Balance Of Payments

BALANCE OF PAYMENTS-PRE AND POST BUDGET (2009-2010) SCENARIO

Presented by :

Faisal Bin Hasan

Presented to :

Mr. Ghulam Rasool

Date

27 June , 2009

:

TABLE OF CONTENTS                

Introduction Favorable & Unfavorable Balance of Payment Balance of Payment- Components Pakistan’s Balance of Payment Compared with regional countries. Balance of Payment in the last few years. Balance of Payment- Pre-budget scenario/ Current situation. Foreign Debt. Reasons for Unfavorable B.O.P War on terror causing B.O.P problem B.O.P and Foreign Remittances Foreign Exchange Reserves B.O.P and Services Sector SBP Governor’s Statement Balance of Payment- Future Expectations Suggestions Conclusion

INTRODUCTION  Balance of payments is a statistical statement designed to provide for a specific period of time a systematic record of an economy’s transactions with the rest of the world.  It is a Systematic Statement of all the economic transactions between the country and the rest of the world.  Its major components are the Current Account and the Financial Account.

INTRODUCTION  Debit: The spending of foreign currency is Debit and it is a negative item.

 Credit: If a transaction earns foreign exchange for the nation , It is recorded as a plus item and it is a Credit.

 Generally Imports are debits and exports are credits.

FAVORABLE AND UNFAVORABLE BALANCE OF PAYMENT  If credits are more i.e exports are more than it is a positive sign for the economy and it is known as Favorable B.O.P.

 If debits are more i.e imports are more than it is a negative sign for the economy and it is known as Un Favorable B.O.P.

 Pakistan has a Un Favorable B.O.P for many years due to dependency on imports.

BALANCE OF PAYMENTS- COMPONENTS :  B.O.P Comprises of :  Current Account and Financial Account.  Current Account includes : Merchandise (Import/Export) , Services, Investment Income and Unilateral Transfers (Foreign Aid etc.)  Financial Account includes: Loan transactions, Investment Flows, Short term capital and other related items.

PAKISTAN’S BALANCE OF PAYMENT COMPARED WITH REGIONAL COUNTRIES  Pakistan is ranked 19 out of 31 countries in the Asia Pacific region .  China , India , Bangladesh and Iran are much better placed than Pakistan.  Despite some success in achieving steady economic growth and reducing poverty, Pakistan lags significantly behind other countries in the region.

Source: Business & Finance Review

BALANCE OF PAYMENT IN THE LAST FEW YEARS •

Current Account: ($ Million) July-April

July-June Current Account

2006- 200707 08

200708

200809

Balance

-6878

-11173

-8547

-13735

BALANCE OF PAYMENT IN THE LAST FEW YEARS •

Financial & Capital Account ($ Million)

July-June

July-April

Financial & Capital Account

200607

2007-08

2007-08

200809

Balance

10276

8303

6290

3608

Source: SBP

BALANCE OF PAYMENT – PRE BUDGET SCENARIO / CURRENT SITUATION  Today, Pakistan faces a severe balance-of-payments crisis and can cover only about four-six weeks' worth of imports.

 The Current account deficit has improved by $ 2.6 billion and stood at $ 8.547 billion during July- April 2008-09 as against $ 11.173 billion in the corresponding period of last year, thereby showing an improvement of 23.5 percent.

 The Financial and Capital account stood at $ 3608 million during July-April 200809 as against $ 6290 million in the corresponding period of last year which shows a decline of $ 2682 million. Source : State Bank of Pakistan

FOREIGN DEBT 1999

2006

US $ 39 B

US $ 36 B

2008 US $ 45 B

The Government paid nearly $ 3 B in annual debt servicing payments in the last FY, this year it will be even more. Together the debt servicing payments amount to nearly 13.8% of the entire budget of $ 29 Billion.

Source: Business & Finance Review

REASONS FOR UNFAVORABLE B.O.P 

A part from dependency on imports there are some other reasons :

  

Global Recession since 2008. Deteriorating Law and order situation which stops investment . Slow Growth of Production.

  

Low Exports. Water Shortage / Mismanagement which results in low crops. Energy crisis causing low out put and closure of many industrial units which reduces the exports.

