WEEK 9

BALANCE OF PAYMENTS, IMF, FDI,

REMITTANCES, EASE OF DOING BUSINESS

INSTRUCTOR: INAM GHANI QPM & BAR, PSP

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 THE BALANCE OF PAYMENTS
• Kindle Berger definition, "The balance of payments of a country is a systematic record of all
economic transactions between the residents of the reporting country and residents of
foreign countries during a given period of time".
• It is the method countries use to monitor all international monetary transactions in a specific
period.
• It is usually calculated every quarter and every calendar year.
• All trades conducted by both the private and public sectors are accounted for in the BOP 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. 2

• The BOP is divided into the current account, the capital account, and the financial account.
• The Current Account
• It 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.
• Within the current account are credits and debits on the trade of merchandise, which
includes goods such as raw materials and manufactured goods that are bought, sold, or
given away (possibly in the form of aid).
• Goods and services together make up a country's BOT. It makes up total imports and
exports. If a country has a BOT deficit, it imports more than it exports, and if it has a
BOT surplus, it exports more than it imports.
• Receipts from income-generating assets such as stocks in the form of dividends are also
recorded in the current account.
• The last component of the current account is unilateral transfers.
• These are credits that are mostly workers’ remittances, which are salaries sent back into
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the home country of a national working abroad, as well as foreign aid that is directly
received.
• The Capital Account
• The capital account is where all international capital transfers are recorded.
• This refers to the acquisition or disposal of nonfinancial assets and non-produced assets,
which are needed for production but have not been produced, such as a mine used for the
extraction of diamonds.
• The capital account is broken down into
• the monetary flows branching from debt forgiveness,
• the transfer of goods, and
• financial assets by migrants leaving or entering a country,
• the transfer of ownership on fixed assets (assets such as equipment used in the
production process to generate income),
• the transfer of funds received to the sale or acquisition of fixed assets, gift and
inheritance taxes, death levies, and, finally, uninsured damage to fixed assets.
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• The Financial Account
• In the financial account, international monetary flows related to investment in business,
real estate, bonds, and stocks are documented.
• Also included are government-owned assets, such as foreign reserves, gold, special
drawing rights (SDRs) held with the IMF, private assets held abroad, and direct foreign
investment.
• Assets owned by foreigners, private and official, are also recorded in the financial
account.
• The current account should be balanced against the combined capital and financial accounts.
• If a country has a fixed asset abroad, this borrowed amount is marked as a capital account
outflow.
• However, the sale of that fixed asset would be considered a current account inflow (earnings
from investments).
• When a country has a current account deficit that is financed by the capital account, the
country is actually foregoing capital assets for more goods and services.
• If a country is borrowing money to fund its current account deficit, this would appear as an
inflow of foreign capital in the BOP. 5
• Some economists believe that the liberalization of BOP restrictions eventually lead to
financial crises in emerging market nations, such as the Asian financial crisis.
• Many of these countries had restrictive macroeconomic policies, by which regulations
prevented foreign ownership of financial and nonfinancial assets.
• The regulations also limited the transfer of funds abroad.
• With capital and financial account liberalization, capital markets began to grow, not only
allowing a more transparent and sophisticated market for investors but also giving rise to
foreign direct investment (FDI).
• For example, investments in the form of a new power station would bring a country greater
exposure to new technologies and efficiency, eventually increasing the nation’s overall gross
domestic product (GDP) by allowing for greater volumes of production.
• Liberalization can also facilitate less risk by allowing greater diversification in various
markets.
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• Pakistan's balance of payments position remained under pressure mainly due to adverse
global shocks, stabilization measures along with the devastating flood which has further
aggravated the gloomy economic conditions during outgoing fiscal year.#
• Current account narrow down by 76.1% and recorded a deficit of US$ 3.3 billion during Jul-
Apr FY2023, against a deficit of US$ 13.7 billion in the same period last year, on account of
decline in the merchandize trade deficit.
• Financial account recorded net outflow amounting to US$ 1.9 billion in Jul-Apr FY2023,
against an inflow of US$ 8.1 billion last year.
• Exports declined by 11.7% during Jul-Apr FY2023 amounting to US$ 23.2 billion
• Imports during Jul-Apr, FY2023 amounted to US$ 46.9 billion
• The regulatory measures to curtail the imports include: Imposition of 100 percent Cash
margin requirement on a total of 702 items, RDs up to 100 percent were levied on more than
800 luxury items, Tightening in regulations for exchange companies, tightening regulation
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for consumer financing, increasing Cash Reserve Requirements for banks by 100 bps during
Jul-Mar FY2023.
 INTERNATIONAL MONETARY FUND
• Primary Functions
• Promote international monetary co-operation,
