BALANCE OF PAYMENTS AND

TRADE REGIMES

Dr. Abdul Salam Lodhi

salam@buitms.edu.pk
 LECTURE OUTLINES

19-Mar-21
 Balance of Payment

 Balance of Payment of Pakistan

 Foreign Trade Policy of Pakistan

 Pakistan’s Foreign Trade

2
 BALANCE OF PAYMENT

19-Mar-21
 The difference in total value between payments into
and out of a country over a period is called Balance
of Payment BoP.
 BoP can be divide in to three components.
 Current account
 Capital account
 Financial account

 Capital account includes the cash flows resulting

from capital receipts and expenditure. These are
investments made by both private and public
companies.
3
 CURRENT ACCOUNT

 Current account records all the fund inflows and

19-Mar-21
outflows relating to the trading of products,
services, and other incomes.
 Current account also indicates the comparative
advantage the country has over others since it
provides an important yardstick of the status of
international trade.
 Components of Current Account
 Balance of Trade
 Trading of Services
 Net Investment Income
 Net Cash Transfers
4
 FINANCIAL ACCOUNT
 Financial account is a component of a country’s balance of

19-Mar-21
payments that covers claims on or liabilities
to nonresidents, specifically with regard to financial assets.
Financial account components include direct investment,
portfolio investment and reserve assets broken down by
sector.
 The financial account is a tracking mechanism for shifts in
international asset ownership, and it is composed of two
subaccounts.
 The first subaccount includes domestic ownership of foreign
assets, such as foreign bank deposits and securities in
foreign companies.
 The second subaccount includes foreign ownership of
domestic assets, such as the purchase of government bonds
by foreign entities or loans provided to domestic banks by 5
foreign institutions.
 FINANCIAL ACCOUNT

19-Mar-21
 If the domestic ownership of foreign assets portion
of the financial account increases, it increases the
overall financial account.
 If the foreign ownership of domestic assets
increases, it decreases the overall financial account;
the overall financial account increases when the
foreign ownership of domestic assets decreases.
 The financial account involves financial assets such
as gold, currency, derivatives, special drawing
rights, equity, and bonds.

6
 COMPONENTS OF FINANCIAL ACCOUNT
 Foreign Direct Investment FDI refers to a business in

19-Mar-21
one country making an investment or acquiring
control in another business situated in a different
country. Many popular multinational firms such as
Coca-Cola, Unilever and Nestlé have invested in
countries through FDI.
 Whereas, sometimes aid may be given by developed
and industrialized nations on a governmental basis to
help and support developmental strategies in a
socially and economically backward countries that is
called as Official Development Assistance ODA.
 Portfolio Investment
 Investment in stocks, bonds, debts and other financial
assets. 7

 Government Loans Granted for Other Nations

BALANCE OF PAYMENT OF PAKISTAN

19-Mar-21
 Pakistan's balance of payments has remained
under severe pressure over the last decades.
 Most of the time our current account is in deficit
as we import more than export.
 As far the capital account would be in surplus if
rest of the word buy more of our assets compare
to the assets that we are buying form the word.

8
 BALANCE OF PAYMENT OF PAKISTAN

S.N Financial volume

19-Mar-21
o year

1 2015-16 $ 5 billion (1.7% of GDP)

2 2016-17 $ 12.4 billion (4.1 % of GDP)
3 2017-18 $ 7.4 billion 4.4 % of GDP(July to
December 2017)

4 2018-19 $ 21.8 billion ()

5 2019-20 $ 14.7 billion
9
EXTERNAL SECTOR IN FINANCIAL YEAR 2018-2019.

Policy intervention has reduced current account by

19-Mar-21

27 percent to $11.56 billion during July-April
FY2019 compared to expansion of 70 percent to
$15.9 billion of the corresponding period last year.
 Imports have been restricted by 5 percent to $ 44
billion compared to $46 billion last year.
 Trade deficit reduced by 7.4 percent to $ 23.9 billion
against $25.8 billion last year.
 Remittances improved by 8.45 percent to $ 17.8
billion against 16.4 billion last year.

10
EXTERNAL SECTOR IN FINANCIAL YEAR 2019-20

19-Mar-21
 The improvement in Pakistan’s balance of
payments that started in FY2019 continued in
FY2020 as well.
 The implementation of the market-based exchange
rate system, along with other demand
management policies adopted earlier resulted in a
sharp 73.1 percent decline current account deficit
 The volume of current account deficit remained
only US$ 2.8 billion (1.1 percent of GDP) during
July March FY2019-20 against US$ 10.3 billion
last year (3.7 percent of GDP).
11
 CONT…
 The significant reduction in the current account deficit

19-Mar-21
is mainly due to import compression of a wide range of
non-energy and energy products.
 Quantum-led import declines were observed across all
product categories and were complemented by lower
international prices of most of Pakistan’s principal
import commodities.
 Low international prices suppressed export earnings
of many emerging markets including Pakistan as unit
prices of textiles and rice continued to drop.
 Lower unit values dominated, partially offsetting the
impact of significant volumetric growth in several of
the major export products. 12
 CONT…
 The COVID-19 outbreak has jolted even the strongest world
economies and posed significant challenges for investments and
exports to increase further in the coming months.

19-Mar-21
 With regard to Pakistan despite the adverse impact of Corona virus
on economy the overall external account liquidity has improved due
to a decline in oil and other commodity prices on the back of a
slowdown in global economies.
 This will further reduce the import bill and the current account
deficit. In light of recent domestic and global developments, the
spillover impact of the Coronavirus outbreak on global trade and
financial markets is moderate and short-lived.
 In such a scenario, the export slowdown and market volatility
should be contained while the benign growth and inflation impacts
of lower global commodity prices would dominate.
 Under a worst-case scenario, there will be a prolonged and sever
phase of weak demand in Pakistan’s major exports and remittances
may fall significantly due to lay-offs of our workers abroad.
 The government, cognizant of the 19 challenge, has taken various
measures to prevent its outbreak and adopted approach with well-
established SOPs to move the wheel of the economy in this difficult13
time.
19-Mar-21
14
THANKS