Definition: -

“Balance of payments is systematic record of total transactions of a country with rest of the world in a given period of time usually a year.” It's a record of all financial flows in and out of a

country calculates the BOP. It presents a classified record of all receipts on account of goods

exported, services rendered and capital received by residents and payments made by them on account of goods imported and services received from the capital transferred to non-residents or foreigners.

Types of balance of payment

When the value of imports exceeds the value of exports, the resulting negative number is called a trade deficit. For example, if the value of imported items to the United States equaled $1 trillion last year, but the value of exported items from the United States equaled $750 billion, then the United States would have a negative $250 billion BOP, or a $250 billion trade deficit.

Surplus in (BOP): -

If the receipts of a country are greater than its payments the result is Surplus.

Receipts > Payments

Balance in (BOP): -

If the receipts of a country and its payments are equal the result is Balance.

Receipts = Payments

Deficit in balance of payments: -

If the receipts of a country are less than its payments the result is Deficit.

Receipts < Payments

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“Simply whenever, the foreign payments of a country are more than the foreign receipts of the country, the deficit in BOP rises. In other words, whenever the demand for foreign exchange is more than the supply of foreign exchange the deficit in BOP occurs”

The causes of deficit in BOP are as under:

1. Increase in imports: Pakistan has to import capital goods for rapid industrialization of the country in order to build

up the economy. The heavy import of machinery has considerable increased the import bill and has

adversely affected balance of payment.

2. Decrease in Exports: Pakistan basically is an agricultural country. Its major exports are rice, cotton, raw wool,

leather, fish etc. Our exports, during the last five years, are remaining around $ 15 billion to $ 20

billion. The reason is that our export base is narrow. It is concentrated in relatively low value added

products. Value of exports during 2010-11 is $ 24 billion.

3. Less Modernization of Machinery: Since 1970’s, there have been less modernization, balancing and replacement of machinery in

the private industrial sector. The fall in production and decline in the quality of products has adversely

affected exports.

4. Consumption Oriented Society: People of Pakistan are mostly consumption oriented. Due to rapid rise in population and

increased consumption habits, the domestic manufactured goods are mostly consumed in the country.

The exportable surplus is going on decline. Govt. has to import 4.0 million tones of wheat and heavy

amounts of sugar, pulses and tea in 2005-06, being an agrarian country.

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5. Increase in Prices of Inputs: The increase in the prices of fuel, electricity, high capital costs of imported machinery,

exchange rates etc. have inflated. The costs of both imported capital goods and industrial raw material,

on which domestic industry is heavily dependent the inflationary impact of the rise in the prices of

inputs are not helping in achieving the export targets set in each financial year.

6. Tough Competition: Stiff competition in the foreign market particularly of our value added goods has reduced the

volume of foreign trade in Pakistan. There is availability of higher standard goods at lower prices in

international market. It causes reduction in exports, which result in deficit in BOP.

7. Political Uncertainty: The political uncertainties in the industrial units have considerably affected the efficiency of

the industries. The fall in the volume of production, particularly in the manufacturing value added sector

has reduced export earnings. Due to reduction in export earning, our BOP is unfavorable.

8.   Foreign Debts Servicing: Pakistan has obtained about $ 59.5 billion from different countries and it pays interest on

these loans regularly. It paid $ 7.8 billion as debts services charges during 2010-11. The interest

payment has adversely affected the balance of payment.

9.   Defense Needs: We have to purchase modern weapons for our defense at a very high cost from different

countries, which increases burden on our BOP and it becomes adverse. Expenditure on defense is Rs.

275 billion.

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Simply to remove deficit in BOP, a country should increase its exports and decrease its imports. They are discussed below:

1. Increase the Exports: -

Any country which faces deficit in BOP should give subsidies to the exporters. They may also consist of granting of loans at reduced rates to the exporters as well as providing insurance facilities and shipment services etc. Moreover, if countries follow the policy of subsidizing the other countries may also follow it. In this way the benefits of subsidies will not be availed.

2. Restrictions on Imports:

Any country which faces deficit in BOP may also impose restrictions on imports by increasing the import duties, imposition of exchange control etc. In this way the imports will decrease.

3 . Manufactured Goods: Instead of exporting primary goods like raw cotton, Pakistan should export manufactured

goods like textiles and garments, leather goods, food products and electrical goods.

4. Reduction in Export Duties: This step will make our export competitive in the international market. Foreigners will prefer

to import from Pakistan because of low prices.

5.Quality Products: Many of our goods cannot be exported because of poor quality. Thus, electric fans, cycles,

electric motors, shoes, ball pens, crockery etc. cannot be sold abroad. Pakistan is needed to improve the

quality of its products according to international standard.

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6.   Packing: High quality packing is essential for promoting exports. If packing is not attractive and

durable, it will not capture foreign market.

7.Import of Only Essential Items: Only essential items should be imported which are needed for our industrial production. Import of

luxuries should be banned. People should be educated to come out from the complex of foreign goods.

8 .Population Control:   Many of our problems are arising due to fast increase in population. Sincere efforts should be made

to decrease growth rate of population. People should be educated in this regard.

9.Decrease in Consumption:Taxes should be imposed to reduce the consumption of many items. Rich people in our country are

spending freely on unnecessary imported consumer items. So, foreign exchange reserves are wasted.

10.Labour Intensive Industries: Labor intensive industries should be established, because labor is cheaper in Pakistan, these

industries can be set up at lower cost. The products of these industries can be exported.11.Deflation:

The country which is facing deficit in BOP should follow the policy of deflation. This policy can be adopted with the help of tight fiscal policy by decreasing Govt. expenditures and increasing taxes. This will have the effect of decreasing the incomes and expenditures of the people. In this way, there will be a deflation in the economy. As a result the imports will decrease and exports will

increase. 12. Devaluation:

Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of home currency against foreign currency. Generally devaluation is resorted to where there is serious adverse balance of payment problem.

When a country devalues its currency, exports becomes cheaper and imports become expensive which causes a reduction in the BOP deficit.

13. International Monetary Fund (I.M.F):

As the international level, the institution named as IMF has been set up. This institution has been assigned to perform the following functions:

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•To serve as a pool of international reserves.

•To keep an eye on exchange rates of currencies.

•To provide assistance to those countries who face persistent deficit in their BOP. In this respect IMF has initiated a lot of and with the help of these farcicalities them member of IMF who faces deficit in BOP, can get loan from IMF and use it to remove its deficit.

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