Balance of Payments

Seminar in Economic Policy

Jawaid Alam
MBA (R)
28
th
June 2014
1
What is the BoP?
IMF definition
BoP identity according to IMF
Components of BoP
Components of Current Account
Components of Capital Account
Balance of Trade
Terms of Trade
Foreign Exchange Reserves
Pakistans Balance of Payments Prospects & Policy Proposals
Causes of BoP difficulties
Factors affecting exports
Policy Proposals




2
Agenda
What is BOP ?
3

Balance of payments is a statistical statement
designed to provide for a specific period of time a
systematic record of an economys 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.
CONCEPTUAL FRAMEWORK OF BOP
BOP registers transactions between residents and
non-residents.
BOP deals with flows.
BOP uses double entry accounting system.
BOP adopts the principal of accrual accounting (time
of recording).
BOP are normally expressed in domestic currency or
in stable unit of account.
4
Principles and Concepts
Double-entry System
The basic convention of a BOP statement is the
DOUBLE ENTRY ACCOUNTING SYSTEM in
which every transaction is represented by two
entries of equal values. If for example an
exporter receives foreign
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6
currency in payment for goods, a credit
entry would be recorded in the BOP
accounts for export of goods and offsetting
debit entry would be recorded for exports
increase in foreign currency bank balance.
In BOP these entries would be recorded as:

Credit Debit
Merchandise 100 ..
Foreign Currency Assets .. 100
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The balance of payments statistics are used for a
number of reasons within a country and worldwide.
The most frequent users are:

Domestic Economic Policy
Government authorities are constant users of balance of
payments and other statistics in carrying out their
responsibilities of monitoring economic activity, formulating
recommendations an appropriate balance of payments and
domestic economic policies and evaluating various economic
strategies.
Why is it important ?
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International Uses
Regional balance of payments statistics are used both by the
Pakistans authorities and by the authorities of partner countries to
monitor developments in economic relations between Pakistan
and those countries or specific country grouping.

Pakistans balance of payments is used by academic and
business observers as well as by policy maker around the world in
monitoring developments in the worldwide payments position and
in comparative studies of trends in the balance of payments of
various countries.
BOP data is also used by international bodies such as IMF, World
Bank and other external stakeholders etc.
Why is it important ?
Who does it compile
Statistics Department of State Bank of
Pakistan is responsible to compile Pakistans
Balance of Payments Statistics (BOP) as per
IMF format (BPM5)
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Periodicity and Timeliness
Monthly (highly provisional), Quarterly
and Annually.

Monthly: By the time lag of 36 days after the
reference Month.
Quarterly: By the time lag of one quarter after
the reference period.
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Standard Components of BOP
I. Current Account
Goods
Services
Income
Current Transfers
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II. Capital & Financial A/C
Capital Account
Financial Account
Direct Investment
Portfolio Investment
Financial Derivatives
Other Investment
Reserve Assets
III. Errors and Omissions
Standard Components of BOP
Goods FOB
General merchandise.
Goods for processing.
Repairs on goods.
Goods procured in ports by carriers
Non-monetary gold.
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Services

Transportation.
Travel.
Communication
Construction
Insurance
Financial
Computer and information
Royalties and license fees
Other business services
Entertainment & Cultural and
recreational
Government services

13
Standard Components of BOP
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Services
Standard Components of BOP-
Contd
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Income
Compensation of employees
Investment income
Direct investment
Portfolio investment
Other investment
Monetary authority
General govt.
Banks
Others
Standard Components of BOP-
Contd
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IV. Current transfers Credit Debit Net
General government
Other sectors
Workers remittance .
Resident FCAs .
Others .

Standard Components of BOP-
Contd
Capital account

Capital transfers
General government
Debt forgiveness
Others
Other sectors
Debt forgiveness
Others
Acquisition/disposal of non-produced non-financial assets
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Standard Components of BOP-
Contd
Financial account
Direct investment
Direct investment abroad
Direct investment in reporting economy

Portfolio investment
Portfolio investment Asset
Portfolio investment Liability

Financial Derivatives

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Standard Components of BOP-
Contd
Other investment
Assets
Trade Creditors
Loan
Currency and Deposits
Other assets

Liabilities
Trade Creditors
Loan
Currency and Deposits
Other assets
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Standard Components of BOP-
Contd

Reserves Assets
Monetary gold
SDRs
Reserve position in the Fund.
Foreign exchange
Other claims
Errors and omissions Net

Exceptional financing.