• Facilitate international trade,
• Foster sustainable economic growth,
• Make resources available to members experiencing balance of payments difficulties,
• Prevent and assist with recovery from international financial crises
• Parent organization UN
• Budget (2022) $1.2 billion USD
• Staff 2,400
• The IMF is a major financial agency of the UN, and an international financial institution
funded by 190 member countries, with headquarters in Washington, D.C.
• It is regarded as the global lender of last resort to national governments, and a8 leading
supporter of exchange-rate stability.
• Its stated mission is "working to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world.“
• Established on Dec 27, 1945 at the Bretton Woods Conference, primarily according to the
ideas of Harry Dexter White and John Maynard Keynes, it started with 29 member countries
and the goal of reconstructing the international monetary system after WWII.
• It now plays a central role in the management of balance of payments difficulties and
international financial crises.
• Through a quota system, countries contribute funds to a pool from which countries can
borrow if they experience balance of payments problems.
• As of 2016, the fund had SDR 477 billion (about US$667 billion).
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• Upon the founding of the IMF, its three primary functions were:
• to oversee the fixed exchange rate arrangements between countries, thus helping
national governments manage their exchange rates and allowing these governments to
prioritize economic growth, and
• to provide short-term capital to aid the balance of payments and prevent the spread of
international economic crises.
• to help mend the pieces of the international economy after the Great Depression and
World War II as well as to provide capital investments for economic growth and projects
such as infrastructure.
• The IMF's role was fundamentally altered by the floating exchange rates after 1971.
• It shifted to examining the economic policies of countries with IMF loan agreements to
determine whether a shortage of capital was due to economic fluctuations or economic
policy.
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• The IMF also researched what types of government policy would ensure economic recovery.
• A particular concern of the IMF was to prevent financial crises, such as those in Mexico in
1982, Brazil in 1987, East Asia in 1997–98, and Russia in 1998, from spreading and
threatening the entire global financial and currency system.
• The challenge was to promote and implement a policy that reduced the frequency of crises
among emerging market countries, especially the middle-income countries which are
vulnerable to massive capital outflows.
• Rather than maintaining a position of oversight of only exchange rates, their function
became one of surveillance of the overall macroeconomic performance of member
countries.
• Their role became a lot more active because the IMF now manages economic policy rather
than just exchange rates.
• In addition, the IMF negotiates conditions on lending and loans under their policy of
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conditionality, which was established in the 1950s.
• Low-income countries can borrow on concessional terms, which means there is a period of
time with no interest rates.
• Non-concessional loans, which include interest rates, are provided mainly through the
Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and
Liquidity Line (PLL), and the Extended Fund Facility.
• The IMF provides emergency assistance via the Rapid Financing Instrument (RFI) to
members facing urgent balance-of-payments needs.
• The IMF is mandated to oversee the international monetary and financial system and
monitor the economic and financial policies of its member countries.
• This activity is known as surveillance and facilitates international co-operation.
• Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s,
surveillance has evolved largely by way of changes in procedures rather than through the
adoption of new obligations.
• The responsibilities changed from those of guardians to those of overseers of members'
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policies.
• Some of the conditions set by IMF for structural adjustment can include:
• Cutting expenditures or raising revenues, also known as austerity.
• Focusing economic output on direct export and resource extraction,
• Devaluation of currencies,
• Trade liberalisation, or lifting import and export restrictions,
• Increasing the stability of investment (by supplementing foreign direct investment with
the opening of facilities for the domestic market),
• Balancing budgets and not overspending,
• Removing price controls and state subsidies,
• Privatization, or divestiture of all or part of state-owned enterprises,
• Enhancing the rights of foreign investors vis-a-vis national laws,
• Improving governance and fighting corruption,
• These conditions are known as the Washington Consensus.
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 Benefits
• These loan conditions ensure that the borrowing country will be able to repay the IMF and
that the country will not attempt to solve their balance-of-payment problems in a way that
would negatively impact the international economy.
• The incentive problem of moral hazard when economic agents maximise their own utility
to the detriment of others because they do not bear the full consequences of their actions is
mitigated through conditions rather than providing collateral; countries in need of IMF
loans do not generally possess internationally valuable collateral anyway.
• Conditionality also reassures the IMF that the funds lent to them will be used for the
purposes defined by the Articles of Agreement and provides safeguards that the country
will be able to rectify its macroeconomic and structural imbalances.

