financial sector if pakistan and its role in economy

7/29/2019 Financial Sector if Pakistan and Its Role in Economy

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Financial Sector if Pakistan and its Role in Economy Financial Sector A collection of firms that provide financial services to commercial and retail customers. This sector includes

Banks Investment funds Insurance companies

Banks An institution transacting the business of accepting, for the purpose of lending or investment of

deposits of money from Public, repayable on demand or otherwise, and withdraw able by cheque, draft

order or otherwise and includes any post office saving bank

Central Bank A central Bank is responsible for

Safeguarding the financial stability of the country. It holds the ultimate reserves of the nation. Controls/Regulates the purchasing power. Acts as banker to the state

State Bank of Pakistan Under the State Bank of Pakistan Order 1948

"regulate the issue of Bank notes and keeping of reserves with a view to securing monetary

stability in Pakistan and generally to operate the currency and credit system of the country to its

advantage".

State Bank of Pakistan Under the State Bank of Pakistan Act 1956

The structure, operation and authority of state bank was determined. Mixed ownership Govt.(51):Private sec(49) scope of the Banks operations was considerably widened to


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"regulate the monetary and credit system of Pakistan and to foster its growth in the best national

interest with a view to securing monetary stability and fuller utilization of the countrys productive

resources".

State Bank of Pakistan On1st January 1974 the Bank was nationalized. Full ownership of federal government. Management by Board Of 7 Directors headed by Governor. State Bank of Pakistan Under financial sector reforms, the State Bank of Pakistan was granted autonomy in February

1994.

On 21st January, 1997, this autonomy was further strengthened by issuing three AmendmentOrdinances namely,

State Bank of Pakistan Act,1956, Banking Companies Ordinance, 1962 and Banks Nationalization Act, 1974.

State Bank of Pakistan The changes in the State Bank Act gave full and exclusive authority to the State Bank

to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan

The amendments in Banks Nationalization Act abolished the Pakistan Banking Council (aninstitution established to look after the affairs of NCBs)

State Bank of Pakistan Traditional Role Developmental Role State Bank of Pakistan


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The traditional functions, which are generally performed by central banks almost all over theworld and includes

Bank of Issue Banker to the Government Adviser and Agent to the Government Bankers Bank Controller of Credit Exchange Control

State Bank of PakistanBank of Issue

Sole Authority of printing notes Previously Notes should be backed by Proportionate reserve system. 30% should be maintained in the form of Gold coins/bullion, and approve

foreign currency.

Presently Minimum reserve system has been adopted by SBP.Banker to the Government

Make/ Receive Payments for Government Advances money to Government State Bank of Pakistan

Adviser and Agent to the Government

Advice on Economic issues Govt. agent for exchange control Receive loans and make interest payments Agent for issuing T-Bills

Bankers Bank

Lender of Last Resort


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Provides liquidity to Banks State Bank of Pakistan

Controller of Credit

Credit to different sectors Controlling credit by changing interest rate Implementing Restrictions

Exchange Control

Custodian of foreign Exchange. keep the exchange rate of the rupee at an appropriate level and prevent it from

wide fluctuations

Control over foreign Exchange payments The surrender requirement of foreign exchange receipts on account of exports. Export price check

State Bank of Pakistan The non-traditional or promotional functions, performed by the State Bank include

1. Development of financial framework, institutionalization of savings and investment,2. Provision of training facilities to bankers,3. And provision of credit to priority sectors.4. Growth of Banking System5. Mobilizing domestic savings6. Disbursement of credit for Rural development.7. SBP Role in Economic Development8. Assistance to Specialized Financial Institutions.(ZTBL, HBFC etc.)9. Monetary and Credit Policy

Check on Inflation Adequate supply of Finance


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10.Credit for priority Sectors11.Export Refinance Scheme12. Islamization of Financial System13.Establishment of Banking Publicity Department.14.supervision of the financial system to ensure its soundness and stability by off-site

surveillance andon-site inspection

15.Scheduled Banks Among these 31are Pakistani and 13 are Foreign Banks In the period of July-August 2011-12 Financial Sector and Economic Development Financial Sector Development and Economic Development are inter-related. No economy can grow and improve the living standards of its population in the absence of a

well functioning and efficient financial sector.

Banks in Pakistan account for 95 percent of the financial sector and hence a sound and healthybanking system is directly related to economic growth and development of Pakistan.

Financial Sector and Economic Development The modern growth theory identifies two main channels through which the financial sector

might affect long-run growth in a country:

1. First, through catalyzing the capital accumulation and2. Second by increasing the rate of technological progress. Financial Sector and Economic Development Financial intermediaries perform five basic functions that affect an economy.1. Mobilizing savings from domestic households and corporates2. Pooling and managing risk3. Acquiring and disseminating information about investment opportunities4. Monitoring borrowers and exerting corporate control and


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5. Facilitating the exchange of goods and services. Financial Sector and Economic Development

These functions of an efficiently working financial sector allow the above two channels to work

for promoting growth by:

Mobilizing savings for investment Facilitating and encouraging capital inflows and Allocating the capital efficiently among competing uses

Nationalization of Banks 1st January 1974 all Banks were nationalized Objectives of nationalization Effects of Nationalization Financial Sector Issues and constraints Large segments of the economy, population and geography remain underserved by the formal

financial system.

