Balance of Payments Research Work

BALANCE OF PAYMENTS:

Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world. 

These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate). With a pure float the central bank does not intervene at all to protect or devalue its currency, allowing the rate to be set by the market, and the central bank's foreign exchange reserves do not change.

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 Pakistani’s 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, than 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 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.

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