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• In the judgment of the IMF, the adoption by the member of certain corrective measures or
policies will allow it to repay the IMF, thereby ensuring that the resources will be available
to support other members.
• As of 2004, borrowing countries have had a good track record for repaying credit extended
under the IMF's regular lending facilities with full interest over the duration of the loan.
• This indicates that IMF lending does not impose a burden on creditor countries, as lending
countries receive market-rate interest on most of their quota subscription, plus any of their
own-currency subscriptions that are loaned out by the IMF, plus all of the reserve assets that
they provide the IMF.

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 Impact
• According to a 2002 study by Randall W. Stone, the academic literature on the IMF shows
"no consensus on the long-term effects of IMF programs on growth".
• Some research has found that IMF loans can reduce the chance of a future banking crisis,
while other studies have found that they can increase the risk of political crises.
• IMF programs can reduce the effects of a currency crisis.
• Some research has found that IMF programs are less effective in countries which possess a
developed-country patron (be it by foreign aid, membership of postcolonial institutions or
UN voting patterns), seemingly due to this patron allowing countries to flaunt IMF program
rules as these rules are not consistently enforced.
• Some research has found that IMF loans reduce economic growth due to creating an
economic moral hazard, reducing public investment, reducing incentives to create a robust
domestic policies and reducing private investor confidence.
• Other research has indicated that IMF loans can have a positive impact on economic16 growth
and that their effects are highly nuanced.
 Criticisms
• Developed countries have more dominant role and control over less developed countries
• The Fund worked on the incorrect assumption that all payments disequilibria were caused
domestically.
• Some IMF policies may be anti-developmental; deflationary effects of IMF programmes
quickly led to losses of output and employment in economies where incomes were low and
unemployment was high.
• Moreover, the burden of the deflation is disproportionately borne by the poor.
• Policies were based in theory and influenced by differing opinions and departmental
rivalries.
• Critics suggest that its intentions to implement these policies in countries with widely
varying economic circumstances were misinformed and lacked economic rationale.
• IMF's very nature of promoting market-oriented approaches attracted unavoidable criticism.
• On the other hand, the IMF could serve as a scapegoat while allowing governments to blame
international bankers. 17