Lack of consumer protection and low level of financial literacy contribute to financial sectorunderdevelopment

The privatization of the banking system made it more dynamic and competitive but it still hassome way to go.

Some new products have been developed, especially in consumer lending. Butcompetition is impeded by lack of transparency in the pricing of deposit-taking, and

dominance of a few large banks with vast branch networks and captive rural markets.

Financial Sector Issues and constraints The banking sector has been consolidating and most banks have strengthened their financial

positions in recent years but It has also distort competition.

The operations of Development Finance Institutions (DFIs) require reconsideration. Competition and continuous market innovations raise challenges for SBP in its role as regulator

and supervisor of banks


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The recent global financial market turmoil and the current privately-owned structure of thedomestic banking system, highlight the need for a financial safety net to deal with systemic

risks.(This includes depositor protection, liquidity and Lender of Last Resort facilities )

Financial Sector Issues and constraints Macroeconomic stability in general, and monetary and financial stability in particular, are

prerequisites for financial sector development.

The financial sector is too bank-centered and needs to become more diversified in order tomeet the country's future financing needs.

The growth and development of banking system and other financial institutions and markets arelimited by shortcomings in the infrastructure for financial services and transactions.

Financial Sector Issues and constraints Improved credit information and credit rating systems be developed to facilitate efficiency. while more certainty and finality in financial transactions needs to be achieved by

modernization of payment systems,

Land and property registries need modernization The judicial system needs reform for the efficient functioning of the financial system Recommended Banking Reforms by SBP Implement a financial inclusion program for banks to meet the needs of underserved economic

subsectors, including outreach programs to meet the requirements of the agriculture, housing,

SME and microfinance sectors.

Strengthen consumer protection through new legislation, codes of conduct and newinstitutional arrangements and improve financial education through educational outreach

programs.

Strengthen competition and efficiency in the banking sector with more transparency, morediversification with new products and delivery channels as well as measures to reduce the

market distortions created by the large banks in rural areas

Recommended Banking Reforms by SBP Further strengthen and consolidate the banking sector by continued efforts to raise governance

and risk management standards, higher capital requirements and resolution of underperforming

commercial and specialized banks.


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Strengthen prudential regulation and supervision by updating banking legislation andregulations, methods of supervision, and stricter enforcement of prudential rules for all banks,

including state-owned ones.

Introduce a framework for consolidated supervision and reorganize the regulatory architectureto allow better regulation and supervision of financial groups and conglomerates.

Deepen financial intermediation by developing not only the banking sector but also NBFIs,private and government debt markets and the stock market.

Recommended Banking Reforms by SBP Develop a financial safety net of protection for small depositors, clearly structured lender of last

resort (LOLR) facilities, an updated framework for market exit and resolution of unviable banks,

and coordination arrangements with the GOP for dealing with systemic banking problems.

Strengthen the powers of SBP to maintain monetary and financial stability by updating the half-century-old SBP Act in accordance with best international practices for central bank

independence, accountability and governance structures.

Develop the financial infrastructure, especially payment systems, but also human resources,credit information, credit ratings, land and property registries and minimize procedural delays in

the legal system to improve the efficiency of financial sector transactions.

ECONOMY OF PAKISTAN TRANSPORT AND COMMUNICATION SECTOR BY: Sadia Ahmad TRANSPORT AND COMMUNICATION SECTOR

Transport is Civilization

Sustainable economic development is dependent on an efficient communication system and arobust and low cost transport system.

TRANSPORT AND COMMUNICATION SECTOR Transportation sector is comprised of

Road Services Railway Services


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Airway Services Shipping Services

Communication sector is comprised of Postal & telephone services Mass Media Information technology/ telecommunication

Role Of Transport And Communication Sector In Economic Development Transport and communication sector accounts for 11% of GDP. Provides employment to 6% of labor force. This sector contributes to Economy through

Economic Benefits Social Benefits Political Benefits

Role Of Transport And Communication Sector In Economic Development Economic Benefits

1. Improved Productivity2. Stimulate internal & External Trade3. Enhanced Export Competitiveness.4. Exchange of goods b/w rural and urban areas5. Increase in Agricultural production6. Food Security7. Geographic Specialization8. Extension in settlement Areas9. Major contributor to governments revenue through taxes, duties and licensing

fee.

Role Of Transport And Communication Sector In Economic Development


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1. Reduction in vehicle operating cost and Travel Time cost2. Mobility of Labour3. Reduction in population migration4. Stabilization in Prices5. Balanced growth of Economy6. Provision of employment7. Adoption of new techniques/ technology(e.g. Just-in-time)8. Utilization of Natural Resources9. Revenue Generation through Tourism10. Increase in GDP

Role Of Transport And Communication Sector In Economic Development Social Benefits

Increase of Education Sense of Solidarity and Brotherhood Social welfare Connectivity Provision of amusement facilities

Political Benefits Maintenance of Law & Order Sound Defense Awareness Major modes of Transport in Pakistan

Major modes of domestic transport in Pakistan include; Road Services Railway Services


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Airway Services Shipping Services

Road Transport Roads carry over 96 percent of inland freight and 92 percent of passenger traffic and are

undoubtedly the backbone of the economy.