  

Political Uncertainty. Fiscal Policies Trade Restrictions of developed countries.

   

Limitless Export of Primary commodities. Depreciation of Pakistan Rupee. Inflation Low Foreign Exchange Remittances.

WAR ON TERROR CAUSING B.O.P PROBLEM  Pakistan will face a serious B.O.P problem next year partly because:  The United States has not reimbursed over $ 1.2 billion the country spent on the war on terror.  Under the Coalition Support Fund the U.S reimburses Pakistan for terrorism related operations.  The govt. has received $447 million since Sep.2008 leaving a balance of over $ 1 billion. SOURCE: MINISTRY OF FINANCE

B.O.P AND FOREIGN REMITTANCESHOW THEY HAVE DECLINED FY 05-06

FY 06-07

FY 07-08 (July _Nov)

US $ 5.49 B

US $ 6.5 B

US $ 2.97 B

FOREIGN EXCHANGE RESERVES FY 06-07

FY 07-08

FY 08-09 (July _Dec)

US $ 15.18 B

US $ 10.83 B

US $ 9.34 B

Main sources of Foreign Exchange (excluding FDI): Textile exports Workers remittances

B.O.P AND SERVICES SECTOR •

The deficit in services sector decreased by $ 260 million from $ 4,430 million in 2006-07 to $ 4,170 million in 2007-08. The item-wise receipts and payments in services account are as follows during 2006-2008. 2007-08

2006-07

ITEM Credit

Debit

Net

Credit

Debit

Net

Services

4,140

8,310

-4,170

3,769

8,199

-4,430

1. Transportation

1,102

3,177

-2,075

1,080

2,863

-1,783

1.1 Passenger

646

521

125

656

453

203

1.2 Freight

127

2,224

-2,097

124

2,083

-1,959

1 .3 Other

329

432

-103

300

327

-27

2. Travel

277

1,625

-1,348

216

1,411

-1,195

2.1 Business

15

62

-47

8

57

-49

2.2 Personal

262

1,563

-1,301

208

1,354

-1,146

3. Communications services

123

98

25

198

101

97

4. Construction services

74

60

14

16

143

-127

5. Insurance services

30

126

-96

29

131

-102

6. Financial services

74

135

-61

70

133

-63

104

90

14

72

44

28

41

115

-74

33

99

-66

459

2,557

-2,098

391

2,953

-2,562

2

0

2

1

6

-5

1,854

327

1,527

1,663

315

1,348

7. Computer and information services 8. Royalties and license fees 9. Other business services 10. Personal, cultural, and recreational services 11. Government services.

(Million US $)

SBP GOVERNOR’S STATEMENT The Governor State Bank of Pakistan recently said that Pakistan was not facing any balance of payments (BOP) difficulties during the current fiscal year as the IMF, World Bank and Asian Development Bank would soon release their loans for the country.

SOURCE :SBP NEWS.

BALANCE OF PAYMENT-FUTURE EXPECTATIONS  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.

 Furthermore , If the U.S reimburses $ 1.2 billion to Pakistan regarding War on terror , It will certainly boost our B.O.P.

BALANCE OF PAYMENT-FUTURE EXPECTATIONS  Friends of Pakistan has promised significant monetary support. If it realizes than it will have a positive effect.  Imports are expected to decrease by 15 % . If it happens it will have a positive effect on B.O.P.  Pakistan’s B.O.P is relying on foreign element and support. If it realizes than B.O.P deficit would decrease otherwise it’s future looks bleak.

SUGGESTIONS  Pakistan must increase its production so that Surplus can be exported.  Pakistan don’t need to enter IMF & World Bank Programs.  New Water Reservoirs need to be made.  Pro Active Export Policy and better marketing of Surplus goods.  Electricity crises needs to be solved urgently so that open mills and factories give more production and closed units open again.  Pakistan needs a leadership with competence, very strong nerves, clear understanding of the issues and psyche of the other side of the table, ability to negotiate with the super powers and come out with a most suitable package.

CONCLUSION Beggars are never given choices ... Leaders made us beggars, they have 'kashkool' in their hands and now they're begging in front of IMF, US, Saudia, China, Friends of Pakistan, Iran, Germany, NATO ....!!”

Thank You for your patience