• IMF is insensitive to political aspirations of LDCs while its policy conditions were
• In 2006, a senior ActionAid policy analyst Akanksha Marphatia stated that IMF policies in
Africa undermine any possibility of meeting the Millennium Development Goals (MDGs)
due to imposed restrictions that prevent spending on important sectors, such as education and
health.
• The IMF has been criticised for being "out of touch" with local economic conditions,
cultures, and environments in the countries they are requiring policy reform.
• Another criticism is that IMF policies are only designed to address poor governance,
excessive government spending, excessive government intervention in markets, and too much
state ownership.
• This assumes that this narrow range of issues represents the only possible problems;
everything is standardised and differing contexts are ignored.
• A country may also be compelled to accept conditions it would not normally accept had they
not been in a financial crisis in need of assistance.
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• Pakistan recently agreed to another IMF stand-by arrangement worth $3 billion, with $1.2
billion having been paid upfront and the remaining $1.2 billion to be disbursed over the 9
month duration of the arrangement.
• Going to the IMF has become an almost routine occurrence in Pakistan with the gap between
visits having shrunk considerably over the years.
• Between 1958-1988 11 lending commitments with the IMF were agreed to whereas
between 1993-2001, 8 lending commitments were agreed to in less than one-third of the
preceding time-frame.
• An interesting bit of trivia here, between 1958-1988, Pakistan’s GDP was on an
unprecedented rise, being the highest among South Asian countries for almost the entirety of
the 3 decades.
• Beyond that, between the 1990s and 2020s, it has hardly ever come close to recapturing that
trend.
• While it may seem tempting to consider the preceding decades as the golden years, decline
rarely ever comes immediately. 19
 FOREIGN DIRECT INVESTMENT
• FDI is defined as an ownership stake in a foreign company or project made by an investor,
company, or government from another country.
• Generally, the term is used to describe a business decision to acquire a substantial stake in a
foreign business or to buy it outright to expand operations to a new region.
• The term is usually not used to describe a stock investment in a foreign company alone.
• It is a key element in international economic integration because it creates stable and long-
lasting links between economies.
• FDIs are substantial, lasting investments made by a company or government into a foreign
concern.
• FDI investors typically take controlling positions in domestic firms or joint ventures and are
actively involved in their management.
• The investment may involve acquiring a source of materials, expanding a company’s
footprint, or developing a multinational presence. 20
• The top recipients of FDI over the past several years have been the USA and China.
• The U.S. and other Organisation for Economic Co-operation and Development (OECD)
countries have been the top contributors to FDI beyond their borders.
• Foreign direct investments can be made in a variety of ways, including
• opening a subsidiary or associate company in a foreign country,
• acquiring a controlling interest in an existing foreign company, or
• by means of a merger or joint venture with a foreign company.
• The threshold for an FDI that establishes a controlling interest, per guidelines established by
the Organisation for Economic Co-operation and Development (OECD), is a minimum 10%
ownership stake in a foreign-based company.
• That definition is flexible.
• There are instances in which effective controlling interest in a firm can be established by
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acquiring less than 10% of the company’s voting shares.
 TYPES OF FOREIGN INVESTMENTS
1. Horizontal FDI:
• revolves around investing funds in a foreign company belonging to the same industry as that
owned or operated by the FDI investor.
• Here, a company invests in another company located in a different country, wherein both the
companies are producing similar goods.
• For example, the Spain-based company Zara may invest in or purchase the Indian company
Fab India, which also produces similar products as Zara does.
• Since both the companies belong to the same industry of merchandise and apparel, the FDI is
classified as horizontal FDI.
2. Vertical FDI;
• occurs when an investment is made within a typical supply chain in a company, which may or
may not necessarily belong to the same industry.
• As such, when vertical FDI happens, a business invests in an overseas firm which may supply
or sell products.
• Vertical FDIs are further categorised as backward vertical integrations and forward22 vertical
integrations.
• For instance, the Swiss Coffee producer Nescafe may invest in coffee plantations in
countries such as Brazil, Columbia, Vietnam, etc.
• Since the investing firm purchases, a supplier in the supply chain, this type of FDI is
known as backward vertical integration.
• Conversely, forward vertical integration is said to occur when a company invests in
another foreign company which is ranked higher in the supply chain, for instance, a coffee
company in India may wish to invest in a French grocery brand.
3. Conglomerate FDI:
• When investments are made in two completely different companies of entirely different
industries, the transaction is known as conglomerate FDI.
• As such, the FDI is not linked directly to the investors business.
• For instance, the US retailer Walmart may invest in Toyota Motors.
4. Platform FDI:
• A business expands into a foreign country, but the products manufactured are exported to
another, third country.
• For instance, the French perfume brand Chanel set up a manufacturing plant in the 23
USA
and export products to other countries in America, Asia, and other parts of Europe.
• FDI can foster and maintain economic growth, in both the recipient country and the country
making the investment.
• On one hand, developing countries have encouraged FDI as a means of financing the
construction of new infrastructure and the creation of jobs for their local workers.
• On the other hand, multinational companies benefit from FDI as a means of expanding their
footprints into international markets.
• A disadvantage of FDI, however, is that it involves the regulation and oversight of multiple
governments, leading to a higher level of political risk.
• An examples of FDI in the world today is the Chinese initiative known as One Belt One
Road.
• It involves a commitment by China to substantial FDI in a range of infrastructure programs
throughout Africa, Asia, and even parts of Europe.
• This accounts for nearly $2 trillion in cash flows around the world, with the U.S. and China
leading in the FDI inflow statistics.
• The FDI inflow in October 2023 was recorded at $122.46 million, down by 29.05% 24
in
September, which was also lower than the $193.6 million recorded in August 2023.
 REMITTANCE
• A remittance is a non-commercial transfer of money by a foreign worker, a member of a
diaspora community, or a citizen with familial ties abroad, for household income in their
home country or homeland.
• Money sent home by migrants competes with international aid as one of the largest
financial inflows to developing countries.
• Workers' remittances are a significant part of international capital flows, especially with
regard to labor-exporting countries.
• Major operators are Western Union, MoneyGram, Pure play money transfer, Weise, Ria
Money Transfer, Worldremit, Currencyfair, Remitly etc
• Two players the Clearing House Interbank Payments System (CHIPS) and the Society for
Worldwide Interbank Financial Telecommunication (SWIFT) dominate the international
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electronic funds transfer for interbank payments between two bank accounts.
 ECONOMIC BENEFITS FOR DEVELOPING COUNTRIES
• World Bank economists contend that remittance receivers' higher propensity to own a bank
account means that remittances can promote access to financial services for the sender and
recipient, claimed to be an essential aspect of leveraging remittances to promote economic
development.
• Remittances are generally thought to be counter-cyclical.
• The stability of remittance flows amidst financial crises and economic downturns make them
a reliable source of foreign exchange earnings for developing countries.
• As migrant remittances are sent cumulatively over the years and not only by new migrants,
remittances are able to be persistent over time.

