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SHAH ABDUL LATIF UNIVERSITY

KHAIRPUR

ASSIGNMENT TOPIC:
BALANCE OF PAYMENTS AND BALANCE
OF PAYMENTS PROBLEMS IN PAKISTAN

Submitted by:
Ahtisham Rajput-107
Ibrar Ahmed Qazi-136
Zain-ul-Abdin Shaikh-196

CLASS: BBA III (Morning)

DEPARTMENT OF BUSINESS ADMINISTRATION


ACKNOWLEDGEMENT

It is a report on the topic Balance


of payments and balance of
payments problem in Pakistan.

Thanks to ALMIGHTY ALLAH who


supported us in our every way
and it is ALLAH blessing that we
have completed this report

Secondly we would like to thanks


our parents who really supported
us in our hard and fast time and it
is their blessing that we were able
to write.

We are grateful to our respected


teacher Sir Mohammad Saleh
Memon for providing us the
opportunity to share our ideas in
the shape of report and for
facilitating us in our difficulties.
In last we would like to appreciate
the efforts of our friends, Faraz
Sheikh, Javed Iqbal Rajput and Sadil
Sardar khan while preparing this
report.

DEDICATION

We dedicate this report to Ahtishams uncle LATE IMRAN RAJPUT who


recently passed away from this mortal world. May Almighty Allah rest his
soul in the heaven. Ameen.
CHAPTER NO: CONTENTS PAGENO:

1.0 Introduction To Balance Of Payments 1

1.1 Balance Of Payments 1


1.2 Pakistans Balance Of Payments Performance 1
1.3 Reasons Of Surplus In The Above Years 1

2.0 Terminology Of Balance Of Payments 2

2.1 Current Account 2


2.2 Position Of Pakistans Current Account 2
2.3 Capital And Financial Account 3
2.4 Position Of Pakistans Capital and Financial
Account 3
2.5 Foreign Reserves 4
2.6 Position Of Pakistans Foreign Reserves 4
2.7 Current Bop Position 4-5
2.8 Balance Of Payment-Future Expectations 5

3.0 History Of Pakistans Export Performance


Exports From 1947 To 1971 6
3.1 Pakistans Export Performance After
Separation Of Bangladesh 6-7
3.2 Exports Of Pakistan 7
3.3 Major Exports Of Pakistan 8
3.4 Composition Of Pakistans Exports 8
3.5 Direction Of Pakistans Exports 9
3.6 Current Position Of Export Of Pakistan 9
3.7 Imports Of Pakistan 10
3.8 Composition Of Pakistans Imports 10
3.9 Major Sources Of Pakistans Imports 10-11
3.10 Recent Trend Of Imports 11
3.11 Summary Of Imports And Exports 11

4.0 Problems Of Pakistan Balance Of Payment 12

4.1 Dependence On Textile 12


4.2 Import Oriented Industry 12
4.3 Tough Competition In International Market 12
4.4 Political Uncertainty 12
4.5 Increase In Prices Of Inputs 12
CHAPTER NO: CONTENTS PAGENO:

4.6 Fiscal Policy 12


4.7 Exports Of Primary Goods And Imports 13
Of Finished Goods
4.8 Energy Crisis 13
4.9 Dependence On Foreign Assistance 13
4.10 Natural Disasters 13
4.11 Shortage Of Availability Of Credit To
Private Sector 13
4.12 Limited Countries Exports 13-
14
4.13 Strikes And Processions 14
4.14 Rise In Freight Rates 14
4.15 Consumption Oriented Society 14
5.0 Impacts Of Balance Of Payment Deficit On Economy 15

5.1 Foreign Reserves Of Country Shrink 15


5.2 It Leads Us To Borrow Money From
Other Financial Institutions 15
5.3 Foreign Earning Will Decrease 15
5.4 Countrys Currency Value May Depreciate 16
6.0 Suggestions To Overcome Balance Of Payment Deficit 17

6.1 Improve The Technology 17


6.2 Exploration Of New Markets 17
6.3 Ban On Strikes And Processions 17
6.4 Law And Order 17
6.5 Brand Oriented Marketing 17
6.6 Cost Of Doing Business 18
6.7 Dependence On Textile Sector Exports 18
6.8 Minimize Expenditure On Importing Services 18
6.9 Export Of Finished Goods Rather Than
Primary Goods 18
6.10 Resolution Of Energy Problem 18
6.11 Improved Fiscal Policy 18
6.12 Improved Infrastructure 18

CONCLUSION 19

REFERENCES 20

TABLE OF TABLES

Table Page
TABLE NAME
number number

2.1 Current Account 3

2.2 Capital And Financial Account 3

2.3 Foreign Reserves 4

3.1 Exports Promotion Schemes 6

3.2 Pakistans Exports 7

3.3 Pakistans Major Exports 8


3.4 Composition Of Exports 8

3.5 Major Exports Markets 9

3.6 Structure Of Imports 10

3.7 Composition Of Imports 10

3.8 Major Sources Of Imports 11

5.1 Pakistans Currency Rate 16

1.0 INTRODUCTION TO BALANCE OF PAYMENTS

There is no country in this world which produces every thing that it needs. So every
country therefore, tries to produce those commodities in which it has competitive
advantage then countries exchange their commodities produced b the other countries
e.g. as Pakistan export cotton, rice etc in other countries and in return it import those
goods which it cannot produce or dont have competitive advantage as Capital goods,
edible oil etc. so as we maintain our personal business record similarly a country also
maintain its record in the shape of balance of payment.

