ASSIGNMENT ON BALANCE OF PAYMENT OF PAKISTAN

SUBMITTED TO:N.C. RAJYALAKSHMI SSIM

SUBMITTED BY:DUSHYANT KUMAR(19107) MANIK KUMAR(19114)

Siva Sivani Institute of Management

KOMAPLLY

History of Pakistan
Pakistan, along with parts of western India, contain the archeological remains of an urban civilization dating back 4,500 years. Alexander the Great included the Indus Valley in his empire in 326 B.C., and his successors founded the Indo-Greek kingdom of Bactria based in what is today Afghanistan and extending to Peshawar. Following the rise of the Central Asian Kushan Empire in later centuries, the Buddhist culture of Afghanistan and Pakistan, centered on the city of Taxila just east of Peshawar, experienced a cultural renaissance known as the Gandhara period. Pakistan's Islamic history began with the arrival of Muslim traders in the 8th century in Sindh. The collapse of the Mughal Empire in the 18th century provided an opportunity to the English East India Company to extend its control over much of the subcontinent. In the west in the territory of modern Pakistan, the Sikh adventurer Ranjit Singh carved out a dominion that extended from Kabul to Srinagar and Lahore. British rule replaced the Sikhs in the first half of the 19th century. In a decision that had far-reaching consequences, the British permitted the Hindu Maharaja of Kashmir, a Sikh appointee, to continue in power. Pakistan emerged over an extended period of agitation by many Muslims in the subcontinent to express their national identity free from British colonial domination as well as domination by what they perceived as a Hindu-controlled Indian National Congress. Muslim anti-colonial leaders formed the All-India Muslim League in 1906. Initially, the League adopted the same objective as the Congress--self-government for India within the British Empire--but Congress and the League were unable to agree on a formula that would ensure the protection of Muslim religious, economic, and political rights.

After Independence
With the death in 1948 of its first head of state, Muhammad Ali Jinnah, and the assassination in 1951 of its first prime minister, Liaqat Ali Khan, political instability and economic difficulty became prominent features of post-independence Pakistan. On October 7, 1958, President Iskander Mirza, with the support of the army, suspended the 1956 Constitution, imposed martial law, and canceled the elections scheduled for January 1959. Twenty days later the military sent Mirza into exile in Britain, and Gen. Mohammad Ayub Khan assumed control of a military dictatorship. After Pakistan's loss in the 1965 war against India, Ayub Khan's power declined. Subsequent political and economic grievances inspired agitation movements that compelled his resignation in March 1969. He handed over responsibility for governing to the commander in chief of the army, General Agha Mohammed Yahya Khan, who became President and Chief Martial Law Administrator.

General elections held in December 1970 polarized relations between the eastern and western sections of Pakistan. The Awami League, which advocated autonomy for the more populous East Pakistan, swept the East Pakistan seats to gain a majority in Pakistan as a whole. The Pakistan Peoples Party (PPP), founded and led by Ayub Khan's former Foreign Minister Zulfikar Ali Bhutto, won a majority of the seats in West Pakistan, but the country was completely split with neither major party having any support in the other area. Negotiations to form a coalition government broke down, and a civil war ensued. India attacked East Pakistan and captured Dhaka in December 1971, when the eastern section declared itself the independent nation of Bangladesh. Yahya Khan then resigned the presidency and handed over leadership of the western part of Pakistan to Bhutto, who became President and the first civilian Chief Martial Law Administrator. Bhutto moved decisively to restore national confidence and pursued an active foreign policy, taking a leading role in Islamic and Third World forums. Although Pakistan did not formally join the Non-Aligned Movement until 1979, the position of the Bhutto government coincided largely with that of the non-aligned nations. Domestically, Bhutto pursued a populist agenda and nationalized major industries and the banking system. In 1973, he promulgated a new Constitution accepted by most political elements and relinquished the presidency to become prime minister. Although Bhutto continued his populist and socialist rhetoric, he increasingly relied on Pakistan's urban industrialists and rural landlords. Over time the economy stagnated, largely as a result of the dislocation and uncertainty produced by Bhutto's frequently changing economic policies. When Bhutto proclaimed his own victory in the March 1977 national elections, the opposition Pakistan National Alliance (PNA) denounced the results as fraudulent and demanded new elections. Bhutto resisted and later arrested the PNA leadership.

Pakistan Economic Conditions.

