Project Of Economics Doc

BALANCE OF PAYMENT OF PAKISTAN

MBA

Section (A) Group # 3 Group Members: Name:

ID #:

FARAN MAJEED

083114

SYED AKIF QADRI

083103

IBRAR HUSSAIN

083109

Acknowledgement

In the name of ALLAH who has created this universe and left it for MAN to explore the new horizons and to be concurred. He has bestowed His master piece “MAN” with the greatest strength in the universe which is knowledge. With the help of this knowledge man is going higher and higher and is seeking for new destinations. This is knowledge which makes things easier and easier to be done. Same is the case with us, we with the help of such knowledge have been able to do such a job which was assigned to us and is regarding our final project of economics. If ALLAH had not given us the power of knowledge, we could not be able to accomplish this task. Then we would like to remember His last messenger Hazrat Muhammad (SAW) who is the person through whom knowledge came to us, and who enlightened the world with His message and brought the human being out of darkness of ignorance to the light of knowledge. We would like to thank our parents who always encourage us at the time when we became disappointed and it is fact that without their untiring and selfless efforts we could never do this.

At the end we would like to thank our respected teacher Prof SHAFIQ-UR-REHMAN who did his best and worked hard for us so that we may get some practical knowledge of the practical field. We pay our gratitude from the core of our heart to this great teacher without his kind help and guideline, we could never been able to complete this project.

Dedication We would like to dedicate our this effort to our respected teacher who is always very kind , humble and courteous. He does not have only the good appearance but has a beautiful heart as well. He in fact knows how to teach and how to be nice. According to our opinion He follows the following quotation:

“It is very nice to be important, But It is more important to be nice.”

Over view • Introduction • Definition • BOP accounts • How does the BOP balance • Major exports and imports • Problems • Remedies • Conclusion

INTRODUCTION Balance of payment is the comprehensive record of economic transactions between the residence of a country and the rest of the world during the course of one year. Balance of payments like all balance sheets must balance. The items which lead to an inflow of foreign earning, 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 Balance of trade is one of the major indicators for assessing economic performance of the country. It determines the trade potential of the country. If the balance of trade of any country is positive, that country is considered economically sound and vice versa 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. An “economy” is comprised of economic entities (residents) that have closer association with that specific economy than with any other. Economic entities that have closer association with other economies are nonresidents.

DEFINITIONS “The record of all transactions of goods & services of one country with the rest of the world.” “Balance of payment is the comprehensive record of economic transactions between the residence of a country and the rest of the world during the course of one year. Balance of payments like all balance sheets must balance.” “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.”

Balance of Payments

The balance of payments is an accounting listing (tabulation) of the values of economic (trade and financial) transactions between the residents of a (home) country and residents of other countries. Balance of payments entries are recorded based on the double-entry bookkeeping principle. The balance of payments entries are always balanced; the entries add up to zero. Balance of Payments Accounts Current Accounts It include all the imports & exports of goods and services • Merchandise Trade • Service Trade • Services of Capital: Interest Incomes, Dividends • Unilateral Current Transfers Capital Accounts It include all the financial transactions with the rest of the world • US private investments abroad • Foreign private investments in the US • Other investments/capital transactions • Errors and statistical discrepancies Official (Capital) Accounts The reserve facilitate to maintain balance in current account and capital account • •

(Changes in) US official reserve assets abroad: gold, SDRs, foreign currencies (Changes in) foreign official assets in the US

Pakistan's payments problems have been chronic since the 1970s, with the cost of oil imports primarily responsible for the trade imbalance. The growth of exports and of remittances from Pakistanis working abroad (mostly in the Middle East) helped Pakistan to keep the payments deficit in check. Since the oil sector boom began subsiding in the early 1980s, however, remittances declined. Remittances from overseas workers peaked at $2.9 billion in 1982/83, then dropped to $1.4 billion by 1997/98 and $1 billion from 1999 to 2001. This trend especially accelerated during the Gulf War, when nearly 80,000 Pakistanis in Kuwait and Iraq lost their jobs. Only about 25% of these jobs had been regained a year after the end of the conflict. Increased imports and softer demand for Pakistan's textiles and apparel in major markets also caused the current account deficit to further increase. The balance of payments position weakened in 1995/96 as imports grew by 16% and exports by only 6%. The rupee was devalued by 11% during 1995 and 1996 to encourage exports. Nevertheless, foreign reserves fell to around $800 million by mid1997. By 2000, foreign debt equaled 100% of GDP. The government took steps in the