1.1 BALANCE OF PAYMENTS: It is a record of economic transactions


between residents of one country and the rest of the world during the course of one year.
The balance of payments like all balance sheets must balance. The items which lead to
an inflow of foreign earnings are placed on the credit side of the balance sheet, whereas
the items which give rise to an outflow of foreign currency are placed on the debit
side1.

1.2 PAKISTANS BALANCE OF PAYMENTS PERFORMANCE:


Pakistan balance of payment situation has not been satisfactory since independence. The
country with2 the exceptions of 5 years i.e. (1950-51, 1954-55, 1955-56, 1958-59, and
1959-60) has been running a constant deficit in his balance of payment n current
account. The deficit in current account is being met by short and long term loans from
the other countries or from institutes as International Monitory Fund (IMF).

1
Economics of Pakistan by Professor M. Saeed Nasir chapter International trade page 183.
2
Economics of Pakistan by M. Seed Nasir edition 2009-10, chapter international trade page number 184.
1.3 REASONS OF SURPLUS IN THE ABOVE YEARS:

The surplus of Rs: 578 crore in 1950-51 in BOP was mainly due to the Korean
War.
The favorable BOP in the year 1954-55 amounting to Rs: 9.9 crore was
marginal. However, the surplus on current account was due to devaluation of
rupee and greater trade restrictions on imports.
While in 1958 to 1960 BOP was in surplus due to introduction of Bonus
vouchers.
Excluding the five years stated above, Pakistan has been facing a deficit in its BOP.
The current account deficit in BOP for the year 1996-97 was $3.28 billion. It has been
down to $ 1.92 Billion during 1997-98 and $1.14 billion in 1999-2000. Pakistans
current account balance was favorable in 2002 to 2004. However it slipped again into
danger zone in 2004-05 and 2006-07 due to higher imports of oil and machinery. BOP
deficit increased to $ 13.735 billion during 2007-08 against $ 6.878 billion in 2006-07.
During 2008-09 (July- April) the deficit reduced to $ 8.549 billion against $11.173
billion in the corresponding year period last year but in 2009-10 this deficit reduced to
$3.6 billion1 and now currently we have a trade surplus of 26 million in our current
account which is a good sign3.

3
Kawish Newspaper, 20 January 2011 page number 3.
2.0 TERMINOLOGY OF BALANCE OF PAYMENTS

In balance of payment the credit is Exports, while debit is Imports.

If the Exports exceed imports we call it trade surplus.


If the imports exceed exports we call it trade deficit.
If the exports equal to imports we call it trade balance/ equilibrium.

The main items which are included in the balance of payments are given below:

CURRENT ACCOUNT
CAPITAL ACCOUNT
OFFICIAL RESERVE

Now each segment of balance of payment is explained below:

2.1 CURRENT ACCOUNT: consists of four main components it summarizes the


Trade Balance Sum of exports and imports of merchandise goods.
Net Services Balance Sum of receipts and payments on export and imports of
services such as travel, freight, insurance, transportation, etc.
Net Income Balance Sum of all receipts and payments on interest on loans,
profits, dividends, royalties, etc.
Current Transfers Sum of all private and official transfers such as workers
remittances through banks, receipts through Exchange Companies, foreign
currency deposits of residents.

2.2 POSITION OF PAKISTANS CURRENT ACCOUNT: Our current


account has shown improvement as in 2007-8 trade deficit was $13.8 billion and in
2009-10 it reduces to $3.06 billion and recently it now turns into a surplus of 26
million which is a good sign.

Our export and imports has shown improvement as our exports of goods has
increased while imports of goods has decreased and due to this our trade deficit
reduced from $11.1 billion to $9.9 billion See (Table 2.1).

Our servicing account also shown improvement as its deficit was $3.21 billion
and it reduces to $1.98 billion in 2009-10 See (Table 2.1).

Our income account although did not show improvement as it showed constant
decline from 2007-08 See (table 2.1).

Our remittances has also shown increment as in 2008-09 it contribute to $635


billion while in 2009-10 it reached to $ 7.30 billion See (table 2.1) .
Source: Table 2.1 Pakistan economic survey 2009-10, chapter balance of payment page number 101,
and table number: 7.11.

So over all our current account has shown improvement as it can be seen with the
improvement that takes place in these two to three years.

2.3 CAPITAL AND FINANCIAL ACCOUNT: Capital and Financial Account


Consists of the sum of all foreign direct and portfolio investment, foreign long, medium
and short term loan repayments of principal and disbursements of loans, foreign
currency account of non residents.