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• This is particularly true of remittances sent by circular migrants, migrant workers who move
back and forth between their home and host countries in a temporary and repetitive manner.
• At the state level, countries with diversified migration destinations are likely to have more
sustainable remittance flows.
• From a macroeconomic perspective, there is no conclusive relationship between remittances
and GDP growth.
• While remittances can boost aggregate demand and thereby spur economic activity, other
research indicates that remittances may also have adverse macroeconomic impacts by
increasing income inequality and reducing labour supply among recipient countries.

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• The United States continued to be the largest source of remittances.
• Due to its large diaspora, India consecutively remains the top receiver of remittance.
• In 2022, the top five recipient countries for remittances inflows in current USD were India
(US$100 billion), Mexico (US$60 billion), China (US$51 billion), the Philippines (US$38
billion), Egypt (US$32 billion) and Pakistan (US$29 billion).
• Remittances in Pakistan averaged 3723.49 USD Million from 2002 until 2023, reaching an
all time high of 8260.00 USD Million in the second quarter of 2022 and a record low of
906.00 USD Million in the third quarter of 2023.
• Inflow of overseas workers' remittances clocked in at $2.5 billion in October 2023, 11.5%
higher on a month-on-month basis when compared to $2.2 billion in September 2023,
showed data released by the State Bank of Pakistan (SBP).,
• The latest value from 2022 is 7.93 percent.
• For comparison, the world average in 2022 based on 168 countries is 5.40 percent. 28
• Remittances have grown to be a significant source of income for countless families all over
the world.
• They provide a number of benefits, like enhanced financial inclusion and assistance for
families, but they also have significant drawbacks, including hefty fees and fluctuating
currency rates.
• One of the significant advantages of sending large amounts in remittances to Pakistan is
its remarkable impact on poverty alleviation and improving the standard of living.
• These remittances serve as families' lifelines, often directed towards meeting essential needs
such as food, housing, education, and healthcare.
Challenges facing remittances
• High remittance costs.
• Access to formal remittance services in both the send and receive markets.
• Prevalence of informality.
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• Limitations in maximizing the productive potential of remittances.
 EASE OF DOING BUSINESS
• A high ease of doing business means that the regulatory environment in such country is
more conducive to the starting and operating a local business.
• In 2020 New Zealand 1, Singapore 2, Hong Kong 3, whereas India 63 & Pakistan 108
• Ease of Doing Business Index comprises of ten Indicators on the basis of which ranking is
issued;
• A nation's ranking on the index was based on an average of 10 sub indices:
• Starting a business: Procedures, time, cost, minimum capital to open a new business
• Dealing with construction permits; Procedures, time, and cost to build a warehouse
• Getting electricity; procedures, time, and cost required for a business to obtain a
permanent electricity connection for a newly constructed warehouse
• Registering property; Procedures, time, and cost to register commercial real estate
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• Getting credit; Strength of legal rights index, depth of credit information index
 • Protecting investors; Indices on the extent of disclosure, the extent of director liability,
and ease of shareholder suits
• Paying taxes; Number of taxes paid, hours per year spent preparing tax returns, and total
tax payable as a share of gross profit
• Trading across borders; Number of documents, cost, and time necessary to export and
import
• Enforcing contracts; Procedures, time, and cost to enforce a debt contract
• Resolving insolvency; The time, cost, and recovery rate (%) under a bankruptcy
proceeding
• The Doing Business project also offers information on the following datasets:
• Distance to the frontier – Shows the distance of each economy to the "frontier," which
represents the highest performance observed on each of the indicators across all
economies included since each indicator was included in Doing Business
• Good practices – Provide insights into how governments have improved the regulatory
environment in the past in the areas measured by Doing Business 31
THANK YOU VERY MUCH!

QUESTIONS?

COMMENTS!

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 HOME WORK
MINIMUM ONE PAGE HAND WRITTEN RESPONSE PER QUESTION
SUBMISSION DATE: 10TH JANUARY 2023

1. What is BoP? Write a short note on Pakistan’s Balance of payment?

2. What is the IMF program for Pakistan? What are its impact, benefits and disadvantages, if
any for Pakistan?
3. How far is Pakistan able to attract Foreign Direct Investments? How can we improve the
situation?
4. What is the importance of remittances for the people and economy of Pakistan? Why do
you think our remittances are decreasing? How can we reverse this trend? 33