Balance of Payment

Only available on StudyMode
  • Download(s) : 212
  • Published : December 31, 2012
Open Document
Text Preview
BALANCE OF PAYMENT (BOP)

Introduction:
Balance of payments (BOP) is a record of economic transitions between the residents of one country and the rest of the world during one year. The balance of payment like all balance sheets must balance. The items, which lead to, an inflow of foreign earnings are placed on the credit side of the balance sheet, whereas the items, which give, rise to an outflow of foreign currency are placed on the debit side. Definition:

“Balance of payment is a systematic record of a nation’s total payments to foreign countries, including the price of imports, the outflow of capital and gold, and the total receipts from abroad, including the price of exports and the inflow of capital and gold.” According to Pas Taylor:

“Balance of payment refers to the difference between the total payments out of a country during a given period of time. These payments are of visible and invisible items.” Situation in Pakistan:
Pakistan, since independence, has been experiencing deficit (un-favourable) in its balance of payment except the following five years i. e., 1950-51, 1954-55, 1955-56, 1958-59, and 1959-60. In 1965-66, the balance of payment was highly deficit due to war against India. Explanation:

Balance of payments of a country has three types of account: a)      Current Account
b)      Capital Account
c)      Official Reserve Account

a)      Current Account
It includes export and import of all goods and services and transfer payments on receipts and payments sides respectively. b)     Capital Account
In capital account, on receipts side, short term and long-term capital inflow receipts of foreign direct investment and foreign debts are posted. Same items are written in payment side while making payment. c)      Reserve Accounts

It shows the foreign exchange position of a country. Official reserve account has the records of foreign official holding and increase reserves of gold and foreign currencies.

Surplus and Deficit in Balance of Payment
Any payment to foreigners is a deficit item in BOP while any receipt from foreigners is a surplus item in BOP. In other words whenever the demand for foreign exchange is more than the supply of foreign exchange the deficit in BOP occurs. If receipts are equal to payments on the current account and long-term capital account of balance of payment, then it is said the balance of payment of that country is in balance. If receipts are larger than payments on both the accounts, than it is said that the balance of payment is surplus. Conversely if payments are larger then the receipt on both of these accounts, then it is said that the balance of payment is in deficit. If there is persistent deficit in BOP then country should take some measures. However, when a country enjoys surplus it feels a sense of relief. Up to date Situation:

According to the Economic Survey of Pakistan 2010-11, imports of Pakistan are $ 32.3 billion and its exports are $ 24 billion. It is showing a deficit of $ 8.3 billion. Above situation is showing that Pakistan faces a continuous deficit in its balance of payment

Problems in BOP
These are the permanent problem of deficit in BOP:
LIMITED EXPORT CAPACITY
* Agriculture problem:
Pakistan basically is an agricultural country.. 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. * Consumption Oriented Society

People of Pakistan are mostly consumption oriented. 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. * 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...
tracking img