Economics Chapter 16 Balance of Payments of Pakistan for kpk board class 12 notes.
Balance of Payments of Pakistan
Q.1) Write a note on Pakistan’s balance of payments problem. What steps are taken in Pakistan to overcome this problem?
Answer:
Balance Of Payments of Pakistan
Balance of payments of a country is the annual record of economic relations of the country with the rest of the world. It gives the details of foreign exchange received or foreign exchange spent on account of export and import of goods and services, it also records the movement of capital (Foreign loans and investment) inside or outside of the country.
The position of balance of payments of a country has close relation with the overall economic condition of a country. Thus, study of changes in this balance and the problem of equilibrium or disequilibrium in the balance of payments has great importance for the economists and policy makers in the government. There will be disequilibrium in the balance of payments when the value of total imports exceeds the value of total exports (both visible and invisible).
Problem in balance of payment.
Pakistan’s balance of payments has always been deficit except for two years. The chronic problem has two roots:
a) Limited export capacity
b) Unrestricted import needs.
A. Limited export capacity
Pakistan has a limited exportable surplus of goods or services for the following reasons.
1. Few export items are available because:
- Quantity produced can meet only local demand.
- Ø Quality of goods is inferior which cannot compete in foreign markets. In 2009-2010, 75% of total foreign exchange was earned by only 5 items. Cotton products alone contribute above 52 %.
2. Export of semi-manufactured and low-value goods Pakistani exports are generally low value goods like cotton yarn, cloth, rice and carpets. They do not get very high prices in the international market. In 2009-2010, export of primary and semi manufactured goods contributed 26% of total earnings of foreign exchange.
Read more: Economics Chapter 14 Public Finance in Pakistan
3. Consumption oriented society:
We are consumption oriented people. Most of the goods produced in the country are consumed locally. Little is left for exports.
4. Unfavorable terms of trade increase the trade gap of Pakistan. The prices of imported goods rise more sharply than prices of exports. This is because we export Iow-value manufactured goods. On the other hand, we import high tech goods e.g. electronics.
5. Unfavorable attitude of developed countries:
Developed countries have put many restrictions on imports from Pakistan, e.g., America and Europe have fixed quotas for our textiles.
6. Inflation is makes export goods difficult to compete in international markets
B. Unrestricted import needs
Due to the developing and expanding nature of our economy and fast growing population we need huge imports. Main factors which keep import bill high are:
7. Pakistan is a developing economy. Pakistan is undertaking huge programs of development in agriculture, industry, transport, communications, electric power generation, irrigation etc. For all projects, imports of various kinds of machinery and raw materials are needed.
8. Import oriented industries and consumption habits. Many of our industries are run on imported raw materials. Pakistan Steel Mills Is an example for which most of the raw material is imported.
Moreover our people are very fond of imported goods.
9. Oil bill:
Our domestic production of oil meets only 20% of demand. So, Pakistan imports oil in huge quantities. In 2010-11 the prices of petroleum were very high, 30% of our export earnings were used to meet the import of oil.
10. Huge import of invisible goods Pakistan utilizes the services of foreign banks, airlines, shipping lines, insurance companies, internet, weather satellites, TV channels etc. Moreover, our people spend a lot of foreign exchange under one excuse or the other e.g., medical check-up, education, business trips, ministers tours etc.
11. Debt servicing has assumed an alarming situation. Pakistan has accumulated huge foreign loans which exceed $60 billion. Debt servicing has become a heavy drain on our foreign exchange reserves. About 8 billion needed annually to repay loans.
Measures to Correct Disequilibrium
To correct adverse balance of payments, three ways are suggested.
- More exports.
- Less imports.
- Minimum expenditure on invisible items.
A. MORE EXPORTS
Pakistan can increase exports by making them competitive in prices, superior in quality and creating greater surplus of export goods.
1. Labour intensive industries Labour is cheaper in Pakistan, these industries can be set up at lower cost. The products of these industries can be exported.