The current road network is about 260,000 kms catering to11 million vehicles of all types. Road Transport

Total road network includes

Highways, Motorways, Main Or National Roads, Strategic Highways (Gilgit to Skardu) Secondary And All Other Roads In A Country.

National Highway Authority NHA is presently the custodian of Pakistans major interprovincial links called the National

Highways , including Motorways

The NHA road network is around 12,000 kms, which is merely 4.6 percent of the overall roadnetwork but it takes 80 percent of Pakistans commercial traffic.

National Highway Authoritya. Completed Projects

NHA has completed 12 projects of flyovers, bridges, interchanges and road up gradationduring the last one year at a cost of Rs 19.6 billion.

b. Ongoing Projects

At present, 46 development projects on roads covering 2,985 kms are ongoing at a costRs 245 billion in different sections/ packages. These projects include construction of

roads, river bridges, tunnels, flyovers, interchanges.

National Highway AuthorityNew Development Projects


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During the financial year, NHA has launched/ awarded 16 new development projectscovering a length of above 500 kms including construction of a number of bridges,

flyovers and interchanges costing Rs. 70,951 million.

NHA is simultaneously constructing 12 bridges across the rivers. These are; on riverChenab 4, on rivers Sutlej 2, on river Swan 1 and on river Indus 5.

Pakistan Railways Pakistan Railways provides an important mode of Transportation in the farthest corners of the

country and brings them closer for Business, tourism, and education.

An effective railway system of the country facilitates commerce and trade, reducestransportation cost and promotes rural development and national integration.

Pakistan Railways The Pakistan Railways Network comprises 8,775 kilo meters of track.

737 stations, 596 locomotives, 2,725 freight wagons and 2040 passenger coaches

It carries 64 million Passengers annually. However from July 2011 to March 2012 it has carried 25 million. Why do people use Railway Transport From past to present PAK RAILWAYS IN 1861

It was not very long ago when Pakistan Railways was one of the three best railwaysystems in Asia

PAK RAILWAYS IN 2012Pakistan railway is facing losses due to

Mismanagement, Poor maintenance


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And weak ticket checks that allow people to get away with not paying for theirtickets

From past to present PAK RAILWAYS IN 1861

The number of locomotives that Pakistan Railway claims to own was 502. The condition of the engines was excellent

PAK RAILWAYS IN 2012 A shortage of locomotives has compelled Pakistan Railways (PR) to suspend more of its

passenger trains. (137 locomotives are in working order ).

A lot of wear and tear has made to the engines Reasons of downfall of Pakistan Railways

Role of Government for Rehabilitation of Pakistan Railways Restructuring of Pakistan Railways

The Cabinet Committee of Restructuring (CCOR) has approved a restructuring framework for

Pakistan Railways.

1. New Board of Directors of PR has been constituted by including academia, managementprofessionals, rail experts and executive functionaries.

2. Repair of locomotives has been given a priority for restoration of Railway services andfreight operations are also being prioritized for revenue generation

Role of Government for Rehabilitation of Pakistan Railways Restructuring of Pakistan Railways

3. It has been decided that adjustment of fares and freight pricing will be determinedaccording to market conditions and cost of doing business.

4. Private Sector involvement is the focus moving forward.5. Commercial management of rail operations and outsourcing of noncore functions is

being initiated with an aim to improve efficiency of rail operations.

6. An asset management company is being established for optimum utilization of PRsassets.

7. Role of Government for Rehabilitation of Pakistan Railways


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7. Pakistan Railways has entered into the Public-Private Partnership business in; Passenger Trains, Rehabilitation of Locomotives, Management Operation of Terminal Facilities including Dry Ports.

Role of Government for Rehabilitation of Pakistan Railways8. The Ministry of Railways is also in process of allowing private sector to operate on Pakistan

Railways network under Public Private Partnership (PPP) frame work.

9. The Ministry of Railways has also adopted a Track Access Policy for private sector participationto operate freight and passenger trains on Pakistan Railways infrastructure.

Achievements during the Fiscal Year Track:

During the last financial year, 16 kms of track was rehabilitated on the Pakistan Railwaysnetwork besides doubling of more than 15 kms of track.

Service Buildings: Construction of railway station at new Multan city and improve facilities for the

passengers at different railway stations.

Signaling: Signaling system of four railway stations is rehabilitated during the period.

Achievements during the Fiscal Year Establishment of new Dry Port:

A new dry port was set up at near Raiwind industrial area, Lahore through Public PrivatePartnership at a cost of Rs. 494.0 million.

Pakistan International Airlines (PIA) After a short period of independence, Pakistan decided in 1951 that it needed a national flag

carrier airline; the government of the country accordingly established Pakistan International

Airlines (PIA) in this role.

On 1 February 1955 the airline flew its first international service, between Karachi and Londonvia Cairo.

Currently number of planes owned by PIA is 39


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Major problems faced by PIA1. The bad governance, poor performance and corruption are the major causes of its failure.2. The Pakistan International Airlines is a big organization with more than 18000 employees.3. PIA was known all over the world for its excellent performance and superior quality. That was

the golden period for PIA. But now it has lost his luster.

