National University of Modern Languages

Department Of Economics

Current Issues of Pakistan

M.Sc. Economics 3rd (M)

Balance of Payment (Pakistan)

Submitted To:
By: Taha Najam
Mehwish Mushtaq
Fatima Khan
 Contents

Chap 1: Abstract and Introduction

Chap 2: Pakistan and China BOP

BOP of Pakistan
Exports and Imports of China
Reasons of Trade Deficit of Pakistan
Data Of Pakistan
BOP of china
Exports and Imports of china

Chap 3: Comparative Analysis of Pakistan and China BOP

Chap 4: Policy Recommendations and Conclusion

 Abstract
This study was carried out to find the most influential variable in the large trade balance in the case of
Pakistan's trade deficit responsible country. The data that we collected is from 1990-2005. This data belongs
to Pakistan and china. We make a comparative analysis of Balance of payment. And the main point is to find
out the problem of trade deficit in Pakistan, what is the main reason behind it and also checks the balance of
payment and gives some policy to improve balance of payment of Pakistan and how to overcome the trade
deficit.

Introduction

A statement that the transactions in an economy during a given period ended with the rest of the world. The
balance of payments, which is also known as the balance of international payments, includes all transactions
between residents of a country and its people, not with goods, services and income; financial assets and
liabilities with the rest of the world; and transfers as gifts. BOP classifies these transactions in two accounts -
the current account and the capital account. The current account covers transactions in goods, services,
investment income and current transfers, while the capital account includes mainly transactions in financial
instruments.

Trade Deficit is an economic measure of a negative trade balance in which a country's imports exceed its
exports. A trade deficit represents an outflow of domestic currency to foreign markets. And

Trade Surplus is an economic measure of a positive trade balance, where a country's exports are greater than
imports. A trade surplus represents a net inflow of foreign currency markets, and is the opposite of a trade
deficit, which would represent a net outflow.

Charles (1901) when the country imports more than she exports she will lose foreign exchange. All great
nations of the world with the exception of Russia and United States, declared to earn loses due to high
imports.

Mundell- Fleming (1962-1963) increase in trade deficit led by increase in budget deficit because consumer
spending increase which means import of the country will increase and export will decrease.
 Pakistan
Pakistan faces permanent trade deficit more than half century except two fiscal years. In 1951 and 1972-73. So
from 1990 to 2005 Pakistan face permanent trade deficit because of large imports. But in 2005-2006 in
Mushraf era Pakistan face a trade surplus in some months not in whole year. Because os large foreign aid and
stability in economic progress like Our GDP on that time is around 5.6. So that is the main reason of trade
surplus in that time. But 2006 to onward 2013 Pakistan faces the trade deficit. Because of some reason that
we discuss with you after reason of trade surplus of 1951 and 1972-3. Pakistan recorded a trade deficit of
243603 PKR Million in September of 2014. Balance of Trade in Pakistan averaged -22158.76 PKR Million from
1957 until 2014, reaching an all time high of 6457 PKR Million in June of 2003 and a record low of -280964 PKR
Million in August of 2014.

1951: Pakistan won currency on exports of jute and raw cotton trade surplus was Rs.176 million of this
increase in export demand due to the Korean War and main reason is countries and peoples think that world
war 3 is started so that why our trade balances is in surplus.

1954-55: In that time balance of payment is little favorable due to devaluation and restrictions on imports
(PRs. 09.9 Crore)

1955-56: Due to 20% increase in exports so balance of payment is favorable.

1959-60: Bonus Vouchers Scheme and Restrictions on Imports so little favorable balance of payment on that
time.

1972-73: The government devalued the rupee Bhutto by 56% and imposed high tariffs on imports of luxury
goods. The trade surplus was Rs.153 billion this year.

Imports of Pakistan Trade balance is in deficit, Pakistan, mainly due to higher imports of energy and
expense on war on terror. The main imports are fuels (40 % of total imports, machinery and transport
equipment (18 %) and chemicals (16 % of total imports). food and animal or vegetable oils (13 percent) and
manufactured goods (12 percent). Main import partners are: United Arab Emirates (17 percent), China (15
percent), Saudi Arabia (11 percent) and Kuwait (9 percent). Others include: Malaysia, Japan, India and United
States.

Exports of Pakistan Knitwear and cotton (28 % of total exports), bedding, carpets (8 %) and rice (8%).
Others include: leather, fish, sports goods and fruits and vegetables. Main export partners are: United States
(15 percent of total exports), United Arab Emirates (10 percent), Afghanistan (9.5 percent), China (9 percent),
United Kingdom (5.1 percent) and Germany (4.8 percent) and Hongkong (1.6 %). exports of Pakistan are based
agriculture, where a lot is created depending on the weather and the natural uncertainty about the cultures
that affect trade (exports). exports minus imports more of the time in Pakistan and imports are too expensive
compared to the value of exports its also one of the main reasons for the trade deficit. We collect the data
from 1990 to 2005 in this era Pakistan faces the trade deficit.
Reasons of Trade Deficit of Pakistan:
There is lot of reasons of Pakistani balance of payment is in deficit now we discuss with you 1 by 1.