As per information on Pakistan economic conditions in financial year 2008, value of Pakistani rupee has decreased in value because of political and economic instability. Pakistan is known to have one of fastest developing economies in world. Though it is a poor country, Economic conditions in Pakistan point out that growth rate has been better than global average growth rate. Fiscal deficit as targeted in 2009 is 5.5 percent of GDP, which was 7.4 percent in 2008 fiscal. Pakistan economic conditions are not going to get any better in 2009

as it has been estimated that inflation will get down to 20 percent by July 2009. It has been found out in first quarterly review that condition stabilized and huge sum was borrowed from central bank. Economy of Pakistan is going through political and economical turmoil at present. After Mumbai attacks, this country went through financial crisis as there were international pressures. Karachi Stock Exchange in 2009 experienced a great blow with five percent off in a single day. This has been recorded as worst single-day act in last 32 months. Political upheaval also forces economy of Pakistan to depend on International Monetary Fund (IMF). It has been recorded that Pakistan economic conditions suffered worst hit during October 2007 to October 2008 as there was 25 percent inflation and from international reserves about 10 billion dollars had to be taken off. Economic managers of Pakistan approached IMF to stabilize economic crunch. A stand by loan of 7.6 billion dollars was approved by IMF to pull Pakistan out of economic crisis.

According to present economic conditions of Pakistan, GDP purchasing power parity has been estimated to be $454.2 billion in fiscal 2008. $160.9 billion was GDP official exchange rate. Real growt rate to GDP has been at rate of 4.7 percent in 2008. $2,600 has been contributed to per capita GDP. There were 50.58 million workers in Pakistan.

Pakistan - Balance of payments

This paper analyzes the balance of payments for Pakistan through monetary approach for the period 1980-2008. This study utilizes the reserve flow equation, Co-integration test and error- correction model to analyze whether glut money supply influence a disturbance variable or not. The results have shown that the role of monetary variables for Pakistans balance of payment do not determine empirically. Three significant relationships have found between Gross Domestic Product Growth Rate (GDPG) and net foreign assets (NFA) is considered as a positive relationship while between Domestic Credit (DOM_CREDIT) extension and NFA is considered as a negative relationship, and the relationship between interest rate (INTEREST) and NFA is considered as a negative relationship as mentioned by the monetary approach to balance of payments. Some variables propose that monetary approach plays a significant role but monetary actions are not only options for authorities to correct the Balance of payments disequilibrium. 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. Remittances

from overseas workers peaked at $2.9 billion in 1982/83, then dropped to $1.4 billion by 1997/98 and $1 billion from 1999 to 2001. This trend especially accelerated during the Gulf War, when nearly 80,000 Pakistanis in Kuwait and Iraq lost their jobs. Only about 25% of these jobs had been regained a year after the end of the conflict. Increased imports and softer demand for Pakistan's textiles and apparel in major markets also caused the current account deficit to further increase. The balance of payments position weakened in 1995/96 as imports grew by 16% and exports by only 6%. The rupee was devalued by 11% during 1995 and 1996 to encourage exports. Nevertheless, foreign reserves fell to around $800 million by mid-1997. By 2000, foreign debt equaled 100% of GDP. 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. An increase in liquid foreign exchange reserves in 2001 was due in part to outright purchases from the kerb market and inflows from international financial institutions. 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.

The US Central Intelligence Agency (CIA) reports that in 2001 the purchasing power parity of Pakistan's exports was $8.8 billion while imports totaled $9.2 billion resulting in a trade deficit of $399.9 million. The International Monetary Fund (IMF) reports that in 2001 Pakistan had exports of goods totaling $9.13 billion and imports totaling $9.74 billion. The services credit totaled $1.46 billion and debit $2.33 billion. The following table summarizes Pakistan's balance of payments as reported by the IMF for 2001 in millions of US dollars. Current Account Balance on goods Balance on services Balance on income `Current transfers Capital Account 1, 880 608 871 2,07 9 5,4 38

Financial Account Direct investment abroad Direct investment in Pakistan Portfolio investment assets Portfolio investment liabilities Other investment assets Other investment liabilities Capital Account Financial Account

399 -31 38 3 192 54 613 399

Pakistan Current Account

Pakistan reported a current account surplus equivalent to 604 Million USD in the second quarter of 2011. Pakistan exports rice, furniture, cotton fiber, cement, tiles, marble, textiles, clothing, leather goods, carpets and rugs and food products. Pakistan imports mainly petroleum, petroleum products, machinery, plastics, transportation equipment, edible oils, paper and paperboard, iron and steel and tea. Its main trading partners are: European Union, China, The United Arab Emirates and The United States. This page includes: Pakistan Current Account chart, historical data and news.

C ou ntr y

I ndi cat or

R efer enc e

A ct u al

P rev iou s

N ex t Re lea se

I m pa ct

P aki sta n

C urre nt Acc oun t

Ju n/20 11

6 04 .0 0

5 2.0 0

About

current

account

Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers in the current accounts of most of the world's economies. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contributes to a current account surplus; negative net sales to abroad generally contributes to a current account deficit. Because exports

generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports. The net factor income or income account, a sub-account of the current account, is usually presented under the headings income payments as outflows, and income receipts as inflows. Income refers not only to the money received from investments made abroad (note: investments

are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc. For example, the United States' net income has been declining exponentially since it has allowed the dollar's price relative to other currencies to be determined by the market to a point where income payments and receipts are roughly .

