Presented By: Shankar Lal Wadhwa

Presented By: Shankar Lal Wadhwa

A record of all transactions between the residents of a country and the rest of the world during a certain period of time, generally a year Classification Includes:
Current Account Capital Account

Transactions with the non residents which are settled immediately and do not create any future liability are included in the current account.

It further divided in to: 1) Net export of goods (export-import) 2) Net receipts on A/c of service (Net Investment income=Income earnings on foreign investments payments made to foreign investments), and, 3) Net unilateral transfers: such as foreign aid or gift of money from a resident of one country to family members living in another country

It is a record of all international transactions for assets. Assets include bonds treasury bills, bank deposits, stocks, currency, real estate etc It is used in financing of CAD.

It includes the reserve account, along with loans and investments between the country and rest of the World.

When residents of country sell more assets than they buy from foreigners, the capital A/c balance is positive creating a capital Account surplus. When residents purchase more assets than they sell, the capital account balance is negative, creating a capital

account deficit.

The current account should balance with the capital account, because every transaction is recorded as both a credit and a debit, and since credits must equal debits and the balance of payments is equal to credits minus debits, the sum of the balance of payments statements should be zero. For practical reasons, however, it deviates slightly from zero.
BOP = Current Account + Capital Account = Credits - Debits 0

Trade Deficit improved (declined) by 13.9% in July-Apr 2009-10, from $14.2 B in July-Apr 2008-09 to $12.2 B. Improvement comparatively broad based both Exports and Imports contributed. Improvement in Trade Balance is due to: Massive fall in import expenditures due to decline in international prices Export recorded the growth of 8% during july2009-10 due to exchange rate depreciation and improved production of crops.

Expectations of increase in international oil prices in coming months can have adverse effect on trade balance.

Exports amounted to $15.9 B. Growth of 8% in ten months. Preceding period decline of 3%. Higher quantum export of items like rice, fruits and raw cotton. All major sectors witnessed positive growth. Food Group increased by 7.1%. Major contributor rice and fruits. Quantity export of rice increased by 66% and for non Banaspati rice increased by 100%. Textile export increased by 7% in 10 months, compared to decline of 9.3% in preceding period.

Textiles which is a major driver of the exports of Pak captured 53.3% share in total exports during current fiscal year and witnessed an increase of 7%. While petroleum group & other manufactutres collectively contribute approxmately 24% of total exports.

During FY10, services account deficit contracted by 51.0 % compared to 47.6 % decline last year recording lowest deficit in six years The impressive growth in the services exports during FY10 was on account of robust performance by the government services sector. Receipts from international bodies, remittances received by foreign missions in Pakistan by embassies and consulates. Growth of 25.4 % during FY10 compared to growth of 14.4 % last year

Transportation services exports witnessed a decline of 6.6% during FY10 against an increase of 18.9 % last year due to lower freight earnings on account of falling merchandise exports and reduced earnings of domestic airlines

import decline by 2.8% against last year.

Decline in imports due to:

Lower international prices

Compressed domestic demand

Exchange rate depreciation, and,

Improved production of crops.

Food group imports declined by 21.3 percent during JulyApril 200910 over the corresponding period last year. This decline in food group is due to import as unit values of most of food items remained higher during JulyApril 200910 over same period last year. Within food group items, wheat import bill witnessed the maximum decline of 96.4 percent while

sugar which increased by 591.6 percent during JulyApril 200910 against the same period last year mainly as a result of the efforts to improve the domestic supply condition of sugar in the country.

Machinery group import declined by 10.6 percent

during JulyApril 200910 over the same period last year and witnessed a decline of $ 460.0 million in absolute terms during current fiscal year 200910. Import of agricultural machinery posted an increase of 130.6 percent growth in overall import bill of the country. This growth in agriculture machinery is led by increased import of tractors and parts of tractors on the back of projects like Green and Benazir Tractor Schemes.

Textile machinery import witnessed substantial growth of 20.5 percent during JulyApril 200910. This can be seen as a reflection of the revival in textile related activities in the country.