Major problems faced by PIA4. The major problems faced by PIA are

Increase In Oil Prices, Over-staffing, Devaluation Of Local Currency, Political Interference And Its Weak Financial Position Since The Last Decade. PIA has suffered huge loss of more than 64 billion rupees from 2005 to 2008. It has also

suffered huge losses in 2009 and 2010 particularly due to increase in the price of the

fuel and devaluation of Pakistani rupee.

Major problems faced by PIA6. Flight delays and cancellations have become the norm rather than the exception.7. The average ratio of staff is too much high.8. Several unpleasant incidents occurred in PIA in the past few years.9. PIA has problem of maintenance and repairs.10.Dirty seat covers, messy floor carpets, dirty and gritty outlook, rattling planes and failing

equipment need refurbishment, better maintenance and planning.

Restructuring of PIA A restructuring plan of PIA has been finalized to addresses issues

Corporate governance, Human resource rationalization, Financial and operational restructuring,


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Engineering improvement, Procurement and logistics, Marketing and airport services.

Strategic Business Units (SBUs) are being established for outsourcing of non-core functions ofPIA.

Restructuring of PIA Rationalization of employment in PIA is being addressed through attrition and no new hiring is

being undertaken except for operational staff.

A financial restructuring plan has been finalized which includes equity injection, rollover of loanand government guaranteed loans among others.

Ports and Shipping Pakistan National Shipping Corporation

The national flag carrier of Pakistan, trading under the name of Pakistan NationalShipping Corporation (PNSC) is engaged in transportation of dry bulk and liquid cargoes

globally.

PNSC is an autonomous corporation, which functions under the overall control of theMinistry of Ports and Shipping, Government of Pakistan.

Ports and Shipping Pakistan National Shipping Corporation

It manages a fleet of 10 ships, real estate and a repair workshop. The consolidated revenue of the PNSC Group during July-March 2011-12 were Rs. 6640

million.

Ports and Shipping1. Karachi Port Trust (KPT) (27.8 million tones of cargo )2. Port Qasim Authority (19.7 million tones )3. Gwadar Port. ( import all bulk cargo comprising of Urea, Wheat and Coal through it.) (4.1 million

tones)

Communication Sector Communication sector is comprised of


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Information technology/ telecommunication Postal & telephone services Mass Media Telecommunication

Any transmission, emission, or reception of signs, writing, images and sounds of any nature bywire, radio, optical or other electromagnetic systems.

The sector that includes the telecommunication service providers, network operators,regulators, manufacturers, subscribers, and users.

Telecommunication has emerged as one of the fastest growing sectors of the economy eversince the sector was opened to private concerns.

Telecommunication sector in Pakistan In 2007 the sector grew by 80 percent while average growth rate in last four years has been

more than 100 percent.

Telecommunication is the most documented sector of the economy and a major contributor ofall the three Inland taxes in the country i.e. Sales Tax, FED and Income tax. It is also one of the

most heavily taxed sectors of the economy.

30 percent of the total FDI in the country during the last six years is due to telecom Sector. Broad band Services Broad band Subscribers have been more than 150% for last 4 years. Broad Band Services subscribers reached at 1.9 million at the end of Feb 2012. Impact on Economy The telecom industry of Pakistan contributes around 3 percent to Pakistans GDP. After the deregulation of the telecommunication sector, the sector has seen an exponential

growth.

The mobile telephone market has exploded fourteen-fold since 2000 to reach a subscriber baseof 118.32 million users in March 2012, one of the highest mobile tele-densities in the entire

world.

Impact on Economy


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In addition, there are over 6 million landlines in the country with 100% fiber-optic network andcoverage.

Pakistan is on the verge of a telecom revolution and is by far the most attractive sector inPakistan in terms of Foreign Direct Investment coming into the country.

Since liberalization, over the past four years, the Pakistani telecom sector has attracted morethan $9 billion in foreign investments.

A large number of jobs are created by call centers. Impact on Business Transaction costs of data collection, placing and receiving orders have greatly reduced due to

the availability of advanced telecommunication infrastructure.

It has put a positive effect on the output of individual firms and in aggregate overall economy. Communication tools such as internet and telephone are progressively more important for the

economic development.

Impact on Education The internet provides all types of information related to the business, health, education,

culture, weather etc as needed by the different users.

Distance learning is only possible through advanced telecommunication tools. It has also allowed educational institutions to deliver online lectures. Impact on Education Establishment of Virtual University for distance learning is also a futuristic move as centers of

this university have also been set up all over the country, which are interconnected via

broadband.

Impact on Social Life The impact of boom of Telecom Sector has also been substantial on Pakistani culture. In Pakistan people of a family live very connected with each other and there is a very strong

joint family system there.

We have a lot of traditional and religious events when members of a family send greeting textsto each other.

Overseas Pakistanis who having problems to contact with their back-home earlier are alsoenjoying the fruits of telecom sectors.


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Telecom services are playing role in Social-Welfare like now it has become easy to pay forcharity through an SMS.

Source of Social ills and Crime Cell phones have become status symbol in Pakistani society and this is the reason that people

spend lavishly behind new and glitzy models.