2.4 POSITION OF PAKISTANS CAPITAL AND FINANCIAL


ACCOUNT: Our capital account has shown improvement as compare to 2008-09 but
this improvement is not satisfactory. Our financial account has not shown any
improvement what so ever and it is constantly declining See (table 2.2).

Pakistan has invested $11 million I 2009-10 in other countries which is a good
sign but on the other hand foreign investment is constantly declining from 2007-
08 to 2009-10 and behind decline in foreign investment major reason are law
and order situation and bad governance.

Source Table 2.2: Pakistan economic survey 2009-10, chapter balance of payment page number 101,
table number: 7.11.
2.5 FOREIGN RESERVES:

2.6 POSITION OF PAKISTANS FOREIGN RESERVES: Our foreign


reserves has increased incredibly after 11 September 2001 incidence and they cross
$15 billion which was the highest foreign reserves in the history that were held by
Pakistan in 2006-07 and soon after one year we loss our foreign reserves because of
high import of oil and other commodity. Recently according to SBP report we liquid
foreign reserve of $17.4 billion See (table 2.3).

Source Table 2.3: http://www.sbp.org.pk/ecodata/forex.pdf

Although our foreign reserves right now are the highest in the history of Pakistan but
there is major contribution of IMF- International Monitory Fund borrowed money and
when in the month of June 2011 Pakistan will pay the loan to IMF its foreign reserves
will shrink and the condition of borrowing will become again.

2.7 CURRENT BOPs POSITION: Pakistans Current Account Deficit (CAD)


narrowed down by 65.9 percent as a result CAD declined to $ 3.06 billion in July-April
2009-10 as against $ 8.98 billion last year (see Table.1.0). This decline in CAD during
July-April 2010 was contributed by the improvement in trade, services, income &
current transfers during the period. Specifically, decline in imports and a strong increase
in current transfers played a fundamental role in bringing down the current account
deficit. Decline in trade deficit is due mainly to a fall in imports complimented by
overall improvement in exports during July-April 2009-10. The trade deficit improved
by 18.3 percent during this period. Improvement in services and income account also
played vital role in bringing deficit minimal.
The improvement in income account is based on a decline in investment income
outflows & fall in net interest payments. Income account deficit declined by 29.9
percent during July-April 2009-10 over the same period last year. The deficit in services
trade shrank by 39.9 percent during July-April 2009-10. The increase in services exports
is mainly led by communication, financial, government and other business services.
Among these four groups, communication services exports exhibited significant growth
of 80.2 percent during July-April 2009-10 over the corresponding period last year. This
growth in communication services exports was mainly owed to step taken by Pakistan
Telecom Authority (PTA) to curb illegal traffic in the country. While transportation and
travel remained major categories among the all groups of services export, and these
sectors registered negative growth during July-April 2009-10 because of high oil prices.

2.7BALANCE OF PAYMENT-FUTURE EXPECTATIONS: few future


BOP expectations are given below:

Foreign Direct Investment (FDI) may increase if there is political stability and
continuation of policies.

If the IMF, World Bank and Asian Development Bank release their loans for
Pakistan as promised, than our B.O.P may show some improvement.

Pakistans B.O.P is relying on foreign element and support. If this dependence


diminishes than B.O.P deficit would decrease otherwise its future looks bleak.

Our Prime Minister Promised that energy crisis will come to an end in the Month
of March, 2011 if this happen it will have a good impact on Pakistans BOP.

Our exports may increase and BOP may show good results because of natural
disasters in Australia, Japan etc. so the demand and prices of our raw material
will increase and than Pakistan can earn substantial profit from there and can its
BOP.

Fruits exports from Balochistan, Pakistan can bring foreign earning as there is
strong demand of Pakistani fruits in the countries like Hong Kong, Netherlands,
India, Srilanka, Kenya, Malaysia; Japan etc. by selling this thing Pakistan can
improve its BOP4.

Chinas investors are still showing confidence in investing Pakistans economy.


If this remains constant in upcoming years our BOP will improve.

As recently oil prices reached $104 per barrel it will hurt our BOP because our
major import is based on oil and petroleum.

4
Pakistan and gulf economist, how to boost exports? Feb 14-20, 2011 ,Exporting fruits from
Balochistan , page number 21.
In Short if our government will pay proper attention in boosting exports our
BOP will show positive results in future.
3.0 HISTORY OF PAKISTANS EXPORT
PERFORMANCE EXPORTS FROM 1947
TO 1971:

Pakistan at the time of partition in 1947 consisted of 2


wings East Pakistan and West Pakistan. The economies
of India and Pakistan were complementary before
independence the area which comes to the share of
Pakistan was mainly supplying raw material like jute
from East Pakistan and cotton from West Pakistan to
India and obtained manufactured consumers goods in
return. This pattern of trade continued for sometime but
after the creation of Pakistan, India purchased about
60% of total export of Pakistan. But there was a trade
deadlock with India in September 1949 when Pakistan
refused to devaluate his currency. The sudden refusal of
India to purchase Pakistani jute and cotton created
difficulties for the government of Pakistan. It however,
accepted the challenge and diversified its export to
other countries like UK, Belgium, France, and Italy.
The earning from commodity exports slightly fell from
542.4 million 1948-49 to 535.1 million in 1949-50.
The exports of Pakistans raw material suddenly
increased due to the Korean War in June 1950. The
exports of Pakistan increased to Rs: 1342.5 million in
1950-51 but export earning decline to Rs: 491.4 million
1954-55 partly due to fall in the prices of the raw
material in the international market. In order to increase
export government of Pakistan devalued its currency in
July, 1955. By this act of government export increased
from Rs: 491.4 million in 1954-55 to Rs: 742.40
million in 1955-56. Then there was a continuous
decline in the exports and foreign earning to a low
figure of Rs: 542.9 million in 1961-62. The government
of Pakistan launched various scheme to promote export
of raw material and manufactured goods. The table of
these various schemes is given below:

EXPORTS PROMOTION SCHEMES


Scheme Name Year
Export incentive scheme 1954
Export promotion scheme 1955
Export bonus scheme 1959
Export credit guarantee scheme 1962
Export promotion council 1964
Export market development fund 1966
Pakistan house international 1966
Source Table 3.1: Economics of Pakistan by Professor
M.Saeed Nasir, chapter International Trade page number 178, last
paragraph.

By these above given measures exports increased from


Rs: 542.9 million in 1961-62 to Rs: 1998.4 million in
1970-71.

3.1 PAKISTANS EXPORT


PERFORMANCE AFTER SEPARATION
OF BANGLADESH:
The separation of Bangladesh in December 1971
created problems for the peoples party led by late:
zulfiqar Ali Bhutto government took following
measures to adjust BOP.
1> Devaluated rupee to 131%, 2> Trade
agreement with Muslim countries.

Since 1977-81 there was a sustained increase in


exports, however in 1882-83 export declined by 17%.
In 1984-85 exports decline by 20%. Pakistans exports
grew at an average rate of in the 1990.

3.2 EXPORTS OF PAKISTAN: Exports


amounted to $ 15.9 billion in July-April 2009-10 as
against $ 14.7 billion in same period last year, showing
a growth rate of 8.0 percent compared to the negative
growth rate of 3.0 percent in same period last year.
Higher quantity export of items like rice, fruits and raw
cotton due to their improved production in country
along with recovery of international demand and
exchange rate depreciation were major reasons for the
increase in exports during the improved export.
Source Table 3.2: Economic survey of Pakistan 2009-10,
chapter name balance of payment page 90 and table number 7.1
3.3 MAJOR EXPORTS OF PAKISTAN:
During current fiscal year 2009-10, countrys major
exports followed previous years trend of being
concentrated in five items (cotton manufacturers,
leather, rice, synthetic textile and sports goods).These
five categories accounts for 70.9 percent share in the
total exports during July-March 2009-10 (see Table
3.3). Intensity of concentration further deepens when
analyzed within these five export items, as 51.3 percent
contribution in the total exports came from cotton
manufacturers during July-March 2009-10.
Source Table 3.3: Economic Survey of Pakistan 2009-10,
chapter name balance of payment page 93 and table number 7.2

3.4 COMPOSITION OF PAKISTANS


EXPORTS: The share of primary, semi-
manufactured and manufactured products in
composition of exports since 1994-95 has remained
heavy. But now large share of Pakistans exports
constitute of manufactured goods (see Table.3.4).This
indicates slow movement towards technology and
innovation. More recently, the increase in primary
commodities exports improved production of cotton
crops .The manufactured goods share decline to 3% in
2009-2010 and the main factor was energy crisis faced
by the export sector.

Source Table 3.4: Economic survey of Pakistan 2009-10,


chapter name balance of payment page 94 and table number 7.4
3.5 MAJOR SOURCES OF PAKISTANS
EXPORTS: Pakistan has achieved significant
geographical diversification of its exports. During the
year 2001-2002, 54.9 percent of Pakistani exports were
concentrated in seven major exports markets (USA,
Germany, Japan, UK, Hong Kong, Dubai and Saudi
Arabia) and the remaining exports share of 45.1 percent
consists of all other countries. This direction of export
market continuously declined since 2001-2002 and
presently 31.6% share of exports is held by six major
countries (see Table 3.5) with the remaining countries
making up 68.4 percent of exports. The reliance on
fewer exports markets is the main constraint behind less
exports of Pakistan during July-March 2009-10. Which
suggests that the USA captured the 17.3 percent share
in all export markets of country and still continued to
sustain the largest export market of the country.

Source table 3.5: Economic survey of Pakistan 2009-10,


chapter name balance of payment page 95 and table number 7.5

3.6 CURRENT POSITION OF EXPORT OF


PAKISTAN: The government has revised the export
target for the current financial year 2010-11 at US $22
billion from $20 billion said Makhdoom Amin Faheem
Federal Minister of Commerce in the new cabinet. The
revised target has been set because of record breaking
exports during the last three months, culminating in an
achievement of $2.329 billion in the month of January
2011 in his if the export move with this pace shortly we
will achieve
the target of $22 billion5.