Freezing of FCAs, Hub Power Dispute and Political uncertainty eroded the confidence in the economy. Extraordinary restrictive measures had to be put in place which included administrative controls on foreign exchange and introduction of multiple exchange rates. Debt rescheduling and new inflows from IMF, World Bank and Asian Development Bank in January, 1999 Helped build up the reserve situation to comfortable levels by end June, 1999. A unified exchange rate was re-introduced in May, 1999. Underlying structural problems were not attacked during the breathing period to enable the country to exit from rescheduling. C. Current Situation (Table II) (October 1999 Onwards) Foreign exchange regime was liberalised and all restrictions on foreign investment outflows removed. Stable exchange rate maintained until June, 2000 and the premium over open market rate was stable 4 to 5%.

Current account deficit has been reduced from 3.8% to 1.6%. Export growth recovered to 10% in 1999-2000 after a long time. As inflows from international financial institutions almost dried up, purchases from open market enabled the country to meet its payment obligations. $ 1.3 billion of debt relief under Paris Club was eroded by increase in oil prices. Since June 2000, rupee has been put on free float and there has been depreciation of almost 12% with greater volatility and fluctuations. In 1999-2000 cash payments of $ 3.6 billion were paid on external debt servicing in addition to rescheduling of debt (Table III). External Cash outflows exceeded inflows during 19992000 despite purchases from the market and exceptional financing putting pressure on foreign reserves. There was a draw down of almost $ 400 million from the reserves by end June 2000 (Table IV).

The present government has initiated a number of key structural reforms which had been postponed for a long time. Introduction of agriculture income tax, extension of GST on Retail Trade and Services, aligning prices of gas, petroleum products to international prices, documentation and survey to widen tax base will reduce fiscal deficit and hence further narrow the current account deficit and external borrowing requirements in future. Current account deficit is likely to narrow further in 20002001 as exports are projected to rise by 14% and imports by 8%. Exceptional financing requirements are expected to be reduced from 4 billion annually in 1998-99 and 19992000 to $ 2.2 billion in 2000-2001. Reserve target for end June 2001 is $ 1.7 billion. Workers remittances are down by $ 400 million, and Foreign Investment by $ 500 million -compared to the pre-1998 trends. If these flows are reinstated, oil prices decline, and export growth is further accelerated the gap between inflows and outflows will narrow and the need for further rescheduling will be reduced.

Future Evolution Efficient import substitution of furnace oil by domestically produced natural gas in thermal power generation and enhanced refinery capacity will lower the import bill for petroleum products and improve the current account deficit. Thus new investment in gas exploration, transmission pipeline and distribution systems will have a large pay off both to the macroeconomy as well as the investors. The government has therefore identified oil and gas as one of the four priority sectors for economical revival strategy. Foreign Direct Investment is preferred to debt creating flows as it not only brings capital but also technology and managerial skills. Multinational Corporations help promote competition in the sector by their improved corporate governance standards and practices which have to be emulated by the domestic companies to stay afloat. Profits, Dividends and Remittances account for only a small fraction of our external payments. In 1999-2000 the total payments on this account were only $ 430 million compared to $ 3.6 billion account of external debt servicing obligations. If FDI flows to Pakistan are doubled and payments on account of dividends, profits etc., rise in the same proportion we will have no difficulty in servicing them.

Under this scenario, the FDI inflows will lead to a diminution in external borrowing and hence our debt servicing would consequently decline. The investors will get a remunerative return on their investment which they can remit abroad without much difficulty while the country is able to reduce its dependence on foreign loans and the conditionalities associated with them. In fact, foreign investors will remit only if they are able to generate positive earnings for the economy unlike the external creditors who have to be paid fixed charges irrespective of the fact whether their loan has created positive cash flow or not. Pakistan has suffered in the past due to perception of poor governance and reneging of contracts. This government has taken actions to introduce transparency, predictability, rule of law and accountability in the system. Even the worst critics of this government do recognise that the overall governance has improved although a lot of reforms are either underway or planned to strengthen judiciary, police, civil service and other institutions. In Oil and Gas Sector, the government has moved out of running commercial operations and decided to privatise all publicly owned assets in this sector. Foreign Investors have a great opportunity to own these assets, make them operationally and financially efficient and earn profits.

Pakistan is open for foreign investors and as you can see the measures being taken by the government will further strengthen the balance of payments situation in the future. This should provide comfort to the potential investors about the security, return and transferability of their investment.