It has caused many problems one of which is mobile snatching and theft. Telecom sector has given birth to Cyber Crimes. Cause of many Moral issues in the Society. Telecom Sector and Mobile Banking Introduction of efficient mobile banking services in the country can utilize the strengths of

mobile networks to provide financial services to the large unbanked (rural, poor) population

As well as increase the overall efficiency of the banking sector in Pakistan. Problems and Issues of Telecom Sector

Even though it is the fastest growing sector of the economy yet telecom sector faces many challenges

like

Cut throat competition Rising operational, maintenance cost and Advertisement cost Increasing tariff cost Tax Domain Heavy Taxation Ambiguity in Tax Law 3G Spectrum and Pakistan Telecommunication Terrorism Low Investment Consumers Perspective

Rising operational and Maintenance cost Tax domain


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By Tax domain it is meant that which government would be charging tax on this sector within acountry.

whether would it be done by the federal government or the provincial governments or localgovernments, or by all?

This is a task that needs to be resolved as it would create manifold problems as the twoprovinces of Pakistan i.e. Punjab and Khyber Pakhtunkhwa are placing their own taxes while the

other two provinces are not.

Heavy Taxation WHT of 10 percent is deducted as soon as you will recharge your account.

Example: If you recharge Rs. 100 then Rs. 10 will be deducted as With Holding Tax.

FED is charged on per call/SMS or any revenue generating transaction.Example: FED is charged at @ 19.5%

Ambiguity in Tax Laws Income Tax Ordinance in Pakistan is not explicit on various cases which have arisen due to the

growth in Telecom sector, for example:

i. How entities in Pakistan would be taxed if they are operating a call centre business inPakistan that is providing services abroad via telephone or internet.

ii. Would the income of such individuals be taxed as foreign source or Pakistan sourceincome? Or would this income be exempt?

iii. Computer programmers are running software houses from their homes or single roomsetc, the above mentioned problems are applicable here as well.

3G Spectrum and Pakistan Telecommunication 3G technology would allow the consumer not only to read messages and hear calls, it would

allow video picture of the other person on the handsets as well.

The Ministry of Information Technology issued a policy directive to PTA with the objective ofredefining the policy framework and setting guiding principles for the auction of 3G frequency

leading to introduction of relevant services.

Terrorism The Telecom sector cant be set a side from all these problems arising due to terrorism.


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According to an estimate, the Telecom sector has suffered a loss of Rs.330 million in theprovince of Khyber Pakhtunkhwa and FATA (Federally Administered Tribal Area) due to

terrorism.

The infrastructure destroyed is 127 buildings, 51 mobile towers and 87 PTCL exchanges in all ofthis.

To add fuel to fire the Telecom sector is and has been suffering from the governments counter -terrorism measures occasionally.

On Eid-ul- Fiter a revenue loss of Rs. 2.6 billion was incurred due to cellular shut down Electronic Media Authority (PEMRA) as a statutory body and is mandated for regulating Through licensing and To regulate the growth of the electronic media in the private sector. The establishment and operation of all broadcast media that is satellite TV, FM radio and

distribution services like Cable TV, Mobile TV etc. in the country

Economic Contribution A cumulative investment of approximately U.S. dollar 2.5 billion in the electronic media industry

in Pakistan.

New jobs to more than 200,000 people of diversified skills and qualifications have beenprovided.

In addition, over 7 million people have been accommodated through indirect employment. Postal Services/ The Pakistan Post Post has offered full blend of

i. Express Mail andii. Financial Services.

It provides services through a network ofi. 12,035 (1,797 urban and 10,238 rural) post offices across the country.

Impact of Post Office Department Benazir Income Support Programme (BISP) continuous processing, monitoring and

reconciliation of the specialized money orders (Rs.16,642 million) scheme.


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Western Union Money Remittances Business During the first nine months of current fiscal year(July-March), Pakistan Post has received the foreign remittances amounting of Rs. 9,247.9

million.

Impact of Post Office Department Establishment of Small & Smart Express Centers: 55 Centers have been set up in the urban

areas that provides

i. Urgent Mail Service,ii. Urgent Money Order Service,

iii. Fax Mail & Fax Money orders,iv. Payment of incoming foreign remittances through Western Union,v. Acceptance of Utility Bills,

vi. Traditional Services, Booking of Inland and Foreign Parcels. Impact of Post Office Department Achievements of Saving Bank

During the period July- March 2011-12 an amount of Rs. 160,266.9 million has been collected.

Postal Life Insurance for a sum assured Rs.49,507.9 million and a Premium Income is Rs.1,993.8million.

Computerized Pension Payment SystemOver 1.4 million Civil and Military pensioners are being served by Pakistan Post

Conclusion Transportation and communication arena remains strong, Changing, Expanding and Seeking to meet with the needs of Pakistan's citizen. It is expected to grow at an accelerated pace due to demand. The need of time is that the government should allow all technologies to be used unhindered

but regulated

Theoretical Aspects


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Balance of Payments "The balance of payments of a country is a systematic record of all economic transactions

between the residents of the reporting country and residents of foreign countries during a given

period of time".