2. Manufactured and high-tech goods Instead of low-value products like cotton yam. Pakistan should export high value goods like textiles and garments, leather goods, food products, electronics etc.
3. Quality products Quality of exportable goods like electric fans, cycles, shoes, ball pens, crockery etc. should be improved to attract more customers abroad.
4. Export marketing Agencies: i.e Trade Development Authority of Pakistan, and Export Development Fund and should increase efficiency and increase better environment for exporters.
5. Control immoral practices: The Govt, and the chambers of trade and industry- should take steps so that no exporter can export goods of inferior quality than specified in agreements. Many traders did it in the past
6. Export of Services: There is great scope to export more services from Pakistan. Similarly Workers, remittances can be further increased by following favorable policies.
7. Reduction in export duties makes our exports competitive in the international market Foreigners will prefer to import low price goods from Pakistan.
B. LESS IMPORTS
Imports can be controlled by restricting unnecessary imports and by producing substitutes locally.
1. 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 of the complex of foreign goods.
2. Stability of exchange rate: The Govt, should manage exchange reserves to avoid wastage. State Bank should use the policy to buy and sell foreign currencies in the open market to eliminate excessive fluctuations in exchange rate.
3. Substitutes for imported items should be produced in the country e g. If home production of fertilizer, paper, steel, edible oil and electrical goods is increased, there will be less need for such imports.
C. REDUCTION IN INVISIBLE IMPORTS
Pakistan should reduce expenditure on invisible items. Shipping fleet should be expanded to reduce expenditure on freight (transport charges). The government should keep its expenses of foreign diplomatic missions to the minimum. Foreign trips of ministers and high officials should be reduced.
D. OTHER MEASURES
1. Control on consumption: Our rich people spend lavishly on unnecessary luxury consumer items. They boast that they use imported cutlery, sanitary ware etc.
2. Rupee depreciation makes our exports cheaper. It may be allowed cautiously to keep our exports competitive.
3. Control of smuggling is needed to stop wastage of foreign exchange. Smuggling from Afghanistan, China and other countries should be curbed.
4. Population control to control demand for consumer goods.
5. Liberal trade policies may help in reducing the gap in foreign trade. Permission to keep foreign currency accounts is also a right step.
6. International cooperation for market access: Trade is an important source of growth, employment, and poverty reduction. Every extra dollar of exports from a developing country feeds a poor family and builds a better future for them. Developed countries should be persuaded to give market access to our exports.
Q.2) State the efforts of the govt, in increasing exports.
Answer:
Export Promotion Measures of Government
The government has adopted various measures to reduce the deficit in the balance of payments by boosting exports and restricting imports:
A. FINANCE
- The Export Finance Scheme of commercial banks helps exporters to get credit on low rates of interest.
- Refinance for export provided by the State Bank
- Tax Concessions are given to exporters.
- Zero-rating of sales tax for the entire textile chain, leather products, surgical goods, carpets and sports goods.
- Tax concessions on incomes from export earnings.
- Export rebase scheme, duly draw-backs, etc.
- 4. Export Credit Guarantee Scheme Pakistan Insurance Corporation guarantees compensation in case of non-payment to the exporters from foreign countries.
- 5. Financial Support for compliance certifications for international quality, environment and social standards. Subsidies for setting up Design centres, foreign offices and warehouses, concession in inland freight charges.
B. CAPACITY EXPANSION OF EXPORT INDUSTRIES
1. Diversification of exports is encouraged to export new non-traditional items like
- · Fruit and vegetables.
- · Leather goods
- · Cement, Pharmaceuticals
- · Computer Software.
- · Engineering goods
- · Defense equipment
2. Export Processing Zones (EPZ) have been set up at Karachi. Lahore, Saindak, Risalpur and Sialkot provide facilities for production of export goods.
C. MARKETING AND PROMOTIONAL ACTIVITIES
1. Export Market Development Fund assists exporters to search foreign markets for their products. It helps for participation in trade fairs abroad and in opening display centers/ware /fosses/business offices to keep ready stocks of goods.