5
Pakistan and gulf economist, how to boost exports? Feb 14-20,2011 , Export target for 2011 revised to
$22 Billion, page number 7,
3.7 IMPORTS OF PAKISTAN: Import growth
during July-April 2009-10 declined by 2.8 percent
against the corresponding period last year. Lower
international prices, compressed domestic demand,
exchange rate depreciation and improved production of
cotton crops remained the major factors behind less
imports. Among the major import groups: food,
machinery and telecom groups witnessed a decline
during July-April 2009-10 while Petroleum, consumer
durables, raw materials and other items showed
increment. So over all mixed trend is observed in
imports of Pakistan in 2009-10 See (table 3.6).

Source Table 3.6: Economic survey of Pakistan 2009-10,


chapter name balance of payment page 97-98 and table number 7.6

3.8 COMPOSITION OF PAKISTANS


IMPORTS: Our imports composition showed mixed
trend our capital goods export decline from 2005-06 to
2009-10 while consumer goods (raw material) showed
consistent increment which shows the sign of
dependence on the other countries see (table 3.7).

Source Table 3.7: Economic survey of Pakistan 2009-10,


chapter name balance of payment page 99 and table number 7.8
3.9 MAJOR SOURCES OF PAKISTANS
IMPORTS: Pakistani imports mostly come from
these 7 countries as USA, UK, Kuwait, Germany,
Malaysia, Japan and Saudi Arabia. Pakistan major share
of imports is constitute by Saudi Arabia although since
203-04 our imports from these countries showed
decline (see table 3.8) while imports from other
countries has consistently increased which is also a
favorable sign because Pakistani government tried to
generate alternative markets.

Source Table 3.8: Economic survey of Pakistan 2009-10,


chapter name balance of payment page 99 and table number 7.9

3.10 RECENT TREND OF IMPORTS:


Pakistan imports have decline -2.8 % in the year 2009-
10 which is a good sign and this decline will observe
because of increasing international prices of goods.
According to some economists this our imports will
decline in the up coming years.

3.11 SUMMARY OF IMPORTS AND


EXPORTS: Over all our exports have shown
tremendous increment while our imports have shown
decline. Exports amounted to $ 15.9 billion in July-
April 2009-10 as against $ 14.7 billion in same period
last year, showing a growth rate of 8.0. Higher quantity
export of items like rice, fruits and raw cotton due to
their improved production in country along with
recovery of international demand and exchange rate
depreciation were major reasons for the increase in
exports
Import growth during July-April 2009-10 declined by
2.8 percent against the last year. Compressed domestic
demand, exchange rate depreciation and improved
production of cotton crops remained the major factors
behind less imports. Among the major import groups:
food, machinery and telecom groups witnessed a
decline during July-April 2009-10 while Petroleum,
consumer durables, raw materials and other items
showed increment. So over all mixed trend is observed
in imports of Pakistan in 2009-10.
4.0 PROBLEMS OF PAKISTAN BALANCE
OF PAYMENT

There are a number of problems that causes imbalance


in Pakistans BOP few of them are given below:

4.1 DEPENDENCE ON TEXTILE: our export


is dependent on textile as 53.5% of our total export is
based on textile so rest of the share is occupied by other
items as Rice, cotton, sugar etc. so still we have not
found different commodity through which we can earn
foreign currency and that dependence is affecting textile
industry.

4.2 IMPORT ORIENTED INDUSTRY: Most


of the import substitution industries which have been
set up in Pakistan are importing inputs and technology.
The import of industrial raw material share is 50% in
our total imports which is eating away our precious
foreign exchange earnings of the country.

4.3 TOUGH COMPETITION IN


INTERNATIONAL MARKET: Our balance of
payment is also adversely affected by the international
market competition because different countries are
technologically very sound so they can produce more
goods with limited input but in our country still we use
sick or idle machineries which increase cost of product
and our country cannot compete in international market
with this

4.4 POLITICAL UNCERTAINTY: political


uncertainty is a big problem for he Pakistan because
when government change it become quite difficult for
the investor to show confidence in the newly form
government and history is full of this sort of events as
recently when PPP (Pakistan peoples Party) came in
Pakistan rupee devaluated to almost 43.3% and it hurt
our BOP while in Musharaf era rupee dollar was traded
against Rs: 60. It is commonly observed in our country
that one government stopped the ongoing projects and
start new one which also cause imbalance in our BOP.
4.5 INCREASE IN PRICES OF INPUTS: the
increase in the prices of fuel, electricity, high cost of
imported machinery, utility etc have increase the cost of
imported goods and industrial raw material on which
domestic industry is heavily dependent. So this general
rise in process of imports make Pakistani product
expensive in international market and we always
remain backward in achieving the export target.

4.6 FISCAL POLICY: Behind persistent BOP


deficit there is also a role of fiscal policy because there
are a number of flows in our fiscal policy e.g. our
government have made our businesses life difficult by
imposing heavy taxes on them so what happened with
taxes? When these axes are imposed businesses have
fewer amounts to spend in new projects or for
reinvestment in other areas.

