Posted by : Ahsan Khan Monday, 23 April 2012



DIFFERENTIATE BETWEEN BALANCE OF TRADE AND BALANCE OF PAYMENT. GIVE THE CAUSES OF ADVERSE BALANCE OF PAYMENT. ALSO SUGGEST MEASURES TO IMPROVE IT?
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.”


DIFFERENCE BETWEEN BOT & BOP

1- Definition
Balance of Trade (BOT)
Balance of Payment (BOP)
BOT is the difference between the values of exports and imports of only physical items (goods) of a country during a given period of time (usually one year).
BOP is the difference between the values of exports and imports of both visible and invisible items (goods and services) of a country during a given period of time (usually one year).
2- Surplus or Deficit
Balance of Trade
Balance of Payment
If the value of visible exports is greater than value of visible imports, the balance of trade is said to be favourable and vice versa.
If the value of the total receipts is greater than the total payments, the BOP is termed as favourable and vice versa.
3- Goods and Services
Balance of Trade
Balance of Payment
It includes only (visible) goods.
It includes both (visible and invisible) goods and services.
4- Revenue and Capital
Balance of Trade
Balance of Payment
It includes all revenue receipts and payments on account of imports and exports.
The BOP includes all revenue and capital items.
5- Relationship
Balance of Trade
Balance of Payment
The BOT does not include the BOP. It is the part of BOP.
The BOP includes BOT also. Accordingly, it is equal to the BOT plus import & export of services.
6- Economic Position
Balance of Trade
Balance of Payment
It does not show the actual economic position of a country.
Balance of payment shows the real economic position of a country.
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.

REPRESENTATION BY SCHEDULE

Fiscal Year

Situation
Reason
1950-51
Favourable
Due to the Korean War (Rs. 578.0 Crore)
1954-55
Favourable
Due to Devaluation and restrictions on imports (Rs. 09.9 Crore)
1955-56
Favourable
Due to 20% increase in exports
1958-59
Favourable
Bonus Vouchers Scheme and Restrictions on Imports
1959-60
Favourable
Bonus Vouchers Scheme and Restrictions on Imports
1965-66
Unfavourable
Deficit due to war against India
2007-08
Unfavourable
Deficit  ($ 16.8 billion)
2008-09
Unfavourable
Deficit ($ 12.72 billion)
2009-10
Unfavourable
Deficit ($ 10.945 billion)
2010-11
Unfavourable
Deficit ($ 8.3 billion)
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
CAUSES OF UNFAVOURABLE BOP -OR- BOT:
These are the permanent problem of deficit in BOP:

A-     LIMITED EXPORT CAPACITY

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 1970’s, 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 stage 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, exchange 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 labour, 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 unfavourable.
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.

B-    UN-RESTRICTED IMPORT NEEDS

14. Import of Capital Goods
Pakistan has to import capital goods for rapid industrialization of the country in order to build up the economy. The heavy import of machinery has considerable increased the import bill and has adversely affected balance of payment.
15. Import Oriented Industry
Some of our industries are based on the imported inputs and raw material e.g., oil and petroleum etc. Most of industries, which were established for achieving the twin objective of earning and saving foreign exchange, have been eating away roughly 30 % of aggregate import bill.
16. Rise in Oil Prices
The sharp rise in the prices of oil particularly in 70’s and also in the beginning of 1980’s and 1990’s 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.
17. Increases in Import Payment for Fertilizer
There is sharp increase in the import payments to the outside world due to increase in prices of fertilizers, edible oil and petroleum. Our balance of payment shows debit due to high payments.  
18. Defense Needs
We have to purchase modern weapons for our defense at a very high cost from different countries, which increases burden on our BOP and it becomes adverse. Expenditure on defense is Rs. 275 billion.


MEASURES TO CORRECT ADVERSE BOP
Measures to correct the deficit balance are of three types:

A.      EXPORT LED GROWTH

1. Labour Intensive Industries
Labour intensive industries should be established, because labour is cheaper in Pakistan, these industries can be set up at lower cost. The products of these industries can be exported.
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 Promotion 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.
  

B.     REDUCTION IN IMPORTS

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.

C.     MISCELLANEOUS

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:
            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.

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