Maximum increase among all major import groups has been witnessed in consumer durable group, This rise is mainly led by increase in domestic demand of road vehicle import which exhibits a growth rate of 25.6 percent during the period. During JulyApril 200910 import group of raw material witnessed a growth rate of 1.5 percent. import of fertilizer manufactured remained the prominent factor leading to the increase in import bill of raw material group.

Among all major import groups, the highest decline was observed in Telecom sector, which declined by 30.1 percent during period under review. This decline in telecom sector shows the saturation in telecom market

Terms of Trade (ToT) = export prices/ import prices. Persistent deterioration since 1998-99. Improvement of 2.8% in 2008-09 year.

This improvement in countrys terms of trade also contributed in the decline of CAD during the period under review. However, during JulyMarch 200910, terms of trade could not sustain the process of improvement which started in 200809 due to increase in unit value index of imports and stagnation in unit value indices during July March 200910 over the comparable period last year.

As a result, countrys terms of trade aggregated to 54.9 during JulyMarch 200910 as compared to 56.3 of JulyMarch 200809 thereby witnessed a deterioration of 2.5 percent during the period under review

Pakistans Current account deficit (CAD) narrowed down by 65.9% to $3.06 B as against $8.98 B in the preceding year. This decline in CAD during JulyApril 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. The trade deficit improved by 18.3 percent during this period. Decline in trade deficit is due mainly to a fall in imports complimented by overall improvement in exports during JulyApril 200910.

The improvement in income account is based on a decline in investment income outflows & fall in net interest payments. Deficit declined by 29.9% The decreased deficit (39.9%) of the services account is mainly attributable to: Lower payments on account of transportation because of lower imports Lower payments for other business services

As against Current a/c, Decline in financial account surplus which is fall of 14.5% during July-April 2009-10. The deficit in Financial acount is attributed to: lower loan inflows and maturity of sovereign financial instrument (Sukuk worth $600 million). Fall would be even higher if not for non-recurring SDRS allocation by the IMF.

FDI declined due to: foreign investors risk averseness and severe power deficit. Sectors that recorded decline included communication, financial business and oil & gas exploration. Portfolio investment has increased. However, inflows are short term in nature and notoriously volatile.

1.5(a) Foreign Direct Investment

According to UNCTAD, the global inflows of FDI declined by 40% in 2009.

Remittances have surged by 15% during July-April 200910. February 10 is the only exception amongst the ten months to decline. October 09 witnessed a highest growth of 62.7% during the year. UK and UAE witnessed highest growth rate of 57% and 21.7% respectively in 2009-10. Higher remittances from UK seem to be the result of aggressive bilateral tie-ups to commercial banks with foreign entities under PRI Program. Surge in UAE remittances is due to: (1) Diversion of a part of remittances from informal to formal channels and (2) increased outreach of banks having arrangement with overseas entities.

Reserves decline by 27% in 2007-08 . Major reasons behind the fall in reserves in remained the net outflows from portfolio investment and steep rise in the CAD. Recovery in reserves in 2008-09 was contributed by inflows from IMF and other agencies. Pakistans foreign reserves increased substantially from $ 12.4 billion in endJune 2009 to $ 15.0 billion in endApril 2010 is contributed by lower CAD, inflows from IFIs, reduced market support and higher remittances. Bulk of accumulation was concentrated in first quarter. Result in surge in reserves is witnessed through relative stability in the exchange rate and subsequent increases in foreign currency deposits. The reserves held by the State Bank of Pakistan stood at $ 11.2 billion with the banking system holding $ 3.9 billion in reserves by endApril 2010

After remaining at stable position for more than four years, PKR started to lose significant value against USD and it depreciated by 22% in the period of Jan-Nov 08. This was attributed to factors like:

Substantial loss of foreign exchange reserves Political uncertainty Speculative activities in foreign exchange market Trade related outflows

Pakistan entered in standby agreement with IMF in Nov 08, and adopted a more flexible exchange rate regime. PKR depreciated 3.9% during July-March 2009-10 against USD compared to sharp decline of 16.2% in the corresponding period last year.