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Standard Components of BOP-
Contd
Table 7.2: Summary of Balance of Payments
Billion US$
FY10 FY11 FY12 FY13
Current Account Balance -3.5 0.2 -4.6 -2.5
Trade Balance -11.5 -10.5 -15.5 -15.4
Exports 19.7 25.4 24.7 24.8
Imports 31.2 35.9 40.1 40.2
Services Balance -1.7 -1.9 -3 -1.5
Income Account Balance -3.3 -3 -3.4 -3.7
Workers Remittances 8.9 11.2 13.2 13.9
Financial Account Balance 5.1 2.1 1.5 0.3
Foreign Direct Investment 2.2 1.6 0.8 1.3
Portfolio Investment -0.1 0.3 -0.2 0
Disbursement Of Loans 4.1 2.8 2.5 -0.5
Amortization Of Loans 1.9 2 1.9 -0.5
Overall Balance 1.3 2.5 -3.3 -2
In FY11, there was improvement in the current account witnessed
during the past two years continued in FY11 as well, with the
current account posting a small surplus of US$ 0.3 billion
In FY12, the current account recorded a deficit of US$ 4.6 billion
due to a sharp increase in oil imports, and a temporary slowdown
in remittances that led to a billion Dollar deficit in the month of
September alone.
In FY13, improvement can be traced to the CSF inflows of US$ 1.8
billion.
0.2
-4.6
-2.5
FY11 FY12 FY13
Current account balance
Billion US$
In FY11, although imports have also increased by 14.7 percent, the
growth in exports outpaced the growth in imports.
In FY12, a slowdown in external demand, and domestic supply-side
constraints contributed to a decline in the countrys exports.
In FY13, Trade deficit narrowed slightly mainly due to a decline in imports,
as exports remained more or less unchanged.

-10.5
-15.5 -15.4
FY11 FY12 FY13
Trade balance
Billion US$
In FY11, better unit prices of textile related products supported textile
exporters. Apart from textiles, exports of engineering goods, chemicals &
pharmaceuticals, leather products, fruits and fish also posted positive
growth.
In FY12, with exports continuing to perform poorly, the easing trade
deficit was entirely on account of international oil prices.
In FY13, exports remained more or less unchanged.


25.4
24.7
24.8
FY11 FY12 FY13
Exports
Billion US$
In FY11, both petroleum and non-petroleum imports increased. As with
exports, the prominent factor in inflating the import bill was the rise in
the prices of international commodities, especially the rise in the prices
of petroleum products, palm oil and sugar.
In FY12, the increase in imports, as mentioned earlier, was mainly a
function of higher oil prices. In addition, fertilizer imports also
contributed to the increase in the import bill
In FY13, imports remained more or less the same.
35.9
40.1 40.2
FY11 FY12 FY13
Imports
Billion US$
The financial account surplus declined for the fourth consecutive year in FY11. In
absolute terms, the financial account surplus decreased by US$ 3.0 billion in FY11
the highest fall recorded during the past four years. While foreign direct
investment declined due to lingering issues such as terrorism, energy shortages,
corruption etc., portfolio investment registered a relative improvement.
In FY12, the capital and financial account surplus contracted for the fifth
consecutive year, as both non-debt flows (investment) and debt flows (loans)
continued to decline.
In FY13, the surplus in the financial account declined substantially. This decline
can be traced to net repayments of external debts, which offset nominal increase
in foreign investments during the year.
2.1
1.5
0.3
FY11 FY12 FY13
Financial account balance
Billion US$
2.5
-3.3
-2
FY11 FY12 FY13
Overall balance
Billion US$
Pakistans external account posted a deficit of US$ 3.3 billion
in FY12, against a surplus of US$ 2.5 billion in FY11.
Pakistans balance of payments remained under stress
throughout FY13. Similar to FY12, this stress can be traced to
heavy repayments to the IMF, net outflows to other IFIs, and
anemic foreign investments.
In FY11 of 26.8 percent in foreign direct investment was contributed to by
a decline in both equity capital and in reinvested earnings.
In FY 12, Foreign direct investment (FDI) fell by two large cellular
companies was the major reason for this decline in FDI.
Foreign investments picked up in FY13 to reach US$ 1.3 billion, compared
with just US$ 0.6 billion last year. This is a welcome increase, but the level
of FDI remains glaringly low due to: election-related political uncertainty;
security concerns; and the vulnerability of Pakistans external account.

1.6
0.8
1.3
FY11 FY12 FY13
Foreign direct investment
Billion US$
Balance of Trade



Exports
Overall exports recorded a growth of 4.24 percent during first ten months
of FY14 (Jul-Apr) against a growth of 4.23 percent in the same period last
year. In absolute terms, exports have increased from $20,143 million to $
20,997 million.
Broad categories of exports suggest that textile group and petroleum
group & coal performed well during current year whereas other
manufactures group could not performed and showed a negative growth.
This sector mainly suffered due to sharp decline of more than 72 percent
in the export of jewelry.
The export of raw cotton increased handsomely during current year due to
favorable prices.

The monthly export for the period July-April, 2013-14 remained
consistently above the corresponding months of last year, with the
exception of October and November, 2013 and April 2014 period,
averaging $2,102 million per month as against an average of $2,014
million same period last year.



