The balance of payment has been an important indicator of the growing economic activities in all countries. The purpose of this essay is to discuss factors that causes Balance of payment problems that are encountered by developing and emerging economies. This essay starts off with an introduction of the definition of B.O.P and the overview of its components. This is followed by an insight into the approaches used to explain deficits from the current account of the B.O.P. Furthermore, the causes of the problems were discussed.
The balance of payment has been an important indicator of the growing activities in all countries of the world. It shows the extent to which a country is developed technically and also competitive in the world market. Balance of payment can thus be defined as a statistical record which shows all the economic transactions which occurs between residents of a country and the rest of the world. The transaction between residents and non residents consists of goods, services and income; those involving financial claims on, and liabilities to the rest of the world.
Since the balance of payment deals with transactions and thus deals with flows rather than stocks. Which means it is concerned with the economic events that take place during a specified period of time and not the outstanding totals of economic assets and liabilities that exist at particular periods in time.
Its main purpose is to inform the government about the international economic position of the country and also in helping it make decisions about monetary and fiscal issues, on one hand, and also about its trade and payments on the other hand.
SRUCTURAL OVERVIEW OF THE STANDARD COMPONENTS
The standard components are grouped under two major heading: the current account and the capital and financial account. The current account is further subdivided into three broad categories: goods and services (which is subdivided into goods and services), income and current transfers. The capital and financial account includes, in the capital account, capital transfers and transactions (purchased/sales) in an economy’s non-produced, non financial assets (such as patents and copyrights), and the financial account contain transactions in an economy’s external financial assets and liabilities. The balance of payment of Pakistan is shown in the table below.
Balance of Payments: 2000-2001
Trade Balance -1269
Merchandize Exports (f.o.b) 8933
Merchandize Imports (f.o.b) -10202
Non-factor Services (Net) -981
Investment Income (Net) -2161
Private Transfers (Net) 3898
(Workers’ Remittances) (1087)
Current Account Balance -513
Private Capital (Net) -380
Direct Investment 146
Other Long Term -214
Short Term -312
Public Capital (Net) 577
Long Term Disbursements 2302
Less Repayments Long Term 1795
Other Short Term and Long Term 70
Changes in Reserves -1001
Errors and Omissions 625
Financing Accumulation of Arrears 692
Source: Pakistan Economic Survey-2002-03.
Deficits arise on the current account of the Balance of payment as a result of the combination of these three (3):
SHIFTS IN IS: ABSORPTION APPROACH
If the domestic expenditure increases, it leads to a rightward shift in the IS curve which tends to weaken the balance of payment. The overall move into deficit represents the outcome of two (2) opposing forces. First, as expenditure increases, there’s a corresponding increment in imports and deterioration in the current account (assuming that a movement into deficit or towards a larger deficit may legitimately be regarded as deterioration). Second, an increase in income also induces an increase in the demand for money. With a given money supply, interest rate rises which generates a capital inflow and an improvement in the capital account.