SHAH ABDUL LATIF UNIVERSITY KHAIRPUR

ASSIGNMENT TOPIC:

“BALANCE OF PAYMENTS AND BALANCE OF PAYMENTS PROBLEMS IN PAKISTAN”

Submitted by:Ahtisham Rajput-107Ibrar 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 Ahtisham’s 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 11.2 Pakistan’s Balance Of Payments Performance 11.3 Reasons Of Surplus In The Above Years 1

2.0 Terminology Of Balance Of Payments 2

2.1 Current Account 22.2 Position Of Pakistan’s Current Account 22.3 Capital And Financial Account 32.4 Position Of Pakistan’s Capital and Financial Account 32.5 Foreign Reserves 42.6 Position Of Pakistan’s Foreign Reserves 42.7 Current Bop Position 4-52.8 Balance Of Payment-Future Expectations 5

3.0 History Of Pakistan’s Export Performance Exports From 1947 To 1971 6

3.1 Pakistan’s Export Performance After Separation Of Bangladesh 6-73.2 Exports Of Pakistan 73.3 Major Exports Of Pakistan 83.4 Composition Of Pakistan’s Exports 83.5 Direction Of Pakistan’s Exports 93.6 Current Position Of Export Of Pakistan 93.7 Imports Of Pakistan 103.8 Composition Of Pakistan’s Imports 103.9 Major Sources Of Pakistan’s Imports 10-

113.10 Recent Trend Of Imports 113.11 Summary Of Imports And Exports 11

4.0 Problems Of Pakistan Balance Of Payment 12

4.1 Dependence On Textile 124.2 Import Oriented Industry 124.3 Tough Competition In International Market 124.4 Political Uncertainty 124.5 Increase In Prices Of Inputs 12

CHAPTER NO: CONTENTS PAGENO:

4.6 Fiscal Policy 124.7 Exports Of Primary Goods And Imports 13 Of Finished Goods4.8 Energy Crisis 134.9 Dependence On Foreign Assistance 134.10 Natural Disasters 134.11 Shortage Of Availability Of Credit To Private Sector 134.12 Limited Countries Exports 13-

144.13 Strikes And Processions 144.14 Rise In Freight Rates 144.15 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 155.3 Foreign Earning Will Decrease 155.4 Country’s Currency Value May Depreciate 16

6.0 Suggestions To Overcome Balance Of Payment Deficit 17

6.1 Improve The Technology 176.2 Exploration Of New Markets 176.3 Ban On Strikes And Processions 176.4 Law And Order 176.5 Brand Oriented Marketing 176.6 Cost Of Doing Business 186.7 Dependence On Textile Sector Exports 186.8 Minimize Expenditure On Importing Services 186.9 Export Of Finished Goods Rather Than Primary Goods 186.10 Resolution Of Energy Problem 186.11 Improved Fiscal Policy 186.12 Improved Infrastructure 18

CONCLUSION 19

REFERENCES 20

TABLE OF TABLES

Table number

TABLE NAMEPage

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 Pakistan’s Exports 7

3.3 Pakistan’s 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 Pakistan’s 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 don’t 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 side”1.

1.2 PAKISTAN’S 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

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.

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).

1.3 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. Pakistan’s 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 billion”1 and now “currently we have a trade surplus of 26 million in our current account which is a good sign”3.

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 PAKISTAN’S 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 PAKISTAN’S 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 PAKISTAN’S 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: Pakistan’s 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.

Pakistan’s 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 Pakistan’s 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 BOP”4.

China’s investors are still showing confidence in investing Pakistan’s 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 PAKISTAN’S 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 Pakistan’s 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 PAKISTAN’S EXPORT PERFORMANCE AFTER SEPARATION OF BANGLADESH:

The separation of Bangladesh in December 1971 created problems for the people’s 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%. Pakistan’s 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, country’s 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 PAKISTAN’S 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 Pakistan’s 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 PAKISTAN’S 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 achievethe target of $22 billion”5.

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 PAKISTAN’S 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 PAKISTAN’S 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 Pakistan’s 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 MW”6. This gap -5529 MW is filled by load shedding and this act adversely affects industry as their production doesn’t occur and hey won’t 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.

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

6 Pakistan and gulf economist, Power emergency, Feb 2-8,2009 , Fact sheet page number 61, table 1.

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 don’t 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 won’t 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 countries”7. 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 and it hurt the goodwill of Pakistani exporters as well as Pakistan’s 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.

7 Economic survey of Pakistan 2009-10, chapter name balance of payment, topic name direction of exports page 94

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 thedomestic 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 shrink2. It leads the country to borrow money from other financial institutions.3. Foreign earning will decrease.4. Country’s 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 country’s 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 country’s BOP then it means that country exports are les than its import when exports are less there will be less foreign earning.

5.4 COUNTRY’S CURRENCY VALUE MAY DEPRECIATE: when persistent deficit remain in Country’s 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 Pakistan’s 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 dollar”8.

PAKISTAN’S CURRENCY RATE

US $ RATES PER PAKISTAN RUPEE

8 Economic survey of Pakistan 2009-10, chapter name balance of payment topic: Exchange rate, page 105

YEAR LEADERS US $

1972 Zulfiqar Ali Bhutto Rs:4.7

1977 Zulfiqar Ali Bhutto Rs:9.9

1983 General Zia-ul-Haq Rs:13.1

1987 General Zia-ul-Haq Rs:17.7

1990 Benazir Bhutto Rs:24

1991 Nawaz Sharif Rs:25

1994 Benazir Bhutto Rs:30.6

1996 Benazir Bhutto Rs:40.3

1997-99 Nawaz Sharif Rs:53

1999-08 Parwaiz Musharaf Rs:62

2009 Syed Yousuf Raza Gillani Rs:85

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).

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 etc”9. 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 country’s “war on terrorism”. Both these factors are expected to cover the

9 Pakistan and gulf economist, how to boost exports? Feb 14-20,2011 ,Kyrgyz holds immense trade opportunities for Pakistan , page number 8,

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 it”10.

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 Pakistan’s 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.

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

10 Pakistan and gulf economist, Power emergency, Feb 2-8,2009 ,topic Energy crisis : reality or myth by Mohammad Ashfaq, page number 23

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