Balance of Payments The balance of payment record is maintained in a standard double-entry book-keeping method. International transactions enter in to the record as credit or debit. The payments received from foreign countries enter as credit and payments made to other

countries as debit.

Balance of Payments Balance of Payment is a record pertaining to a period of time; Usually it is an Annual statement. All the transactions entering the balance of payments can be grouped under three broad

accounts.

Structure of Balance of Payment (BOP) The Current Account The Capital Account The Financial Account The Current Account (CA) Current Account transactions are usually transactions in goods and services. A positive value for the current account is called a current account surplus. A negative value is called a current account deficit. The Current Account

The current account mainly consists of 4 types of transactions:

1. Exports and imports of goods

Exports of goods are credits (+) to the current account Imports of goods are debits (-) to the current account


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The Current Account 1. Exports and imports of goods The difference between exports and imports of goods is called ' Trade Balance' or 'Balance of

Merchandise Trade'.

Since the 1947's, Pakistan has a merchandise trade deficit except for one year. For the period of Jul-Oct FY13 Trade Deficit is Rs 6.440 bn. The Current account (CA)

2. Exports and Imports of services

Exports of services are credits to the current account (+) Imports of services are debits to the current account (-). Pakistan has a net debit

($-2,347mill) in services

balance

The Current account2. Exports and Imports of services

This category consists of items such as Tuition paid to universities by international students, Money spent on travel by tourists, Banking, Insurance, Freight, Medical services, Consulting Services etc.

The Current account3. Income A/c (Interest payments on international investments)

The Income component of balance of payments is restricted to income earned from theprovision of two factors of production viz, labor and capital.

Accordingly income earned from the labor is called compensation of employees(less than oneyear stay abroad) while income earned from capital is called investment income.

The Current account3. Income A/c (Interest payments on international investments)


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Interest, dividends and other income received on Pakistani assets held abroad are credits (+) Interest, dividends and payments made on foreign assets held in the Pakistani are debits (-). Pakistan has a net debit ($-2,655 mill) in the investment income account; more payments are

made to foreigners than foreigners make to Pakistani investors.

The Current account4. Current transfers

Current transfers mainly cover receipt on account of workers remittances, withdrawal fromresidents foreign currency accounts.

The Current account4. Current transfers

Remittances by Pakistani working abroad, pensions paid by foreign countries to their citizensliving in the Pakistan count as credits (+).

Remittances by foreigners working in the Pakistan, pensions paid by the Pakistan to its citizensliving abroad, count as debits (-).

Pakistani has the only surplus in current transfers i.e. US$10.8 bill.(July-April 2011-12) 2. The Financial Account (FA) Financial account records all transactions associated with changes of ownership in foreign

financial assets and liabilities.

2. The Financial Account (FA)Also includes government-owned assets such as

Foreign reserves, Gold, Special drawing rights (SDRs) held with the international monetary fund, Private assets held abroad, and direct foreign investment. Assets owned by foreigners, private

and official, are also recorded in the financial account.

2. The Financial Account (FA)The financial account consists primarily of 4 types of transactions:


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1. Foreign Direct Investment Direct investment implies a long-term relationship between the direct investor and the direct

investment enterprise.

It gives a significant degree of influence by the direct investor on the management of the directinvestment enterprise.

For direct investment, direct investor owns 10 percent or more of the ordinary shares or votingpower

2. The Financial Account (FA)1. Foreign Direct Investment

Purchases of Pakistani capital assets (factories, machines, companies) by foreigners are credits(+)

Purchases of foreign capital assets (factories, machines, companies) by Pakistani residents aredebits (-)

Sales of Pakistani capital assets by foreigners count as debits to the financial account (-) Sales of foreign capital assets by Pakistani residents count as credits to the financial account (+) 2. The Financial Account (FA)

2. Portfolio Investment

Portfolio investment implies holding by non-resident of less than 10% share in

Equity securities, Investment in debt securities (in the form of bonds and notes) And investment in money market instruments of local company. 2. The Financial Account (FA)

2. Portfolio Investment

Purchases of Pakistani securities (stocks, bonds, CDs, money-market accounts) by foreigners arecredits (+)

Purchases of foreign securities (stocks, bonds, CDs, money-market accounts) by Pakistaniresidents are debits (-)

Sales of Pakistani securities by foreigners count as debits to the financial account (-)


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Sales of foreign securities by Pakistani residents count as credits to the financial account (+) 2. The Financial Account (FA)

3. Other Investments

Other investment covers short- and long-term trade credits; loans (including use of Fund credit, loans from the Fund, and loans associated with financial

leases);

currency and deposits (transferable and othersuch as savings and term deposits, shares incredit unions, etc.);

And other accounts receivable and payable. Transactions covered under direct investment are excluded. 2. The Financial Account (FA)

3. Other Investments

Increases in loans & trade credits to Pakistani residents by foreigners count as credits (+) Increases in loans & trade credits to foreigners by Pakistani residents counts as debits (-) Repayments of loans & trade credits to Pakistani residents by foreigners count as credits(+) Repayments of loans & trade credits to foreigners by Pakistani residents counts as debits (-) 2. The Financial Account (FA)

4. Reserve Assets

Reserve assets consist of those external assets that are

Readily available to and controlled by monetary authorities for direct financing of paymentsimbalance.

