International Financial Management - Balance of Payment

International Financial Management

Balance of Payments:

The balance of payments is the record of all international trade and financial transactions made by a country's residents.

The balance of payments has three components. They are the current account, the financial account, and the capital account. The current account measures international trade, net income on investments, and direct payments. The financial account describes the change in international ownership of assets. The capital account includes any other financial transactions that don't affect the nation's economic output.

Balance of Payments Deficit:

A balance of payments deficit means the country imports more goods, services and capital than it exports. It must borrow from other countries to pay for its imports.

Pakistan Balance of payment:

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.

Pakistan’s current account remains positive two times in history i.e. in 1983 and 2001-2003. We can discuss the reason for this simultaneously:

In 1983:

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. But however, due to peak in oil prices from 1982/83, Pakistan’s current account again went into deficit.

In 2001-2003:

Surge in exports from 2000/01 was due to primary commodities such as rice, raw cotton, and fish, and other manufactures such as leather, carpets, sporting goods, and surgical instruments. And exceptional increase in remittances from overseas Pakistanis result in surplus.