1. Narrow Export Base

Pakistan basically is an agricultural country. Its major exports are rice, cotton, raw wool, leather,
fish etc. 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.

2. Consumption Oriented Society

People of Pakistan are mostly consumption oriented. Due to rapid rise in population and
increased consumption habits, the domestic manufactured goods are mostly consumed in the country.
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.
3. Less Modernization of Machinery
Since 1970s, there have been less modernization, balancing and replacement of machinery in the
private industrial sector. The fall in production and decline in the quality of products has adversely
affected exports.
4. Increase in the Sick Industrial Units
The number of sick industrial units, mainly due to nationalization of industries, has borne up. It is
on record that the performance of most of the industries in the public sector is not satisfactory. The
decline in production of semi-manufactured and manufactured goods reduces the exportable surplus and
adversely affects the volume of trade.
5. Less Production of Value Added Goods
The share of industry in the GDP is 25.8 %. The share of value added goods must increase to earn
over many years. The share of value added goods must increase to earn foreign exchange and turn the
trend of adverse balance of payment. The production of value added goods is at basic sta ge in Pakistan
that leads to adverse BOP.
6. Devaluation
The repeated devaluation of rupee against US dollar has not helped in the increase of exports. It
has made the imported inputs more costly. The demand for our goods in the international market is
elastic. As such, due to devaluation, as tool for boosting, exports are not effective.
7. Tough Competition
Stiff competition in the foreign market particularly of our value added goods has reduced the
volume of foreign trade in Pakistan. There is availability of higher standard goods at lower prices in
international market. It causes reduction in exports, which result in deficit in BOP.
8. Increase in Prices of Inputs
The increase in the prices of fuel, electricity, high capital costs of imported machinery, e xchange
rates etc. have inflated. The costs of both imported capital goods and industrial raw material, on which
domestic industry is heavily dependent the inflationary impact of the rise in the prices of inputs are not
helping in achieving the export targets set in each financial year.
9. Anti-dumping Duties
Japan, Hong Kong and some other nations imposed antidumping duties on our cotton yarn, fabric
and bed linen. Such types of duties on our exportable goods are also a big hurdle in the way of our
exports.
10. Technical Barriers
 Imposition of non-tariff, barriers like child labor, ISO 14000 etc., has adversely affected our
exports for the last years. The advanced countries of the world have imposed technical barriers such as
patents, copyrights, trade-marks and designs etc. on their imports. Pakistan will have to upgrade the
standard of purity and quality to compete for its products in the international market.
11. Political Uncertainty
The political uncertainties in the industrial units have considerably affected the efficiency of the
industries. The fall in the volume of production, particularly in the manufacturing value added sector has
reduced export earnings. Due to reduction in export earning, our BOP is unfavorable.
12. Fall in Terms of Trade
The import unit values are higher than the export unit values for the last over three decades in
Pakistan. A decline in terms of trade causes imbalance in the balance of payment.
TOT = [(Export Price Index Import Price Index) 100]
TOT = (296.10 446.01) 100] = 66.39 indices
Above computation is showing that we lost about 33.61 % of our export earnings in 2005 -06. According
to Economic Survey of Pakistan 2010-11, terms of trade are 59.3 indices.
13. Foreign Debts Servicing
Pakistan has obtained about $ 59.5 billion from different countries and it pays interest on these loans
regularly. It paid $ 7.8 billion as debts services charges during 2010-11. The interest payment has
adversely affected the balance of payment.

14. Rise in Oil Prices

The sharp rise in the prices of oil particularly in 70s and also in the beginning of 1980s and
1990s is taking a big amount of the foreign exchange earnings. Our import bill of petroleum group is
increased to $ 8670.4 million in 2007-08, while it was $ 530 million in 1978-79.