In BOP, they cover monetary gold, SDRs, reserve position in the fund, foreign currency reservesand foreign currency cash holdings.

2. The Financial Account (FA)4. Reserve Assets

Increases in Foreign Currency/Gold reserves held by central bank count as credits (+) Decreases Foreign Currency/Gold reserves held by central bank count as debits (-)


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Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments 3. The Capital Account (KA) The major components of the capital account

are

1. Acquisition or disposal ofnon-financial assets (for example, a physical asset such as land, patents,

copyrights, licenses, trademarks and franchises.)

And non-produced assets, which are needed for production but have not been produced, like amine

3. The Capital Account (KA) 2. One-sided Financial Transactions, i.e. It includes transactions in which one country gifts

financial assets to another country with no expectation of receiving anything in kind.

In today's world, this implies one major type of transaction - debt forgiveness and relief. Forgiveness of Pakistani debt by foreigners count as credits (+) Forgiveness of foreign debt by Pakistan entities count as debits (-) Balance of Payments Equilibrium Balance of Payments Equilibrium Is defined as a condition where the sum of debits and credits

from the Current Account and the Financial and Capital Account equal zero;

Current A/c + Financial A/c+ Capital A/c = 0 Static Equilibrium In static equilibrium, exports equal imports including exports and imports of services as well as

goods.

National money incomes should be in equilibrium with reference to money incomes abroad. Theforeign exchange rate must also be in equilibrium.

Dynamic Equilibrium The condition for dynamic equilibrium in the is that exports and imports differ by the amount of

autonomous capital movements

Types of BOP Disequilibrium(a) Structural Disequilibrium


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(b) Secular disequilibrium, and

(c) Cyclical disequilibrium,

Structural Disequilibrium It takes place due to structural changes in the economy affecting demand and supply relations

in commodity and factor market.

Structural disequilibrium in balance of payments persists for relatively longer periods; as it is noteasy to remove structural imbalance in the economy.

Important Causes Of Structural Disequilibrium If the foreign demand for a country's products decline due to the discovery of cheaper

substitutes abroad, then the country's export will decline causing a deficit.

If the supply position of a country is affected due factors like crop failure, shortage of raw-materials, strikes, political instability, etc. then there would be the deficit in the balance of

payments

Important Causes Of Structural Disequilibrium A shift in demand due to the changes in tastes, fashions, income, etc. would increase or

decrease the demand for imported goods causing a disequilibrium in the balance of payments.

Changes in the rate of international capital movements may also cause structural disequilibrium. Important Causes Of Structural Disequilibrium A war also results in structural changes which may affect not only goods but also factor of

production causing disequilibrium in balance of payments.

Cyclical Disequilibrium When disequilibrium is caused due to the changes in trade cycles, that is why it is termed as

cyclical disequilibrium.

It is possible that different phases of trade cycles like depression, prosperity, boom, recession,etc, may disturb terms of trade and cause disequilibrium in balance of payments.

Important Causes Of Cyclical Disequilibrium For instance, during boom period, imports may increase considerably due to increase in demand

for imported goods.

During recession and depression, imports may be reduced due to fall in demand on account ofreduced income.


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During recession exports may increase due to fall in price. Important Causes Of Cyclical Disequilibrium During boom period, a country may face deficit in its BOP position on account increase in

imports.

However, during recession its export may increase, and as such BOP position may show surplus. Secular or Fundamental Disequilibrium Secular or fundamental disequilibrium refers to a persistent and long-term deficit or a surplus in

the balance of payments of a country

It occurs when there is a continuous increase in the stock of gold and foreign exchangereserves. There is a persistent surplus & vice-versa.

Important Causes Of Secular or Fundamental Disequilibrium In the initial stages of development, domestic investment exceeds domestic savings and imports

exceed exports.

Disequilibrium arises owing to lack of sufficient funds to finance the import surplus that mainlyarises because of import of Capital goods.

Then comes a stage when domestic savings tend to exceed domestic investment and exportsoutrun imports.

Pakistans BOPs position in FY 2011-12. Global turmoil

World Output decelerated to 3.9 % in 2011 The growth of world trade dropped to 5.8 % in 2011 . European Sovereign Debt Crisis, the turmoil in the Arab

Countries and the natural disasters that hit Thailand and Japan

which caused disruptions in the supply chain.

current account deterioration Increased imports Less exports Power shortages Flood Problems


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Current Account deficit: The current account deficit stood at ($3,394) million during July-April 2011-12 . Mainly caused by trade and services account deficit. Current transfers (workers remittances) helped to avoid further deficit. Current Account deficit The trade deficit expanded due to the 14.5% growth in imports And the 0.1 percent increase in exports; Thus widening the trade deficit by 49.2%. The major factor behind the widening of the trade deficit was the sharp rise in the

import bill due to the higher prices of

crude oil.

Current Account deficit The services account deficit recorded an expansion of $ 1,122 million. This deterioration in the services account was primarily due to the 16.6 percent fall in services

exports.

Pakistan witnessed a strong growth of 25.8% in 2011 and become the 5th largest remittancesrecipient developing country in 2011

Financial Account The financial account posted a surplus of $ 1,200 million. Foreign direct investment declined by 48.3% majorly in the telecommunication, financial

business and power sector during the period due to energy crises and circular debt .