4.7 EXPORTS OF PRIMARY GOODS AND


IMPORTS OF FINISHED GOODS: More
than 30% of our total export is based on primary goods
as Raw Cotton, Jute, Rice etc. while in return we import
capital goods as machineries etc. so what happened?
We pay more on capital goods and earn less foreign
earning from our primary goods.

4.8 ENERGY CRISIS: As we know our industries


cannot run on their capacity unless or until electricity is
provided on regular basis, but unfortunately but
unfortunately electricity is not being provided to our
industries due to a number of reasons one of them is the
incapacity of power plants to operate due to obsolete
machineries. The domestic demand of electricity in
2010 is 20584 MW (Mega Watt) while supply or
installed electricity capacity is 15055 MW6. This gap
-5529 MW is filled by load shedding and this act
adversely affects industry as their production doesnt
occur and hey wont achieve their export target.
Ultimately when they cannot export their goods foreign
earning is stopped while on the other hand imports
remain stable which increase the deficit of BOP.

6
Pakistan and gulf economist, Power emergency, Feb 2-8,2009 , Fact sheet page number 61, table 1.
4.9 DEPENDENCE ON FOREIGN
ASSISTANCE: There is an old saying one who do
wrong thing unconsciously is a mistake but if he repeat
his same behavior then it is not a mistake it is a nature
and one cannot change the nature of any person. Same
as given in words apply on our government and its
partners. They borrow money from other countries and
institutes and dont utilize that money in proper way
and when maturities of these loans come they again
borrow from other institutes as IMF. So this consistent
act of borrowing from all the previous governments has
worsens the BOP deficit and it is a big problem which
Pakistan faces now a days.

4.10 NATURAL DISASTERS: Flood, earth


quake etc have adversely affected our economy
specially our balance of payment billions of rupees are
being spend on reconstruction and rehabilitation while
thousand of hectare of agricultural products are affected
by these things. Hence what happened? Then we cannot
meet our domestic demand and import goods and this
create BOP deficit gap.

4.11 SHORTAGE OF AVAILABILITY OF


CREDIT TO PRIVATE SECTOR: Due to State
Bank Of Pakistan (SBP) tight monitory policy credit is
out of reach from private sector because of higher
interest rate. Since if private sector wont have enough
money how can? We boost our export in other
countries.

4.12 LIMITED COUNTRIES EXPORTS:


Our export is just limited to few countries as USA
(United States Of America), UK (United Kingdom),
China, Saudi Arabia etc more than % of our export goes
in these countries7. We have not found our ways to
enter in other countries by bilateral trade agreement or
by any other means in order to remove BOP deficit.

4.13 STRIKES AND PROCESSIONS: the


daily strikes and procession badly hurt our industrialist
because they have to make their export target complete
in time when these things occur their firms remain close
7
Economic survey of Pakistan 2009-10, chapter name balance of payment, topic name direction of
exports page 94
and it hurt the goodwill of Pakistani exporters as well as
Pakistans image in international market.

4.14 RISE IN FREIGHT RATES: The rapid


rise in the air and sea freight rates has also adversely
affected the BOP of Pakistan. The rise in freight in
because of increased oil prices.

4.15 CONSUMPTION ORIENTED


SOCIETY: Pakistanis are mostly consumption
oriented. Due to rapid rise in population and increased
consumption habits, the domestic manufactured goods
are mostly consumed in the country. So when the
domestic demand is not fulfilled properly how can we
export?
5.0 IMPACTS OF BALANCE OF
PAYMENT DEFICIT ON ECONOMY

If any country BOP face consistent deficit then it is not


a good sign for the country because foreign investors
think if there is no trade how we will get return so they
crowd out that economy. when there is constant deficit
following impacts may come:

1. Foreign reserves of country shrink


2. It leads the country to borrow money from other
financial institutions.
3. Foreign earning will decrease.
4. Countrys currency value may depreciate.

The example of the above given heading is given


below:

5.1 FOREIGN RESERVES OF COUNTRY


SHRINK: When there is a Consistent BOP deficit
reserve of countries shrinks rapidly because imports of
the country increase and exports decrease.
For example: say suppose there is A country who has
foreign reserve of $2 billion and their exports is $.5
billion while imports are $2 billion. So what happened
to country A Foreign reserves? Mathematically it is
given below:

Country A Foreign Reserve


$2 billion
Country A Exports / Foreign earnings
$.5 billion
Sub total
$2.5 billion

Less: payments for imports


$2 billion

Grand total
$.5 billion
So this example clearly show that how quickly county
A reserves fall and how BOP effect foreign reserves
of country.

5.2 IT LEADS US TO BORROW MONEY


FROM OTHER FINANCIAL
INSTITUTIONS: when consistent deficit remain in
countrys BOP it leads the country to borrow from
institutes as IMF- International Monitory Fund as
Pakistan did. Pakistan current account deficit was
$13.735 billion when our governments borrow money
from IMF, so it shows hat if BOP deficit remain it leads
the country to borrow and these institutes make
countries dependent on their money which is a very bad
sign.

