Overview of balance of payment, definition and items included in balance of payment, balance of payment and balance of trade key difference, concept of balance of payment, causes of adverse balance of payment in the context of Pakistan

1. BALANCE OF PAYMENT
April 2019
www.slideshare.net/AhmadHassan244

2. PRESENTED TO:
Ma’am Rida Bilal
PRESENTED BY:
Ahmad Hassan
Roll No. 15 (Reg)
B.Com (Hons)
8th Semester

3. OVERVIEW
BOP is one of the major indicator of a country’s status in the international market.
BOP depict the true picture of a country.
The rise of global financial transactions and trade in the late 20th century spurred bop
and macroeconomic liberalization in many developing nations.
BOP tells about the surplus and deficit regarding a country’s transactions.
Informs government about the international economic position of a country to assist
in reaching the correct decision.

4. DEFINITION
International Monetary Fund (Balance of Payment Manual):
The balance of payment is a statistical statement that systematically summarizes, for
a specific time period, the economic transactions of an economy with the rest of the
world.
In other words:
Economic transactions between the residents of the country and residents of foreign
countries.

5. A COUNTRY HAS TO DEAL WITH OTHER
COUNTRIES IN RESPECT OF THE FOLLOWING
Visible Items: It includes all types of physical goods exported and imported.
Invisible Items: It includes all those services whose export and import are not
visible. E.g. transport services, medical services etc.
Capital Transfers: It is concerned with capital receipts and capital payments.

6. DIFFERENCE BETWEEN BOP AND BOT
The balance of payment takes into account all the transactions with the rest of
the world i.e. visible, invisible, and capital transfers.
The balance of trade takes into account all the trade transactions with the rest
of the world i.e. visible items only.

7. COMPONENTS OF BALANCE OF
PAYMENT
1. Current Account
2. Capital and Financial Account
3. Reserves Account
4. Errors and Omissions

8. 1. Current Account
It represents the summary of the flow of funds between one specified country
and all other countries due to purchases of goods and services or to the cash
flows generated by income-generating financial assets.
It includes: merchandise (goods and services), factor income (interest
payments from abroad), unilateral transfers (gifts, foreign aid)
Formula:
Current Account = Trade balance + Net Factor Income + Net Unilateral Transfers

9. 2. Capital and Financial Account
It describes the value of financial assets transferred across country borders by
people who move to a different country.
It includes patents and trademarks, foreign direct investment, portfolio
investment and other capital investments (short term financial assets).
Formula:
Capital and Financial Account = Increase in Foreign Ownership of Domestic Assets
minus Increase in Domestic Ownership of Foreign Assets

10. 3. Reserves Account
The official reserve account records the government’s current stock of
reserves.
It includes:
Foreign Official Holdings
Official Gold Reserves
Foreign Exchange Reserves
IMF Special Drawings Rights

11. 4. Errors and Omissions
The entries under this head relate mainly to leads and lags in reporting of
transactions.
It is a balancing entry and is needed to offset the overstated or understated
components.

12. CONCEPT OF BALANCE OF PAYMENT
When all components of BOP accounts are included they must sum to zero with
no overall surplus or deficit.
BCA + BKA + BRA = 0
Where
BCA = Balance on Current Account
BKA = Balance on Capital and Financial Account
BRA = Balance of Reserve Account

13. CONCEPT OF BALANCE OF PAYMENT
Explanation:
If a country is importing more than it exports , its trade balance will be in deficit,
but the shortfall will have to be counterbalanced in other ways – such as by funds
earned from its foreign investment, by running down central bank reserves or by
receiving loans from other countries.

14. TYPES OF BALANCE OF PAYMENTS
Surplus Balance of Payment:
If the receipts of a country are greater than its payments the result is surplus. It is
also called favourable bop.
Deficit Balance of Payment:
It the receipts of a country are less than its payments the result is deficit. It is also
called unfavourable bop.

15. CAUSES OF ADVERSE
BALANCE OF PAYMENT
In Pakistan’s Perspective

16. BALANCE OF PAYMENT AS OF MARCH
2019Pakistan Trade Last Previous Highest Lowest Unit
Balance of Trade -302889.00 -317370.00 6457.00 -452668.00 PKR Million [+]
Current Account -4082.00 -3665.00 1418.00 -5798.00 USD Million [+]
Current Account
to GDP
-5.80 -4.10 4.90 -8.50 percent [+]
Exports 275384.00 261669.00 287798.00 51.00 PKR Million [+]
Imports 578273.00 579039.00 676992.00 96.00 PKR Million [+]
External Debt 99108.00 96735.00 99108.00 33172.00 USD Million [+]
Terms of Trade 59.60 57.10 94.83 49.17 Index Points [+]
Remittances 5473.00 5557.00 5557.00 906.00 USD Million [+]
Gold Reserves 64.60 64.60 65.44 64.38 Tonnes [+]
Capital Flows -2919.00 -2138.00 563.00 -4078.00 USD Million [+]
Crude Oil
Production
90.00 88.00 97.00 50.00 BBL/D/1K [+]
Foreign Direct
Investment
3794.70 3451.00 3794.70 2099.10 USD Million [+]
Terrorism Index 8.18 8.40 9.07 6.1

18. CAUSES
Fiscal Policies
Consumption Oriented Society
Export of Primary Commodities
Trade Barriers of Developed Countries
Inflation
Less Modernization of Machinery

19. Fiscal Policies:
Pakistan’s fiscal policies has been a serious obstacle to the expansion of its exports.
The import duties on the raw material required for the production of certain goods
which have an export potential are so high that the production costs make the
goods uncompetitive in the world.
Consumption Oriented Society:
Pakistanis are mostly consumption oriented. Due to rapid rise in population and
increased consumption habits, the manufactured goods are mostly consumed in
the country, so, a very small portion is left for exports.

20. Export of Primary Commodities:
The main factor for unsatisfactory export performance is stated to be the adverse trend in the
terms of trade, but this is the result of heavy dependence of the country’s export earnings on
primary commodities like cotton, rice and semi-manufactured goods, which are subject to
frequent price fluctuations in the world market.
Trade barriers of developed countries:
The trade barriers raised by developed countries against the imports of manufactures from the
developing countries is one of the important factors preventing greater production and export
by some industries in Pakistan, particularly the cotton textile industry.

21. Inflation:
Inflationary conditions are a serious obstacle to the promotion of exports. Inflation
results in the rise of domestic cost of production so that the goods produced cannot
compete in the world market.
Less Modernization of Machinery:
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.

22. thank you
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