However, the Oil & Gas Exploration remained the major attraction during current fiscal year asits share in overall FDI stood at 69.8 percent.

Exchange Rate Pakistans currency has depreciated vis--vis the US dollar. $1 is 97.69 Rs The Pakistan currency is appreciated by 0.51 percent in real terms i.e. in REER. Exchange Rate


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The REER (Real effective Exchange Rate)is defined as the weighted average of nominal exchange rates

adjusted for relative price differential between the domestic and foreign countries.

Foreign exchange reserves: Pakistans overall liquid foreign exchange reserves rose to $13.808 billion (SBP reported on 3-01-

13).

From it reserves held by the State Bank stood at $9.009 billion and $4.799 billion are held byBanks.

Foreign exchange reserves: Pakistan has to pay the tenth installment of the loan for an amount of $500 mill, to the IMF on

Feb 26, 2013.

Pakistan has so far repaid $2.1 billion to the IMF in nine installments against the outstandingloan of $7.8 billion

And then again the next in May 2013. FACTORS INFLUENCING PAKISTANS BOP

1. Concentration of Exports/ Narrow Export Base

The major share of Pakistans export is still concentrated in a only three items (cottonmanufactures, leather and rice).

Due to unfavorable natural conditions, decline in Agricultural products badly effects textilemanufacturing

FACTORS INFLUENCING PAKISTANS BOP2. Concentration of Imports

Pakistans imports are mainly concentrated in 8 commodities. Most significant among all are

Machinery, Petroleum & petroleum products, Edible oil, Chemicals and Fertilizers Transport equipment.


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Besides the efforts of the Govt. for diversification the imports are still fairly concentrated in afew markets i.e. (Saudi Arabia, Kuwait, Japan, U.S.A., Germany and U.K.)

FACTORS INFLUENCING PAKISTANS BOP3. Increase in Import Payments for fertilizers etc. due to rise in Price level.

4. Rise in oil Prices

5. Import of Capital Goods

6. Consumption oriented Society

7. Import of industrial Raw material

FACTORS INFLUENCING PAKISTANS BOP8. Propaganda about exploitation of Child Labour

9. Higher Payments for freight and insurance

10. Dependence on Agri-based Exports

11. Deterioration on Terms of trade

12. Unstable domestic environment

13. Global Economic Slow down

Measures to Correct Disequilibrium in Pakistans BOP1. Exports2. Imports3. Invisible Receipts and Payments4. Foreign direct investments5. Others Measures to Correct Disequilibrium in Pakistans BOP1. Exports Proportion of Value added exports should be increased.


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Promotion of Exports of non-traditional item (food processing, dairy farming, vegetables andfruit canning, and dry fruits).

Export exhibitions and fairs. Quality and cost of the export goods should be improved. Provision ofcompensatory and concessionary finance. Measures to Correct Disequilibrium in Pakistans BOP

2. Imports

The import and export tariffs need revision Permitting duty-free Imports of items used in export goods Imports of luxurious items should be restricted Measures to Correct Disequilibrium in Pakistans BOP

2. Invisible Receipts and Payments

Foreign exchange can be earned through tourism and cultural sector. Payments in Area of Travel/Transport and insurance should be controlled.

Measures to Correct Disequilibrium in Pakistans BOP

Foreign direct investments

Perception of Pakistan in international business circles need to be improved Facilities like availability of capital, infrastructure, cheap labor and peaceful atmosphere etc

may be provided to attract foreign investors.

China and India are good examples as they have attracted large foreign direct investments byproviding them extraordinary production facilities.

Others

Greater investments in the area of research and development (R&D). Increase labor productivity through education, on-the-job training Facilities for the establishment of small and medium scale industries


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Industrialization and engineering Exploring new vistas in fields of genetic engineering,

IT, anti-terrorism technology, computer gaming (like in South Korea),surgical instruments,fashion

designing, gem stone, jewelry and including sports goods.

Measures/Steps Taken By The Government Regarding Exports And Imports1. Diversification of Product &Market2. Value Addition in Exports3. Cluster development4. Brand Development5. Setting Export Processing Zone6. Appointment of trade commissioner7. Improvement in Financial and physical infrastructure8. Investment in gem and Jewelry9. Skill development Program Measures/Steps Taken By The Government Regarding Exports And Imports10.WTO obligations11.Establishment of Trade developing Authority12.Warehouse city13.Support to footwear sector14.Establishing contacts with neglected regions14.Allowing export of organic brown sugar.15.Export of Horticulture exports (could fetch up to $7 billion)16.Banning import of CNG cylinders and conversion kits. Measures/Steps Taken By The Government Regarding Exports And Imports17.Trade Agreements with countries (Free Trade Agreements (FTAs) and Preferential Trade

Agreements (PTAs) with different countries.)


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18.Trade Development Authority of Pakistan (TDAP) is undertaking various export promotionalactivities through trade exhibitions and delegations in the new markets viz China, Hong Kong,

Russia, Malaysia, Africa region, America and Eastern Europe etc.

financial sector if pakistan and its role in economy

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