5.3 FOREIGN EARNING WILL


DECREASE: It is matter of fact that if consistent
deficit remain in countrys BOP then it means that
country exports are les than its import when exports are
less there will be less foreign earning.

5.4 COUNTRYS CURRENCY VALUE


MAY DEPRECIATE: when persistent deficit
remain in Countrys BOP its currency rate depreciate
against other currencies as happened in Pakistan. For
example: After remaining at stable position for more
than four years, Pak rupee started to lose significant
value against US dollar and it depreciated by 22 percent
in the period of Jan-Nov 2008. This depreciation was
attributed to factors like substantial loss of foreign
exchange reserves, political uncertainty, speculative
activities in foreign exchange markets and trade related
outflows. Due to Pakistans entry in standby agreement
with International Monetary Fund (IMF) in November
2008 along with market conditions at that time,
Pakistan adopted a more flexible exchange rate regime.
After shift towards more flexible exchange rate regime,
country witnessed a slow down in exchange rate
depreciation of 2.5 percent during Dec-Jun 2008-09.
More recently, owing to the overall external account
improvement and stable reserve position has made
Pakistani rupee some what stable and it also appreciated
some time against dollar8.

PAKISTANS CURRENCY RATE

US $ RATES PER PAKISTAN RUPEE

YEAR LEADERS US
1972 Zulfiqar Ali Bhutto Rs:
1977 Zulfiqar Ali Bhutto Rs:
1983 General Zia-ul-Haq Rs:1
1987 General Zia-ul-Haq Rs:1
1990 Benazir Bhutto Rs:
1991 Nawaz Sharif Rs:
1994 Benazir Bhutto Rs:3
1996 Benazir Bhutto Rs:4
1997-99 Nawaz Sharif Rs:
1999-08 Parwaiz Musharaf Rs:
2009 Syed Yousuf Raza Gillani Rs:
Source Table 5.1: Pakistan and gulf economist, Inflation
and interest rate Feb 15-21, 2010, Fact Sheet, page
number 48

As the above given table suggests as our BOP is in


constant deficit, our exchange rate is constantly
fluctuating as given in the above table see (table 5.1).

8
Economic survey of Pakistan 2009-10, chapter name balance of payment topic: Exchange rate, page
105
6.0 SUGGESTIONS TO OVERCOME
BALANCE OF PAYMENT DEFICIT

There is no magic through which we can change our


BOP deficit but it is required from us to take concrete
measures in order to make our BOP favorable few the
suggestions which can turn our BOP deficit into a good
position are given below:

6.1 IMPROVE THE TECHNOLOGY: We


should improve the technology of our manufacturing as
well as agriculture sector because these are the sectors
which contribute a lot in our exports.

6.2 EXPLORATION OF NEW MARKETS:


In order to remove BOP deficit Pakistan should explore
new market for their product and also do different trade
agreement with Muslim countries to boost our export.
Actually, now exploration of new market is not just
requirement for Pakistan but it is necessary for Pakistan
because Pakistan is a country with thousands of natural
resources and products so there are number of countries
which can get benefit from Pakistani product for
example: Ali Orozov, Ambassador Kyrgyzstan to
Pakistan in is interview to Khizer H Schon Executive
director of Schongroup in Karachi. Ambassador of
Kyrgyzstan feels that Kyrgyz is an attractive place for
Pakistan to export fertilizer and pesticides. He is also
looking to import pharmaceuticals, textile products and
building material as steel, cement and marbles ties
etc9. So Pakistan can get benefits by providing them
god products and can get foreign currency.

6.3 BAN ON STRIKES AND


PROCESSIONS: The daily strikes and procession
by the political parties must be regulated and controlled
because these things give loss of billions to our
industrial sector which is considered to be as a
backbone of our export.

6.4 LAW AND ORDER: Law and order situation


should be addressed and efforts should be made to
restore law and order situation and wrap up the
9
Pakistan and gulf economist, how to boost exports? Feb 14-20,2011 ,Kyrgyz holds immense trade
opportunities for Pakistan , page number 8,
countrys war on terrorism. Both these factors are
expected to cover the system for increase in production
and exports. Also, these improvements should have
valuable effects on FDI and tourism inflows.

6.5 BRAND ORIENTED MARKETING:


Pakistan rather selling their product to other countries
without proper brand name, Pakistani firms should
create brand image as Gray Nicholas import semi
finished bats from Pakistan and tag their brand name on
it and sell them at higher prices, so Pakistan should also
adopt this policy if they can make quality bats so they
can also them as well.

6.6 COST OF DOING BUSINESS: cost o


doing business has to be reduced to international
competitive levels. Interest rate should be reduced so
that private sector may get credit and flourish him into a
new exporter for the country.

6.7 DEPENDENCE ON TEXTILE SECTOR


EXPORTS: It should be removed and new export
products that can be exported to another country, new
export should be explore as marbles of Baluchistan.