The improvement in inflows on account of portfolio investment and workers remittances backed PKR.
Euro and Pound depreciated by 1.8% and 6.3% respectively against PKR during July-March 09-10. This PKR appreciation was primarily driven by the relative strength of USD against Euro and Pound and PKRs relative stability against USD.

Developed by Ministry of Commerce. Overall objective is to achieve sustainable economic growth through exports. STPF is based on 6 Pillars:
I. II. III. IV. V. VI. Supportive Macro policies and services Enhancing product sophistication level in Pakistans Exports Enhancing firm level competitiveness Domestic commerce reform and development Product and Market diversification, and, Making trade work for sustainable development in Pakistan.

Targets of export growth of 6%, 10% and 13% for 2009-10, 2010-11 and 2011-12 respectively.

Since FY03, the trade balance in goods is in continuous deficit, and the deficit is ever increasing. Ever increasing current account deficit leads to difficulty in controlling the budgetary deficit, which is also influenced by lack of governance. Causes of Balance of Payments difficulties are:
Inability to increase value addition to the raw materials we export. This inability stems from the high cost of energy, poor infrastructure and low capital investment in modernization process. Factors of low production, low quality, income inelastic demand for our products and weak image of the Pakistani traders.

Need to explore the largely untapped area of services where relatively little investment is required. Services currently account for over 60% of global production and employment.
Exports, which are adversely affected by factors, such as: law and order & war on terror, power shortage, increase in unit prices of imports used as inputs for exportable and various demand side constraints.

Workers remittance a big part of net transfers is largely supporting the balance of payments. Increasing Budget Deficit is building pressure on our external resources. As a result the cost of borrowing is increasing; FDI inflows are drying up. Our reserves are built on borrowing from the IMF. The long term sustainable level of the balance of payments deficit, in case of Pakistan is in the range of 2-3% of GDP, depends on two fundamental variables:
The ratio of foreign savings to investment; Growth in foreign exchange earnings from exports of goods and services, workers remittances and other private transfers.

I.

Efforts should be made to restore law and order and conclude the countrys war on terrorism. Restoration should pave the way for increase in production, exports, FDI and tourism inflows. Increase in FDI should lead to modernization which will lead to expansion in services and growth in production.

II.

III.

Inflow of FDI should also lead to capacity building in human resource sectors. Even if skilled people move abroad, that should lead to expansion in home remittances.
Progress should be made in good governance, particularly transparent and timely decision making, monitoring of efficient implementation and setting up effective accountability mechanisms. Control of law and order situation will give boost to our stock exchange and consequently lead to an increased foreign portfolio investment.

IV.

V.

The quality of social and physical infrastructure should be improved. Alternative energy resources should be developed. There should be improvement in macroeconomic stability, particularly containment of inflation and keeping Pakistan rupee competitive in the international markets. Serious efforts are needed to diversify our exports with emphasis on the services sector, dairy products, fruit and vegetables and labor intensive segments of small scale industry.

There is also a need to revisit the direction of exports and exploit untapped markets.

Establish a ceiling for the share of foreign savings in total investment.

Place limits on total external debt and foreign investment (debt and equity) servicing obligations in relation to total foreign exchange earnings.
Maintain a balance between debt and equity to meet a given balance of payments gap. Ratio of 1:2 is recommended (only one third of new obligations in debt). Board of Investment (BOI) need to gear up its efforts to attract FDI to upgrade technologies, Export-related industries mainly textile and energy sector. Credit subsidies in support of textile exports where international prices are falling is not a good option.

The Government needs to review the overall production structure of the country to determine whether the present tariff regime encourages production for domestic consumption or exports.

New promising areas of IT exports and agricultural and livestock product exports should be pursued.
We need to increase domestic savings and investment. Government policies need to be adjusted to ensure social safety nets for the poor.

Skill development and training schemes must be instituted so that any displaced workers can be quickly retained, relocated and reabsorbed in the labor force. Reduced tariffs, particularly on imported raw material, components and machinery can help boost exports.

THANK YOU