Balance of Payments. Economic relation

Balance of payments refers to sum of both the balance of visible and invisible items. The balance of Payment is a comprehensive annualrecord of economic relation of a country with the rest of the world during a given period of time. A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items.

Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

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1. Debit: The spending of foreign currency is debit and negative item.
2. Credit: If a transaction earns foreign exchange for nation it is a plus item and credit.
3. Favourable BOP: If the value of exports is greater than the value of imports, then the balance of trade is said to be favourable.
4. Unfavourable BOP: If value of imports is greater than value of exports, then the balance of trade is said to be unfavourable.
5. BOP must be in equilibrium: BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit.For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.

While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted.Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about.

Balance of payments in pakistan:

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.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. 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. Pakistan is suffering from balance of payment deficit because of increased reliance on mported goods as compared to its domestic production. In the year 2008, the import bill increased by almost 35% of which 4. 9 billion amount comprised of oil related imports. Pakistan is highly dependent on imported oil goods which it imports from foreign countries.

The rising prices of oil commodities was one of the cause to give a downward push to its balance of payments. In spite of the strong growth in remittances and exports (accounted for 7. 1 billion), it still had to suffer from negative balance of payments. Although Pakistan is an agricultural econonomy, but still it imports wheat, pulses, and basic necessity items from abroad. Depletion of pakistani rupee in the last year also posed a great problem for Pakistani economy. Causes of adverse Balance of Payments:

1. Increase in Imports: Pakistan is a developing country and has to import industrial raw material, machinery, instruments and capital goods while exports could not increase.

Besides above it has to spend a lot of foreign exchange on import of consumer goods, petrol, defence armaments etc. 2. Low Volume of Exports.Pakistan’s exports consist of agricultural raw material and primary goods. Due to unfavorable weather conditions crop production of rice and cotton remains low and due to political instability industrial production is also affected which decreases volume of exports.

3. Increase in Domestic Demand: Domestic demand for good and services has incredibly increased due to higher population growth rate.

Major portion of the goods and services produced in the country is consumed; therefore, a smaller portion is left for exports.

4. Increase in Defence Needs: Pakistan is surrounded by enemies.Pakistan has not good relations with India and ex-Soviet Union and its state. Our 38% of the budget is spent on defence needs.

5. Inflation: Price level in Pakistan has increased rapidly.

Cost of Production has increased due to increase in wages and prices of other factors of production. Due to increase in import prices.

6. Increase in Invisible Imports: Pakistan’s invisible imports are less than the invisible imports which makes the BOP position and terms of trade unfavorable. Increase in Foreign Debt: Pakistan’s total public debt stood at an estimated Rs. 8160 billion as of end –March 2010.At this level, public debt is equalent to 56% of GDP, and 379% of total budgeted revenue for the year.

7. Difference in Import and Export Prices: Pakistan mainly exports agricultural raw material and primary goods and imports industrial raw material and machinery. Export prices of agricultural raw material and primary goods are fluctuating while import price are either stable or increasing. The relative increase in import prices is greater than relative increase in export prices.

8. Food Imports: A number of food products e. g., wheat, sugar, edible oil, onion, potatoes are imported to meet shortages.

Changes in capital inflow:

If the capital inflow is unfavorable for a country it causes disequilibrium in balance of payments. Capital inflow is deficit of balance of payments. Measurements To Correct Balance Of Payments:

1. Stimulating exports and checking Imports: If total exports earning have fallen short then steps should be brought down and giving incentives to exporters, providing them information through trade delegations. The imports of luxuries and other unnecessary imports either prohibited or curtailed.

2. Industrial Development:Pakistan BOP is unfavorable because Pakistan exports primary goods and agricultural raw material and imports industrial goods and raw material whose prices are increasing rapidly. To avoid further increasing of balance of payments there must be industrial development.

3. Terms of trade: Terms of trade of Pakistan are unfavorable which is increasing deficit in our balance of trade and balance of payments so there is a need to improve terms for trade by exporting finished goods instead of raw material and primary goods.

4. Balanced growth: Balanced growth means development of various sectors of the economy simultaneously.

In Pakistan agriculture sector dominated in the earlier periods. The result was that other sectors of economy remained neglected and we have to import necessary goods to meet the shortage.

5. Protection of Local Industry: Government should protect local industries and package of incentives must be given and there should be trade restrictions on the import of goods competing with local goods.

6. Import Subtitution: Instead of import of consumer goods and capital goods we must import machinery for import substitution which will save foreign exchange on imports and make the balance of payments unfavorable.

7. Self-Reliance: Pakistan’s balance of payments is now worsening due to repayment of debt and debt servicing. To avoid further deficit we must follow the self reliance policy.

8. Exploring Export Markets: More emphasis should be laid on export survey and export market entry. It is paramount importance that our exporters should know more about operating in a foreign market. It must also be our export policy to make preparations for organizing our efforts to secure more export orders from abroad.

9. Fiscal and Financial Incentives: Fiscal and Financial Incentives are must to increase the quantum of exports. There are as follows:

a) Exports income should be exempted from income tax as is being done in India and other countries.

b) The procedure for receiving the export duty-drawback should be made simple and expeditious.

c) The rate of interest on export refinance should also be minimized and the loans granted liberally.

Conclusion:

Beggars are never given choices…. Leaders made us beggars, they have ‘kashkool’ in their hands and now they are begging in front of IMF, US, SAUDIA, CHINA, IRAN, GERMANY, NATO…!! ”

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