BALANCE OF

PAYMENTS
Introduction

The balance of payments (BOP) is the method countries use to monitor

all international monetary transactions at a specific period of time.
All trades conducted by both the private and public sectors are
accounted for in the BOP in order to determine how much money is
going in and out of a country. If a country has received money, this is
known as a credit, and if a country has paid or given money, the
transaction is counted as a debit. Theoretically, the BOP should be zero,
meaning that assets (credits) and liabilities (debits) should balance, but
in practice this is rarely the case. Thus, the BOP can tell the observer if a
country has a deficit or a surplus and from which part of the economy
the discrepancies are stemming.
Submitted By
Division of balance of payments
Abdul Moiz
The Current Account Saad Ali
MONEY AND BANKING
The current account is used to mark the inflow
Assignment no. 01
Syed Irtiza
and outflow Haider
of goods
and services into a country. Earnings on investments, both public and
private, are also put into the current account. Zain ur Rahman
Awais Qayyum
The Capital Account
Submitted to: Sir BBA-4th
The capital
Hassan Kamran account is where all international capital transfers
Semesterare
recorded. This refers to the acquisition or disposal of non-financial
assets (for example, a physical asset such as land) and non-produced
INSTITUTE
assets, OF for
which are needed BUSINESS
production butADMINISTRATION,
have not been produced, like
a mineUNIVERSITY
used for the extraction
OF ofTHE
diamonds.
PUNJAB, LAHORE.
The Financial Account
In the financial account, international monetary flows related to
investment in business, real estate, bonds and stocks are documented.

Balance of trade of Pakistan

Pakistan recorded a trade deficit of 293929 PKR Million in February
of 2017. Balance of Trade in Pakistan averaged -30212.90 PKR Million
from 1957 until 2017, reaching an all-time high of 6457 PKR Million in
June of 2003 and a record low of -308337 PKR Million in January of
2017.
 Pakistan has been running consistent trade deficit since
2003 mainly due to high imports of energy. Since 2012,
China has emerged as Pakistans largest trading partner
replacing the United States.

Trends of exports and imports of

Pakistan

Major imports and exports

Pakistan's imports are also highly concentrated in few

items namely, machinery, petroleum and petroleum
products, chemicals, transport equipment, edible oil, iron
and steel, fertilizer and tea.
Pakistan exports parathas, roti (highest), rice, kinnows,
mangoes, furniture, cotton fiber, cement, tiles, marble,
textiles, clothing, leather goods, sports goods (renowned
for footballs/soccer balls), cutlery, surgical instruments,
electrical appliances, software, carpets, rugs, ice cream,
livestock meat, chicken, powdered milk, wheat, seafood
(especially shrimp/prawns), vegetables, processed food
items.

Imports of Pakistan

Imports in Pakistan decreased to 465440 PKR Million in

February from 494721 PKR Million in January of 2017.
Imports in Pakistan averaged 68959.61 PKR Million from
1957 until 2017, reaching an all-time high of 494721 PKR
Million in January of 2017 and a record low of 96 PKR
Million in April of 1959.
Exports of Pakistan
Exports in Pakistan decreased to 171511 PKR Million in
February from 186384 PKR Million in January of 2017.
Exports in Pakistan averaged 39006.25 PKR Million from
1957 until 2017, reaching an all-time high of 275483 PKR
Million in September of 2013 and a record low of 51 PKR
Million in April of 1958.
 Role of Banks in improvement of Balance of Payments

Not only banks but government policies, other financial institutions

and measures on financial markets can play their role in improving
Balance of Payments deficit. No reliance can be placed on any single
tool. There is room for more than one approach. But the application of
these tools depends upon the nature of the disequilibrium.

Following are some measures which can be taken to improve BOP

deficit:
 Central Bank along with commercial banks can play their role to
improve macroeconomic stability to make Pakistan more attractive
to inward investment. Investment can raise productivity and
increase our capacity to export. If BOT improves then BOP
improves.