6.8 MINIMIZE EXPENDITURE ON


IMPORTING SERVICES: The expenditure on
invisible imports as services should be curtailed
because services are only for the year while visible
goods as machineries should be imported because it has
long lasting effect on economy and they will give
foreign earning in future.

6.9 EXPORT OF FINISHED GOODS


RATHER THAN PRIMARY GOODS: We
should export finished goods rather than primary goods
because it will give us more foreign earnings. Same
thing has been done by other countries as Bangladesh,
India, and Srilanka. From the last few years they were
selling these primary goods but soon after they realize
that is not enough so now they offer there primary as
well as finished goods in international markets.
6.10 RESOLUTION OF ENERGY
PROBLEM: Energy crisis should be met by short
term and long term planning and measures for short
term we can use solar energy as a source of electricity
while in long term government can construct big dams,
while cheapest of them is wind energy which cost $3
billion and we can get 50000 MW Of electricity from
it10.

6.11 IMPROVE FISCAL POLICY: Fiscal


policy should be addressed accurately as export duty
should be minimized while import duty should be
increased on finished products while imports duty
relaxation should be given to capital goods and raw
material so that our industrialist get tax benefit.

6.12 IMPROVE INFRASTRUCTURE:


Pakistani government should make efforts in order to
make sure it provide goods to other countries on time
because our transportation system is very weak while
transportation cost is very high in our country because
of high oil prices so government should take measures
in order to solve this issue by improving infrastructure
and by providing different incentives to exporters.

In short above given are only the measures that are


being suggested but now it all depending on
government willingness to improve our BOP deficit
otherwise no third-party will come to solve this
problem our government should take measures to
improve our BOP.

CONCLUSION

So by studying we conclude that although Pakistans


Balance of payments has shown improvement and all
the account except income and capital has shown
improvement. If the law and order situation improves
and the war against terrorism end hopefully our BOP
will show more improvement than it is right now.

10
Pakistan and gulf economist, Power emergency, Feb 2-8,2009 ,topic Energy crisis : reality or
myth by Mohammad Ashfaq, page number 23
2009-10 was a good year for Pakistan BOP perspective
as our exports increase and imports decrease after a
long period of time we face balance of trade surplus.
But our government should not stay calm because as
international markets commodity prices are increasing
it will adversely affect our BOP and our balance of
trade surplus will soon turn into deficit and for
removing this gap our government will again beg from
other countries or financial institutes as IMF.

Pakistan has got a lot of potential in a number of


products as agricultural, manufactured products as cloth
etc but the thing is that all these things should be
collaboratively joined together to bring the desire
outcome and if our policy makers utilize their resources
properly then there is no doubt Pakistan will emerge as
a prosperous country on the map of the world.

BOP is our external account recently what our


government is trying is just to portrait a picture which
only looks good but they are forgetting that what about
the other things unemployment, drone attacks, target
killing and poverty who will pay attention on them? But
who care? Just increasing BOP is not enough our
government should come with clear vision what they
want to achieve, improve their taxation system and hire
Professional people so that these people bring changes
in our economy.

Proper measures are required in order to bring all these


above given problems come to an end otherwise our
foreign debt will increase and our foreign reserves will
shrink which will lead us to borrow money and we will
remain backward.

Last but not the least, now it all depends on the hands
of those people on which our future relies if these
people show willingness than our BOP and our country
position will improve, but other wise there are no sign
seems to appear now. We do hope that our politicians
and our leaders understand that reliance on the foreign
assistance and borrowing is not a good thing we should
stand on our own feet and in order to achieve that we
should work with sincerity, honesty, loyally. We should
take example from Japan how they have achieved
progress when atom bomb was dropped on Japan
nothing was left but they rose up as a nation and now
they are the most developed nation of this world.

MAY ALMIGHTY ALLAH BLESS OUR


COUNTRY PAKISTAN
AMEEN
REFERENCES

Economics of Pakistan by Professor M. Saeed


Nasir chapter International trade page 183.

Economics of Pakistan by M. Seed Nasir edition


2009-10, chapter international trade page
number 184.

Kawish Newspaper, 20 January 2011 page


number 3.

Pakistan and gulf economist, how to boost


exports? Feb 14-20, 2011, Exporting fruits from
Balochistan, page number 21.

Pakistan and gulf economist, how to boost


exports? Feb 14-20,2011 , Export target for
2011 revised to $22 Billion, page number 7,

Pakistan and gulf economist, Power emergency,


Feb 2-8,2009 , Fact sheet page number 61, table

Economic survey of Pakistan 2009-10, chapter


name balance of payment, topic name direction
of exports page 94

Economic survey of Pakistan 2009-10, chapter


name balance of payment topic: Exchange rate,
page 105

Pakistan and gulf economist, how to boost


exports? Feb 14-20,2011 ,Kyrgyz holds
immense trade opportunities for Pakistan , page
number 8,

Pakistan and gulf economist, Power emergency,


Feb 2-8,2009 ,topic Energy crisis : reality or
myth by Mohammad Ashfaq, page number 23