PAKISTAN : BALANCE OF PAYMENTS TABLE 1 : HISTORICAL PRESPECTIVE $ Billion

1994-95

Trade Balance Services (net) O.W.Interest Current Transfers (Net) Workers Remittance FCAs Residents Officials Current Account Balance Long Term Capital (Net) a) Official b) Private (FDI

Official Assistance (Medium ST Loans) Foreign Currency Deposits Non Residents Overall Balance 0.2 0.3 -2.5 -2.3 (-0.9 2.7 1.8 0.4 0.3 -2.1 2.5 0.7 1.8 1.5 -0.1 1995-96 -3.7 -3.2 -1.0 2.6 1.4 0.7 0.2 -4.3 2.4 0.7 1.7 1.3 4.3 1996-97 -3.1

-3.6 -0.9 3.2 1.4 1.3 0.3 -3.5 2.2 0.7 1.5 1.0 -0.3 1997-98 -1.8 -3.2 -0.9 3.4 1.5 1.5 0.2 -1.7 1.3 0.6 0.7 0.8 0.6 1998-99 -1.8 -2.5 -1.0) 2.7 1.0 0.5 0.2 -1.6 1.4 1.1 0.3 0.3) -1.4 1.0 0.2 -0.7 -2.3 -0.4 -1.0 -0.3 -3.3

Financing

Net International Reserves Use of Fund Credit Exceptional Financing -0.3 0.1 0 0.4 -

0 1.2 -0.2 0 0.1 0.2 0 -1.2 0.4 4.1

PAKISTAN : BALANCE OF PAYMENTS TABLE II : CURRENT SITUATION (US$ Million)

1999-2000

2000-2001 Projection Trade Balance Services (net) O.W.Interest Current Transfers (Net) Workers Remittance FCAs Residents Officials Purchases

Current Account Balance Capital Account Balance Long Term Capital (Net) c) Official d) Private FDI

Official Assistance (Medium & ST Loans) Foreign Currency Deposits Non Residents Overall Balance -2381 -3894 -183 -1050 -1435 -2766 -1715 3197 983 322 136 1634 -1004 -2890 -212 -492 280 546 -426 223 -966 -84 -124 -231 107 -1214 -2987 -1787

3195

Financing

Net International Reserves Use of Fund Credit Exceptional Financing 209 -289 3965 -977 -239 2266

Pakistan Current Account

TABLE III Pakistans External Debt Servicing (1999-2000) (US$ Million)

Actual Paid A Interest Payments 1) LT Public 2) ST Public 3) Private 4) SBP Deposits, FCBC, FC Bonds 5) IMF Charges B Principal Repayments 1) LT Public 2) ST Public 3) Private 4) Euro Bonds 5) FE-45 Deposits 6) SBP Deposits 7) NBP Deposits 8) FCBC/FEBC 9) IMF Repurchases 49 1965 858 191 623 246 47 265 3134 984 152 610 1087 300 500 4015 49 5098 1842 343 623 610 1333 300 500 47 265 7610

1365 556 120 238 402 Rescheduled 381 381 Total Accrual 1746 937 120 238 402 GRAND TOTAL:

3595

A Reserves at the begning of the year B Inflows of which Exports Services Remittances Purchases Foreign Investment TABLE IV Exceptional Financing C Outflows Pakistans External Cash Flow Position of which Imports (1999-2000) Services (Interest Payments) (US$ Million) Amortization Eurobonds Foreign Currency Deposits D Reserves at the end of the year 1740 20873 8158 1505 983 1634 546 4025 21255 9731 4285 (1776) 3231 610 2382 1358

Trade Balance 6

According to exchange data, the trade deficit during FY03 widened by US$ 242 million relative to preceding year to reach US$ 536 million, as the impact of impressive 19.1 percent export growth was more than offset by a 21.1 percent growth in imports. The highest contribution in export growth was again made by the textile sector, which witnessed a 25.0 percent growth during FY03. All the major value added textile categories contributed significantly to the exports growth on the account of rising

trade volumes and higher unit values. Non-textile exports also grew by 17.2 percent during FY03. The import bill increased by 21.1 percent mainly due to the higher oil and machinery imports.

Services Account
There is a remarkable stability in service account as the deficit has averaged about US$ 2669 million annually over the last five years. The 17 percent improvement in FY03 has occurred mainly due to exceptional receipts of US$ 847 million on account of flows from US for logistic support. If this amount is excluded, the deficit reverts close to its 5-year average. The invisibles account improvement was supported by a smaller, US$ 112 million, decline in the FY03 investment income outflows. This latter improvement owes to a sharp decline in interest paid on external debt and liabilities which, in conjunction with interest received on the countrys burgeoning forex reserves, helped more than offset a US$ 253 million jump in outflows of investment income (excluding interest payments).