2. ISO 9000, 9002 and ISO 14000: To encourage Pakistani firms to get these certificates the government is bearing half of the cost.
3. Government provides brand promotional subsidies for sports surgical goods etc.
4. The Annual Expo Pakistan International Exhibition is held at Karachi.
5. The Trade Development Authority of Pakistan has been created to boost exports.
6. Loans to developing countries are offered to encourage them to import Pakistani manufactured goods.
7. Trading Corporation of Pakistan and Rice Export Corporation work to facilitate export of Pakistani goods.
8. Regional Economic Organizations: To expand trade Pakistan joined regional economic organizations – ECO. SAARC and ASEAN
9. Concessions to exporters are allowed many facilities:
· About passports and travel, export trophies, certificates. Protocol Passes etc.
· Allowed to get direct foreign loans,
· Cheaper air cargo service.
The Govt, compensates inland freight cost for cement, leather garments, furniture sanitary ware, caustic soda etc.
D. COMMERCIAL POLICY
Each year the government announces trade policy to provide new incentives to exporters. The present policy stresses.
· Trade liberalization.
· Preference to the private sector since private exporters are more efficient.
· Establishment of trade houses in important countries.
· Trade agreements with other countries.
· Keep the exchange rate stable.
· Concessions obtained from the EU to increase access to European markets.
· To effectively implement different short term and long term trade policy measures, Strategic Trade Policy Framework (2009-2012) announced.
Q.3) Why is Pakistan’s balance of payments deficit? How can it be corrected?
Answer:
Balance Of Payments of Pakistan
Balance of payments of a country is the annual record of economic relations of the country with the rest of the world. It gives the details of foreign exchange received or foreign exchange spent on account of export and import of goods and services, it also records the movement of capital (Foreign loans and investment) inside or outside of the country.
The position of balance of payments of a country has close relation with the overall economic condition of a country. Thus, study of changes in this balance and the problem of equilibrium or disequilibrium in the balance of payments has great importance for the economists and policy makers in the government. There will be disequilibrium in the balance of payments when the value of total imports exceeds the value of total exports (both visible and invisible).
Problem in balance of payment.
Pakistan’s balance of payments has always been deficit except for two years. The chronic problem has two roots:
a) Limited export capacity
b) Unrestricted import needs.
A. Limited export capacity
Pakistan has a limited exportable surplus of goods or services for the following reasons.
1. Few export items are available because:
Ø Quantity produced can meet only local demand.
Ø Quality of goods is inferior which cannot compete in foreign markets. In 2009-2010, 75% of total foreign exchange was earned by only 5 items. Cotton products alone contribute above 52 %.
2. Export of semi-manufactured and low-value goods Pakistani exports are generally low value goods like cotton yam, cloth, rice and carpets. They do not get very high prices in the international market. In 2009-2010, export of primary and semi manufactured goods contributed 26% of total earnings of foreign exchange.
3. Consumption oriented society: We are consumption oriented people. Most of the goods produced in the country are consumed locally. Little is left for exports.
4. Unfavorable terms of trade increase the trade gap of Pakistan. The prices of imported goods rise more sharply than prices of exports. This is because we export Iow-value manufactured goods. On the other hand, we import high tech goods e.g. electronics.
5. Unfavorable attitude of developed countries: Developed countries have put many restrictions on imports from Pakistan, e.g., America and Europe have fixed quotas for our textiles.
6. Inflation is makes export goods difficult to compete in international markets
B. Unrestricted import needs
Due to the developing and expanding nature of our economy and fast growing population we need huge imports. Main factors which keep import bill high are:
7. Pakistan is a developing economy. Pakistan is undertaking huge programs of development in agriculture, industry, transport, communications, electric power generation, irrigation etc. For all projects, imports of various kinds of machinery and raw materials are needed.
8. Import oriented industries and consumption habits. Many of our industries are run on imported raw materials. Pakistan Steel Mills Is an example for which most of the raw material is imported.