Reductions in government spending, increase in interest rates and

higher taxes.

The Central Bank can lower the exchange rate which will reduce
the overseas price of exports & make imports more expensive
.
Central Bank can regulate the supply of money to provide the
government with cheap or even costless funds.

The government can introduce a temporary deflation which would

make our items cheaper in foreign markets which will result in a
rise in our exports. However, deflation can be successful when the
exchange rate remains fixed.

Financial markets can introduce Exchange Depreciation which

means decline in the rate of exchange of domestic currency in
terms of foreign currency. It stimulates exports & reduces imports
because exports will become cheaper and imports costlier. But it
increases uncertainty and risks in foreign trade and it may result in
hyper-inflation.
 Devaluation refers to deliberate attempt made by monetary
authorities to bring down the value of home currency against
foreign currency. Devaluation is only successful when demand for
exports & imports is elastic. Devaluation may not be effective if
the deficit arises due to cyclical or structural changes.

Tight Monetary Policy; For this bank rate is raised by the Central
Bank of the country which leads to higher lending rates charged by
the commercial banks. This discourages businessmen to borrow for
investment and consumers to borrow for buying durable consumers
goods. This will help in reducing aggregate expenditure and,
depending on the income propensity to import, will curtail imports.
Besides, tight monetary policy helps to reduce prices or lower the
rate of inflation. Lower price level or lower inflation rate will curb
the tendency to import, both on the part of businessmen and
consumers. In a developing country, monetary policy has to be
used along with other policies such as an appropriate fiscal policy
and trade policy to tackle the problem of disequilibrium in the
balance of payments.

Contractionary Fiscal Policy; an increase in direct taxes such as

income tax will reduce aggregate expenditure. A part of reduction
in expenditure may lead to decrease in imports. The other fiscal
policy measure is to reduce Government expenditure, especially
unproductive or non-developmental expenditure. The cut in
Government expenditure will not only reduce expenditure directly
but also indirectly through the operation of multiplier. If tight
monetary and contractionary fiscal policies succeed in lowing
 aggregate expenditure which causes reduction in prices or lowering
the rate of inflation, they will work in two ways to improve the
balance of payments. First, fall in domestic prices or lower rate of
inflation will induce people to buy domestic products rather than
imported goods. Second, lower domestic prices or lower rate of
inflation will stimulate exports. Fall in imports and rise in exports
will help in reducing deficit in balance of payments. However, it
may be emphasized again that the method of reducing expenditure
through contractionary monetary and fiscal policies is not without
limitations. If reduction in aggregate demand lowers investment,
this will adversely affect economic growth. Thus, correction in
balance of payments may be achieved at the expense of economic
growth.

How to improve BOP through Imports and Exports?

Balance of trade is the difference between imports and exports.

Balance of trade is an indispensable component of BOP. Due to a large
difference in imports and exports the balance of trade is negative which
has created a negative impact on BOP. The major reason for our balance
of trade deficit is high levels of consumer spending and low savings
ratio. Pakistan needs to improve its trade strategy. As a consequence of
misplaced policies, Pakistans imports have surged, far outstripping
exports.

How to increase EXPORTS?

Give export incentives
Subsidies
Rapid Industrialization
Increase import tariffs
Get rid of energy crisis
Provide protection to domestic industry
Market Research-textile and food are not the only products for us.
Export Promotion Beauru should perform a proactive role by
selecting goods & services which give us a comparative advantage.
Human Resource Training-to implement skills at the right place.
SMEs should be facilitated and encouraged to export.
Purchase local raw materials at cheap prices.
Increase private-public partnership
Avoid low quality value added products and traditional export
channels
Sales Tax Refund scheme for exporters should be implemented as
soon as possible.

How to reduce IMPORTS?

Fix quotas for a specific time

Increase custom surcharges
Devalue currency which will increase the price of imported goods
Higher interest rate will reduce the consumption of import. A boost
in manufacturing sector will decrease dependency on imports