Data of Pakistan
That data collect from the economic survey of Pakistan 2004-2005

Year Exports Imports Trade Balance Trade Deficit(as

percent of GDP)
1950-51 1,343 1,167 176 .
1972-73 8,551 8,398 153 .
1975-76 11253 20465 -9212 .
1976-77 11294 23012 -11718 .
1989-1990 106469 148853 -42384 4.9
1990-91 138282 171114 -32832 3.3
1991-92 171728 229889 -58161 4.8
1992-93 177028 258643 -81615 6.1
1993-94 205499 258250 -52751 3.4
1994-95 251173 320892 -69719 3.7
1995-96 294741 397575 -102834 4.9
1996-97 325313 465001 -139688 5.7
1997-98 373160 436338 -63178 2.4
1998-99 390342 465964 -75622 2.8
1999-2000 443678 533792 -90114 2.4
2000-01 539070 627000 -87930 2.1
2001-02 560947 634630 -73683 1.7
2002-03 652294 714372 -62078 1.3
2003-04 709036 897825 -188789 3.5
2004-2005 854088 1223079 -369621 3.9
That data of export, imports & trade balance in the form of RS Million

So this data shows totally trade deficit its a very bad condition for Pakistan BOP. The Pakistan imports exceed
the exports of Pakistan. Its a worst condition situation for Pakistan trade. The govt. must take some special
steps to improve the Balance of trade. Because its give bad effect on the GDP of Pakistan. Govt. and
economist of Pakistan must create some policy thats increases the export.
 China
China is world largest country according to population vise. Its total population is around 1.6 billion peoples.
China is world richest country according to 2013 and world 2 nd largest importer. In 2013, China bought
US$1.95 trillion worth of imported products. That total is up by 93.9% since 2009. And china is also number 1
exporter of the world in 2013. China shipped US$2.21 trillion worth of goods, up by 84% since 2009.

Exports of China:
The main exports of china is electronic equipments (561.7 billion US$ its 25.4 % of exports) then Machine,
engines and pumps (383.3 billion US$ its 17.3% of exports) then knit clothing its 4.4% of exports, furniture and
lighting its 3.9% of exports and then Medical technical equipment its 3.4% of exports then plastic its 2.7% and
vehicles its 2.8% then iron and steel products its 2.4% and then foot wear its 2.3%. So its the main exports of
china.

Imports of China:
The main imports of china is following, Electronic equipments (439.4 billion US$ its 22.5 % of imports) then Oil
its 314.7 billion US$ n its 16% of imports then Machines, engines and pump its 8.8% of imports then Medical
technical equipment its 5.5% of imports, then vehicles its 3.7% of imports, plastic its 3.8% of imports,
chemicals its 3.4% of imports and last is copper its 2.6% of imports.

Balance of payment of china:

China recorded a trade surplus of 454.05 USD Hundred Million in October of 2014. Balance of Trade in China
averaged 62.85 USD Hundred Million from 1983 until 2014, reaching an all time high of 498.30 USD Hundred
Million in August of 2014 and a record low of -319.71 USD Hundred Million in February of 2012. Since 1995
China has been recording consistent trade surpluses. From 2004 to 2009 Chinas annual trade surplus has
increased 10 times. Yet, as the global demand is slowing down and import of commodities for vast
infrastructure projects and consumer goods is growing, there has been a significant decline in trade surplus. In
the last few years, the biggest trade surpluses were recorded with the United States, Netherlands, United
Kingdom, Vietnam and Singapore. The biggest trade deficits were recorded with Taiwan, South Korea,
Australia, Germany, South Africa, Japan and Brazil. Chinese trade surplus increased to USD 45.4 billion in
October of 2014 from a USD 31 billion surplus a year earlier. Exports rose more than expected driven by sales
to the United States and Asia while imports slowed. Exports rose 11.6 percent year-on-year in October of 2014
to USD 206.9 billion, following a 15.6 percent increase in the previous month. Sales to the United States
advanced 10.9 percent (10.8 percent in September); exports to the ASEAN countries surged 18 percent and
those to South Korea rose 13.8 percent. Shipments to the European Union slowed (4.1 percent from 14.9
percent in September) and those to Japan shrank at a faster 8.1 percent (-5.3 percent in the previous month).
Imports advanced 4.6 percent year-on-year to USD 161.5 percent in October, slowing from a 7 percent
increase in September. Imports from South Korea (12.6 percent in October from 27.8 percent in September)
and the United States (2.2 percent versus 12.6 percent) eased the most. In contrast, purchases from the
European Union surged 10.4 percent (9.1 percent in the previous month).
 Comparative Analysis of Pakistan and China
China is world largest country in the world according to population vise and Pakistan is to
smaller than China. Pakistan total population was around 200 million in 2012-13. China is
world no 1 largest exporter and no 2 importer. Since 1995 China has been recording consistent
trade surpluses. From 2004 to 2009 Chinas annual trade surplus has increased 10 times. But
Pakistan faces regular trade deficit from 1970 to 2014. Because of high imports and small
exports. Due to those problems that we discuss with u before. China GDP is greater then
Pakistan. China is larger exporter and they have labor intensive industry they have cheap labor
and large no of resource. Over the last 20 years, China has grown at a rate of nearly 10 per
cent per annum, driven primarily by the expansion of the modern, industrial, export-oriented
sector. With some 20 million Chinese workers moving from rural underemployment to the
modern sector annually, the impact is akin to adding another middle-sized industrial economy
to the world economy each year. And with between 200 million and 300 million workers still
to be reallocated from rural underemployment, this is not simply a one-time shock but an
ongoing process that should continue for a decade and more. So this is the main reason of
china they grow with passage of time. But Pakistan have no enough resource and no proper
utilization of resource and political pressure so our export less then china. If we see the
Exports of Pakistan in 2014 its a 275917 PKR Million and imports is in 2014 47228.00 PKR
Million. But on the other hand china export 2136.87 USD Hundred Million and import was
1830.4 USD Hundred Million. So they show clearly huge change between Pakistan and China
Imports and export. So govt. of Pakistan must take special steps for over come the trade
deficit.
 Policy Recommendation For Improve the Bop of Pakistan
Pakistans exports comprises of agriculture products which are used as raw material in the production of value
added goods in other countries.
Following are some recommendations which if adopted by policy makers and concerned authorities will help
in reducing the gap between exports and imports of the country. Need of the time is to produce value added
goods at home and then exports them to earn foreign exchange to pay for heavy imports bill.
1. Labor Intensive Industries
Labor intensive industries should be established, because labor is cheaper in Pakistan, these
industries can be set up at lower cost. The products of these industries can be exp orted.
2. Manufactured Goods
Instead of exporting primary goods like raw cotton, Pakistan should export manufactured goods
like textiles and garments, leather goods, food products and electrical goods.
3. Reduction in Export Duties
This step will make our export competitive in the international market. Foreigners will prefer to
import from Pakistan because of low prices.
4. Quality Products
Many of our goods cannot be exported because of poor quality. Thus, electric fans, cycles, electric
motors, shoes, ball pens, crockery etc. cannot be sold abroad. Pakistan is needed to improve the quality
of its products according to international standard.
5. Export Marketing
Agencies should be made more active. Pakistan has already done this. There are Export Promotio n
Bureau, Export Development Fund and Export Processing Zones etc. All these are playing their effective
role to increase export and to correct the BOP.
6. Immoral Practices
Many Pakistanis have brought bad name to our trade because they export commodities of inferior
quality than specified in agreements. So, all this should be restricted.
7. Pricing of Goods
It is necessary for increasing exports that goods should be produced under optimal conditions and
offered at competitive prices in international market.
8. Packing
High quality packing is essential for promoting exports. If packing is not attractive and durable, it
will not capture foreign market.
9. Joint Venture
Establishing industries with joint venture of foreign investors can also push up the export. The
products of these industries can be sold in the foreign market.

10. Import of Only Essential Items

Only essential items should be imported which are needed for our industrial production. Import of
luxuries should be banned. People should be educated to come out from the complex of foreign goods.
11. Exchange Control
Exchange control is also an important step to minimize the imports. Exchange control should be
followed, so that there is no wastage of foreign exchange to import of un-necessary and luxuries.
12. Substitutes for Imported Items
Import substitutes should be manufactured in the country. If home production of fertilizer, paper,
steel, edible oil and electrical goods are increased, there will be less need for such imports.

13. Decrease in Consumption

Taxes should be imposed to reduce the consumption of many items. Rich people in our country
are spending freely on unnecessary imported consumer items. So, foreign exchange reserves are wasted.

14. Control of Smuggling

Bara markets should be eliminated. After atomic explosion, the Govt. is taking strict measures to
eliminate markets of smuggled goods.

15. Population Control

Many of our problems are arising due to fast increase in population. Sincere efforts should be
made to decrease growth rate of population. People should be educated in this regard.
 Conclusion
In conclusion we see the trade of Pakistan is in worst condition due to many reasons. And china
comparative analysis shows huge gap between Pakistan and China Trade Balance, the china BOP is in
surplus and Pakistan BOP is in full deficit. The Pakistan BOT & BOP is in bad situation. We show the data of
Pakistan from 1990-2005. We discuss the reasons of bad trade. We also recommend the some policy for
improving the BOT & BOP of Pakistan and tell how we achieved trade surplus like china. Govt. should take
some important steps to increase the export of Pakistan. And they must should be control the imports.
Then we improve the BOP of Pakistan. Achievement of surplus in balance of payment is difficult but not
impossible. It can achieve through installing import substitution and export promoting industries.
Government should control the forex and check the import of luxuries.

Reference
The Economic Survey Of Pakistan 2004-2005
Unctad Statistical Year Book 2012
Trading Economics for Data collection
Index Mundi