and obligations received
from foreigners (credits).
 The BOP is an important indicator of pressure on a

country’s foreign exchange rate.
 The BOP helps to forecast a country’s market

potential, especially in short run.
Deficit
“A deficit is the opposite of a surplus. If a

country imports more than it exports, it is
said to have a deficit.”
Factors which cause a Deficit in the
balance of Payments
 Economic Growth
 Decline in Competitiveness
 Higher inflation
 Recession in other countries
 Borrowing money
 Deterioration in the current account
Fixed Exchange Rate:
If the currency is overvalued, imports will be
cheaper and therefore there will be a higher Q of
imports. Exports will become uncompetitive and
therefore there will be a fall in the Quantity of exports.
Economic Growth:
If there is an increase in AD and National Income
increases, people will have more disposable income to
consume goods. If domestic producers can not meet the
domestic AD, consumers will have to imports goods
from abroad.
Higher inflation:
This makes exports less competitive and imports
more competitive. However this factor may be offset
by a decline in the value of sterling.
Recession in other countries:

If the Pakistan’s main trading partners
experience negative economic growth then they
will buy less of our exports, worsening the current
account.
Borrowing money:
If countries are borrowing money to invest e.g.
third world countries.
Deterioration in the current account:

This means that the value of exports has
increased at a slower rate than the value of imports.
Therefore there could have been an increase in the
deficit or the surplus could have changed into a
deficit.
Measures to correct the balance of
payments
The balance of payments can be decreased in three ways:
 The foreign earnings should be increased by

export led growth.
 The imports should be curtailed to essential

items only.
 The expenditure on invisible imports should

be minimized.
The measures which government
should adopt are:
 Highest priority to improvements in export
 Comprehensive system of export compensation.
 Change in export quota policy
 Access to imported raw materials
 Access to credit for exporters

BOP in Pakistan
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.
The US Central Intelligence Agency
reports in 2001 the purchasing power of
Pakistan's exports was $8.8 billion while
imports totaled $9.2 billion resulting in a
trade deficit of $399.9 million.
The International Monetary Fund

reports that in 2001 Pakistan had exports
of goods totaling $9.13 billion and imports
totaling $9.74 billion. The services credit
totaled $1.46 billion and debit $2.33
billion.
BALANCE OF PAYMENT – PRE BUDGET
SCENARIO / CURRENT SITUATION
• 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.
Source : State Bank of Pakistan
BALANCE OF PAYMENT IN THE LAST
FEW YEARS
•Current Account:($Million)
Current Account 2006-07 2007-08 2008-09 2008-09
Balance -6878 -13735 -11173 -8547
•Financial & Capital Account ($ Million)

Financial & 2006-07 2007-08 2008-09 2008-09
Capital Account
Balance 10276 8303 6290 3608
• Pakistan is ranked 19 out of 31 countries in the

Asia Pacific region .
source: SBP
Balance of Payment Equilibrium
Equilibrium is that state of balance of

payment over the relevant time period
which makes it possible to sustain an
open economy without severe
unemployment on a continuing basis.
Disequilibrium in balance of payment
“ The balance of payment is in
disequilibrium when there is either a
surplus or deficit in the balance of
payments. When there is deficit in the
balance of payments, the demand for
foreign exchange exceeds the demand
for it. ”
A number of factors may cause
disequilibrium in the balance of
payments.
1. Economic factors
2. Political factors
3. Sociological factors
Causes of Disequilibrium in BOP with
Reference to Pakistan:
(a) Revenue oriented tariffs

(b) Adverse terms of trade
(c) Import substitution policy of Pakistan
(d) Export of primary commodities
(e) Capital account problem
(f) Trade restrictions of developed countries
(g) Inflation
(h) Ever-increasing demand for imports
Measures to Correct Disequilibrium
in BOP
a) 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:
(i) The proportion of manufactured goods be
increased
(ii) In addition to manufactured exports, the non
traditional exports like food processing,
vegetables, dry fruits be promoted.
(iii) The exporters be 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.
(iv) The quality and cost of the export goods be

improved.
(v) More and more delegates be sent abroad

(b) 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:
(i) The imports of luxurious items should be

restricted.
(ii) The imports of capital goods and

engineering goods should be allowed.
(c) Exchange Depreciation or Devaluation
Exchange depreciation means a reduction in the
value of a currency in terms of gold or other
currencies under ‘free market’ conditions and
coming about through a decline in the demand
for that currency in relation to the supply.
(d) Deflate the Currency:

According to this method, the currency is
deflated. As the currency contracts, prices will
fall, which will stimulate exports and check
imports.
(e) Tariffs: Tariff is a tax levied on imports. It is
synonymous with import duties or custom
duties. Tariffs are used for two different
purposes; for revenue and for protection.
(f) 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.

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PRESENTED TO:

PROF. AZMAT AZIZ

RUBAB RIAZ (1251)

“ Balance Of Payments of a country

A record of all transactions made between one

The BOP is divided into three main

 The current account.

 It is used to summarize all international economic

 The BOP is determined by the country's exports and

 The BOP is an important indicator of pressure on a

 The BOP helps to forecast a country’s market

“A deficit is the opposite of a surplus. If a

Recession in other countries:

Deterioration in the current account:

 The foreign earnings should be increased by

 The imports should be curtailed to essential

 The expenditure on invisible imports should

 Comprehensive system of export compensation.

 Change in export quota policy

 Access to imported raw materials

 Access to credit for exporters

The International Monetary Fund

• Today, Pakistan faces a severe balance-of-payments crisis

• The Current account deficit has improved by $ 2.6 billion

• The Financial and Capital account stood at $ 3608 million

Balance -6878 -13735 -11173 -8547

•Financial & Capital Account ($ Million)

• Pakistan is ranked 19 out of 31 countries in the

Equilibrium is that state of balance of

(a) Revenue oriented tariffs

a) Exports: The enhancing of exports will

(iv) The quality and cost of the export goods be

(v) More and more delegates be sent abroad

(i) The imports of luxurious items should be

(ii) The imports of capital goods and

(d) Deflate the Currency:

(f) Explore new vistas: The disequilibrium in

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