Moreover our people are very fond of imported goods.
9. Oil bill: Our domestic production of oil meets only 20% of demand. So, Pakistan imports oil in huge quantities. In 2010-11 the prices of petroleum were very high, 30% of our export earnings were used to meet the import of oil.
Read more: Economics Chapter 13 Banking in Pakistan
10. Huge import of invisible goods Pakistan utilizes the services of foreign banks, airlines, shipping lines, insurance companies, internet, weather satellites, TV channels etc. Moreover, our people spend a lot of foreign exchange under one excuse or the other e.g., medical check-up, education, business trips, ministers tours etc.
11. Debt servicing has assumed an alarming situation. Pakistan has accumulated huge foreign loans which exceed $60 billion. Debt servicing has become a heavy drain on our foreign exchange reserves. About 8 billion needed annually to repay loans.
Measures to Correct Disequilibrium
To correct adverse balance of payments, three ways are suggested.
Ø More exports.
Ø Less imports.
Ø Minimum expenditure on invisible items.
A. MORE EXPORTS
Pakistan can increase exports by making them competitive in prices, superior in quality and creating greater surplus of export goods.
1. Labour intensive industries Labour is cheaper in Pakistan, these industries can be set up at lower cost. The products of these industries can be exported.
2. Manufactured and high-tech goods Instead of low-value products like cotton yam. Pakistan should export high value goods like textiles and garments, leather goods, food products, electronics etc.
3. Quality products Quality of exportable goods like electric fans, cycles, shoes, ball pens, crockery etc. should be improved to attract more customers abroad.
4. Export marketing Agencies: i.e Trade Development Authority of Pakistan, and Export Development Fund and should increase efficiency and increase better environment for exporters.
5. Control immoral practices: The Govt, and the chambers of trade and industry- should take steps so that no exporter can export goods of inferior quality than specified in agreements. Many traders did it in the past
6. Export of Services: There is great scope to export more services from Pakistan. Similarly Workers, remittances can be further increased by following favorable policies.
7. Reduction in export duties makes our exports competitive in the international market Foreigners will prefer to import low price goods from Pakistan.
B. LESS IMPORTS
Imports can be controlled by restricting unnecessary imports and by producing substitutes locally.
1. 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 of the complex of foreign goods.
2. Stability of exchange rate: The Govt, should manage exchange reserves to avoid wastage. State Bank should use the policy to buy and sell foreign currencies in the open market to eliminate excessive fluctuations in exchange rate.
3. Substitutes for imported items should be produced in the country e g. If home production of fertilizer, paper, steel, edible oil and electrical goods is increased, there will be less need for such imports.
C. REDUCTION IN INVISIBLE IMPORTS
Pakistan should reduce expenditure on invisible items. Shipping fleet should be expanded to reduce expenditure on freight (transport charges). The government should keep its expenses of foreign diplomatic missions to the minimum. Foreign trips of ministers and high officials should be reduced.
D. OTHER MEASURES
1. Control on consumption: Our rich people spend lavishly on unnecessary luxury consumer items. They boast that they use imported cutlery, sanitary ware etc.
2. Rupee depreciation makes our exports cheaper. It may be allowed cautiously to keep our exports competitive.
3. Control of smuggling is needed to stop wastage of foreign exchange. Smuggling from Afghanistan, China and other countries should be curbed.
4. Population control to control demand for consumer goods.
5. Liberal trade policies may help in reducing the gap in foreign trade. Permission to keep foreign currency accounts is also a right step.
6. International cooperation for market access: Trade is an important source of growth, employment, and poverty reduction. Every extra dollar of exports from a developing country feeds a poor family and builds a better future for them. Developed countries should be persuaded to give market access to our exports.
Q.4) Explain Pakistan’s Commercial Policy. What steps are adopted by the Government of Pakistan to improve the balance of payments?