Imports
The imports target for current financial year was set at $43.3 billion
for FY14. Pakistan imports were up by only 1.2 percent in the first
ten months of the current fiscal year, rising from $36,664.94 million
during FY13(Jul-Apr) to 37,104.50 million during first ten months of
current financial year, showing an increase of 439.56million in
absolute term.
The major contributors to this additional import bill have been
alone the machinery group ($463.6 million or 9.8 percent) followed
by Agriculture and Chemicals ($291.5 million or 5.6 percent) and
Textile group ($52.2 million or 2.4 percent).
Other groups witnessed decline in import during first ten months of
current year led by Metal Group (8.4 percent) and food group (5.8
percent). The Petroleum Group, the largest group in the Pakistan
import bill has witnessed a decline of 1.3 percent ($157 million)
during Jul-Apr, FY14.


The monthly imports during July-Apr, 2013-14 witnessed some monthly
fluctuations especially during January and April, 2014 mostly due to
higher imports of construction, mining and textile machinery. Imports
averaged $ 3,711 million per month during this period as against $ 3,667
million for the comparable period last year. Thus, on average, imports
have risen only by $ 44 million per month during the period.


Foreign Exchange Reserves

Pakistans foreign exchange reserves improved by US$ 3.0
billion since July, 2013 and remained around $13.6 billion as
on 2ist May, 2014, a change of more than 28 percent. Of the
overall increase in reserves, SBP reserves increased by $3.2
billion, while that of the scheduled banks decreased by 0.2
billion. This improvement in reserve position was due to
inflows from the IMF under the current program, coalition
support fund (CSF), 3G/4G licenses, Issuance of Sovereign
Bond, multilateral/bilateral institutions and inflows from
friendly countries. This improvement has been achieved
despite the fact that Pakistan has so far repaid $2,708 million
during current year to the IMF and other institutions.
Pakistans Balance of Payments
Prospects & Policy Proposals

By. Sir Ashraf Janjua
in Pakistan Business Review July 2010
41
Trade balance in goods deficit is increasing since
FY03
Reached US$14970 mn in FY08 due to increase
in oil prices.
World economic slowdown and reduction in oil
prices decrease trade deficit but it was still high
compared to potential of economy
Decreasing deficit in services account is due to
lower payments for transportation b/c of lower
imports and lower payments for other business
services


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Analysis of Current A/c Bal of Pak
Debt burden in income account (negative
income a/c)
Investors want return on portfolio
Only surplus component is current transfers
from workers abroad to families at home
Result: Current a/c deficit leads to low
productivity, low exportable surplus, low
reserves for payment, low investment from
abroad, low capacity to borrow on soft terms


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Inability to increase value addition to raw
materials exported due to high cost of energy for
production of tradables, poor infrastructure, low
capital inv. In modernization of machinery to
enhance competitiveness
Due to low production, low quality, income
inelastic demand for products and weak image of
Pak. traders in global market, Pak has not been
able to utilize quota in EU and US markets (70%)


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Causes of BoP difficulties
Services need little inv. and is the fastest
growing sector in global economy, constituting
more than 60% of GDP and employment in
many countries (telecomm, banking,
insurance, transportation)

Training & develop. is needed for HR
optimum utilization of workers, technology
transfer, faster innovations
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1. Law and order and War on terror affects inflow of
FDI (Global Enabling Trade Report 2010, Pak ranked
123 out of 125 countries in terms of business costs of
terrorism)
2. Power shortages affect investment flows
3. Erosion of competitiveness b/c unit prices of imports
are increasing and they are used as inputs for the
exportables
4. Demand side constraints:
a) Recession in world economy
b) Dependence on RM exports of low value
c) Other countries are more competitive in no. of
commodities & services
d) No diversification of export mix

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Factors affecting exports
30-35% of imports are of crude/furnace oil. We
need to spend on import of edible oil, wheat,
sugar, chemical products for manufacturing,
fertilizers
Workers remittances plus pvt and official
transfers is helping the BoP
Problems in financing current a/c deficit Budget
deficit is expanding due to war on terror
increase in cost of borrowing, drying up of FDI
inflows, pressures on cost of external financing
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1. Efforts should be made to conclude war on
terrorism increase in production, exports,
FDI and tourism inflows
2. Increase in FDI would lead to inflow of
advanced technology & growth in services
3. Inflow of FDI would lead to capacity building of
HR sector
4. Good governance is needed: timely decision
making, setting up effective accountability
mechanisms

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Policy Proposals
5. Control of law and order would boost stock
exchange leading to foreign portfolio investment
6. Improve quality of social/physical infrastructure
7. Alternative energy resources should be developed
which would enhance production and exportable
surplus
8. Inflation should be contained to modest level and
Pak rupee should be kept competitive (REER)
9. Efforts should be made to diversify exports with
emphasis on service sector, dairy products, fruit and
vegetables and labour intensive segments of small
scale industry
10. Exploit untapped markets for trade: Africa & Latin
America

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Depends on
1. Ratio of foreign savings to investment
2. Growth in foreign exchange earnings from
exports of goods/services, remittances, pvt
transfers

If this happens, current a/c balance would be 2-
3% of GDP
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Sustainability of BoP
Thank you