TRENDS AND COMPOSITION OF BALANCE OF PAYMENTS

The balance of payment is a summary statement of all economic transactions between the resident of the reporting country and the resident of all other countries during a current fiscal year. Balance of payment condition of Pakistan is very much pathetic. The imports are greater or higher then its exports. Due to increase in aggregate demand and the rise of international oil prices and higher commodity prices the external account of Pakistan came under pressure in the fiscal year 2005-06. The economy has to bear the highest ever current deficit of US $ 5 billion during the fiscal year 2005-06 as compared to the pervious years which is US $ 1.5 billion – the increase of US $ 3.5 billion. Current account deficit is a result of huge trade deficit of US $ 8.4 billion as compared to the pervious year which is US $ 4.5 billion –the increase of $ 3.9 billion.

The main and important reason of trade deficit is increase in the imports bill of Pakistan. The gradually increase in the international oil prices and increase of aggregate demand result the increase in imports up to US $ 24.9 billion during the fiscal year 2006. This growth in the imports yields the trade deficit or more properly current account deficit from a relatively tolerable 1.4 percent of GDP in the fiscal year 2006. The government has projected import bill at US $ 28 billion for the current fiscal year. The over all condition of balance of payment in the second tenure of Mr. Muhammad Nawaz Sharef (1997- 99) witnessed a significant improvement in the balance of payments. The economic condition of Pakistan shows improvement with the start of Musharaf’s regime.

Government of Pakistan launched economic stabilization and structural reform measures to improve the balance of Payment condition of Pakistan. But the analyst said that the trade policy announced for the current fiscal year would not help in reducing the imports and boosting the exports. The real improvement in balance of payment is reported after the event of September11 (9/11). The war against terror enables Pakistan to improve its trade deficit which result improvement in balance of payment. The large current account deficit could be removed by the improvement in the financial account. The financial account surplus is US $ 0.45 billion in fiscal year 2005 to US $ 5.9 billion in fiscal year 2006. The improvement in financial accounts yields the increase in foreign direct investment. Pakistan's trade deficit was $12.112 billion in last fiscal year 2005-2006, almost 10 percent of Gross Domestic Product (GDP), due to its high import bill and the rise in prices. It should be controled by the government of pakistan. The import should be less then the exports. Pakistan's overall external account position improved during July-November fiscal year 2007 compared to the same period last year despite a worsening condition of the current account deficit. Specifically, while the current account deficit increased from US $3.1 billion to US $4.0 billion, an increase of 29.1 percent, the overall external account deficit decreases to US $0.73 billion in July-November fiscal year 20007 as compared to US $0.88 billion in July-November fiscal year 2006.

In the previous year the surpluses in the capital and financial accounts offsets the most of the deficit in the current account. The bulk of the 35.4 percent Year-on-Year increase in the aggregate surplus in the capital and financial accounts during July- November fiscal year 2006 was contributed by foreign investment. Although Pakistan was able to finance the fiscal year 2007 current account deficit the rise in the deficit nonetheless remains a source of some concern, because unlike the previous years, it owed more to a substantial slowdown in the country's exports rather than an extraordinary rise in imports. Specifically, while the imports growth during July- November fiscal year 2006 slowed substantially to 13.9 percent as compared to 33.2 percent in the same period last year, it was the unusual decline in the exports growth. In addition, the current account deficit was also adversely affected by an unusual rise in the income account deficit arising from a higher direct investment income outflows. The rise in the trade, services, and income account deficit was, however, mitigated to an extent by the increase in the current transfers, which increased by 13.4 percent during July-November fiscal year 2006. The external sector showed considerable improvement from last year as it restricted the BOP deficit to $0.9 billion during July-November 2005 from a deficit of $1.5 billion in the comparable period of last year. This occurred despite a massive trade deficit of $3.8 billion (exchange based) during July-December 2005.

On the exports side, the recovery of textile exports (which grew by 26 percent) was impressive given the higher competitive pressures in the post-quota regime, and the additional challenges exporters had to face in the ED market in the form of antidumping duty on key exports and loss of preferential treatment. Indeed, overall exports grew by 23.8 percent despite the loss of external competitiveness by around 4 percent. Worker's remittance continued to be buoyant, with a monthly average of $342 million during July-December 2005. The rising inflows of foreign investment (around $1 billion) and long-term external loans ($211 million) drove the capital and financial account into the surplus zone ($1.8 billion). These large inflows helped contain the decline of foreign reserves to only $976 million against the unprecedented import bill, which swelled by 54 percent to $11 billion. The surprising growth in imports principally resulted from oil imports (due to high energy prices), which accounted for 23 percent of the total import bill, and the import of machinery (excluding transport equipment), which also rose sharply, up 57 percent during July-November 2005 compared to 49 percent in the comparable period of last year The growth momentum of imports is expected to continue in view of increased demand for oil, raw material and industrial machinery. Exports are also expected to sustain their impressive growth due to increased production activities resulting from the on-going capacity expansion drive and continuing modernization and up gradation of key industries. Furthermore, it is expected that worker's remittances and other inflows would be available (such as proceeds of privatization of strategic companies and international financial commitments for earthquake relief operations are realized. Therefore, the foreign exchange position of the country is likely to remain comfortable, in view of sizable foreign reserves ($11.7 billion as on 31 December 2005). SBP is expected to remain an active player in the foreign exchange market to ensure effective monetary and exchange rate management.

Economists believe that the soaring trade deficit would depreciate the Pakistani rupee against dollar and other currencies. The demand by local importers for dollars in the coming months would increase to finance their surplus imports. The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery and automobiles

(Muhammad Aamer Shahzad)

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