early 2000s to liberalize and deregulate the exchange and payments regime. Pakistan moved to a dual exchange rate system in 2000. An increase in liquid foreign exchange reserves in 2001 was due in part to outright purchases from the kerb market and inflows from international financial institutions. Export growth in 2000/01 was primarily due to higher exports of primary commodities such as rice, raw cotton, and fish, and other manufactures such as leather, carpets, sporting goods, and surgical instruments. Imports increased in 2000/01 primarily due to higher imports of petroleum and petroleum products, and machinery. The US Central Intelligence Agency (CIA) reports that in 2001 the purchasing power parity of Pakistan's exports was $8.8 billion while imports totaled $9.2 billion resulting in a trade deficit of $399.9 million. The International Monetary Fund (IMF) reports that in 2001 Pakistan had exports of goods totaling $9.13 billion and imports totaling $9.74 billion. The services credit totaled $1.46 billion and debit $2.33 billion. The following table summarizes Pakistan's balance of payments as reported by the IMF for 2001 in millions of US dollars

How does the BOP balance? Debit(-) 100(+) Imports 120(-) Current Account Balance Reduction in US bank Deposit claims abroad 10 Official Settlement Balance Reduction in official Reserves 10 Balance of Payments

Credit (+) Exports -20 -10 00

Major Export

The main export items of Pakistan are rice, furniture, cotton fiber, textiles, leather etc. Major Import

The main import items of Pakistan are petroleum, industrial machinery, automobiles, computer, computer parts etc.

Problems Following are the main problems of Pakistan balance of payment

• Addition in imports Imports of our country rising day by day. This is the major factor for adverse balance of payment.

• Defense spending We are adding more importance to our defense and importing costly arms and ammunition. This factor also making our BOP unfavorable.

• Very slow growth in production The growth in our production is very slow due to this reason we cannot export sufficient goods to others

• Exports of primary products Our country exports primary products due to this reason we are not able to earn handsome amount of money

• Rise in freight rates The rapid rise in the air and sea freights has adversely affected the balance of payment

• Social factor In our country society is consumption oriented and we have to import a lot and we can export a little amount of goods. This causes our BOP unfavorable

• Excessive consumer imports Our country is importing more consumer goods not capital goods these consumer goods does not result in further producing and become burden on the economy

• Ban on developing countries Many developed countries have imposed ban on our country’s export due to this reason we are not able to export maximum goods

• Affect of inflation If there is inflation in the country the prices of the exportable goods will rise. Consequently other countries will demand less quantity of its goods and services. This will affect the BOP

• Low quality of goods The gods prepared in our country are usually of low quality due to which these are not sold in much quantity and ultimately our exports are less than imports

• Availability o substitutes Due to availability of substitutes in other countries the demand of our product falls

• Narrow export base Export base of our country is very narrow because we export a very few items if any item suffers problem in a year our export remain very low.

• Currency value Our currency value is also not favorable in comparison of other countries from where we are importing goods this factor also affect BOP

• Enhancement in oil prices Oil is major important import of our country and price of oil is continuously rising this feature also matter and makes BOT unfavorable

Current Account Balance on goods Balance on services Balance on income Current transfers Capital Account Financial Account Direct investment abroad Direct investment in Pakistan Portfolio investment assets Portfolio investment liabilities Other investment assets Other investment liabilities Net Errors and Omissions Reserves and Related Items

1,880 -608 -871 -2,079 5,438 … -399 -31 383 … -192 54 -613 716 -2,197

Remedies With the help of following remedies we can easily over come the problems of balance of payment • Reduce imports Our country should maximized its exports as much as possible only goods necessary for further production should be imported and other should be banned • Export promotion Our country should plan an effective strategy to promote export to great level this will helpful to improve our BOP • More trade agreement In order to improve our trade balance our country should make maximum trade agreement with other countries. In this way our trade will increase that will improve our BOP • Explore market We can improve our bop by exploring more and more markets for goods. This factor will especially helpful for maximizing our export that will improve our BOP • Diversification of economy For improving our BOP our country should produce every type of product instead of few. We should promote all sectors of economy • Incentives to exports

Our government should provide some incentives to exporters to maximize export of the country • Enhance production In order to improve BOP country should increase production of goods so we will be export lot and we will also be able to minimize imports • Special schemes In order to improve BOP govt should introduce special schemes for the exporter through these schemes exporter should be encourage • Form trade bodies Govt of the country should establish more and more trade bodies in order to promote exports and in order to improve BOP • Optimum industries Our Govt should establish more and more export industries so that we may able to export more and import less • Reduce use of oil Oil is a major import of our country and we are spending heavy amount of our earned foreign exchange on import of oil. We can minimize spending of foreign by reducing use of oil in the country

Conclusion