Answer:
Commercial Policy of Pakistan
There is probably no country of note today which does not resort to various policy measures in order to control and regulate economic activity in different sectors of its economy. This is true both for the centrally planned as well as for the relatively free-market economies. The international trade sector is of special importance to governments, and thus comes under the purview of policy measures regulating the external economic relations of the country adopted to assist or hinder the export or import of goods and services. Commercial Policy has had a varied history; stress has been placed from time to time, over the last few centuries, on making trade highly restrictive or highly free, according to the prevalent modes of economic thinking. There is not a nation in the world today, however, which does not
interfere and restrict the full development of its commerce with other countries by the use of one, or several, of the devices of modern trade restrictions: tariffs, prohibitions, quotas, foreign exchange control, agreements, subsidies, buy-at- home campaigns, and various uses of its customs administration. The effects of these policies, however, may not be restricted to the domestic economy of the country adopting them, nor may they be specific to the purpose for which a particular policy is adopted. Hence, it becomes imperative that careful consideration is accorded to the formation, implementation, and assessment of the final impact of such a policy.
Read more: Economics Chapter 12 Transport Communication and Human Resources
Steps to improve balance of payment
To correct adverse balance of payments, three ways are suggested.
Ø More exports.
Ø Less imports.
Ø Minimum expenditure on invisible items.
A. MORE EXPORTS
Pakistan can increase exports by making them competitive in prices, superior in quality and creating greater surplus of export goods.
1. Labour intensive industries Labour is cheaper in Pakistan, these industries can be set up at lower cost. The products of these industries can be exported.
2. Manufactured and high-tech goods Instead of low-value products like cotton yam. Pakistan should export high value goods like textiles and garments, leather goods, food products, electronics etc.
3. Quality products Quality of exportable goods like electric fans, cycles, shoes, ball pens, crockery etc. should be improved to attract more customers abroad.
4. Export marketing Agencies: i.e Trade Development Authority of Pakistan, and Export Development Fund and should increase efficiency and increase better environment for exporters.
5. Control immoral practices: The Govt, and the chambers of trade and industry- should take steps so that no exporter can export goods of inferior quality than specified in agreements. Many traders did it in the past
6. Export of Services: There is great scope to export more services from Pakistan. Similarly Workers, remittances can be further increased by following favorable policies.
7. Reduction in export duties makes our exports competitive in the international market Foreigners will prefer to import low price goods from Pakistan.
B. LESS IMPORTS
Imports can be controlled by restricting unnecessary imports and by producing substitutes locally.
1. 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 of the complex of foreign goods.
2. Stability of exchange rate: The Govt, should manage exchange reserves to avoid wastage. State Bank should use the policy to buy and sell foreign currencies in the open market to eliminate excessive fluctuations in exchange rate.
3. Substitutes for imported items should be produced in the country e g. If home production of fertilizer, paper, steel, edible oil and electrical goods is increased, there will be less need for such imports.
C. REDUCTION IN INVISIBLE IMPORTS
Pakistan should reduce expenditure on invisible items. Shipping fleet should be expanded to reduce expenditure on freight (transport charges). The government should keep its expenses of foreign diplomatic missions to the minimum. Foreign trips of ministers and high officials should be reduced.
D. OTHER MEASURES
1. Control on consumption: Our rich people spend lavishly on unnecessary luxury consumer items. They boast that they use imported cutlery, sanitary ware etc.
2. Rupee depreciation makes our exports cheaper. It may be allowed cautiously to keep our exports competitive.
3. Control of smuggling is needed to stop wastage of foreign exchange. Smuggling from Afghanistan, China and other countries should be curbed.
4. Population control to control demand for consumer goods.
5. Liberal trade policies may help in reducing the gap in foreign trade. Permission to keep foreign currency accounts is also a right step.
6. International cooperation for market access: Trade is an important source of growth, employment, and poverty reduction. Every extra dollar of exports from a developing country feeds a poor family and builds a better future for them. Developed countries should be persuaded to give market access to our exports.
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