Balance of Payments

Topics: International trade, Balance of trade, Export Pages: 7 (1490 words) Published: December 26, 2010
Table of Contents:

• Introduction

• Debit

• Credit

• BOP must be in equilibrium

• Balance of payments in Pakistan

• Causes of adverse balance of payments

• Measures to correct BOP

• Conclusion


Balance of payments refers to sum of both the balance of visible and invisible items. The balance of Payment is a comprehensive annualrecord of economic relation of a country with the rest of the world during a given period of time.

A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item. Debit:

The spending of foreign currency is debit and negative item. Credit:
If a transaction earns foreign exchange for nation it is a plus item and credit. Favourable BOP:
If the value of exports is greater than the value of imports, then the balance of trade is said to be favourable. Unfavourable BOP:
If value of imports is greater than value of exports, then the balance of trade is said to be unfavourable. BOP must be in equilibrium:
BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries. While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted. Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about. Balance Of Payments In Pakistan:

Pakistan's payments problems have been chronic since the 1970s, with the cost of oil imports primarily responsible for the trade imbalance. The growth of exports and of remittances from Pakistanis working abroad (mostly in the Middle East) helped Pakistan to keep the payments deficit in check . Since the oil sector boom began subsiding in the early 1980s, however, remittances declined. The government took steps in the early 2000s to liberalize and deregulate the exchange and payments regime. Pakistan moved to a dual exchange rate system in 2000. Export growth in 2000/01 was primarily due to higher exports of primary commodities such as rice, raw cotton, and fish, and other manufactures such as leather, carpets, sporting goods, and surgical instruments. Imports increased in 2000/01 primarily due to higher imports of petroleum and petroleum products, and machinery. Pakistan is suffering from balance of payment deficit because of increased reliance on imported goods as compared to its domestic production. In the year 2008, the import bill increased by almost 35% of which 4.9 billion amount comprised of oil related imports. Pakistan is highly dependent on imported oil goods which it imports from foreign countries. The rising prices of oil commodities was one of the cause to give a downward push to its balance of payments. In spite of the strong growth in remittances and exports (accounted for 7.1 billion), it still had to...
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