Hassam Bin AyubBmba151006

Exchange Rate, Balance of Payment & Trade Deficit

Introduction1. Exchange rate is important policy Variable to

economy effects macro-economics. i.e. Trade, International reserves, inflation, GDP & remittance.

2. Balance of Payment records all economic transactions. Records internal account (domestic) and external account (foreign). External account has two types current balance account and capital balance account.

3. Trade deficit the difference between the imports and exports. The low export rate and high imports cause trade deficit.

Trade Policy of Pakistan

It is designed to achieve three conflictingobjectives.1. Manage-able limits to trade deficit.2. Essential goods availability.3. Investment for National production

sector.

Historical-View Increased Exports (Cotton & Jute) Due to Korean War

in 1952. Total exports $336 million. Declined after war ended in 1958/59 to $96 million. Export duties removed in 1959. Bonus Schemes OGL system to eliminate monopoly. Devalue rupee Rs.4 to $1 to Rs.11.1 Linked with US dollar. In 1988/89, Restriction to imports due to Religious

reason, Luxury goods & for protecting domestic industries.

Historical-View (Cont) High Inflation. Raw-Material replenishment (RMR) Scheme. Compensatory Rebates. In 1988 decreased trade deficit to $2630 million and Bop was $1211 million & remittance $2295 million. Inflow remittance from Kuwait boosted economy. Rupee stable in 2000 to 2007. High remittance and

foreign aid. Global Recession 2008. Oil prices jumped up.

Causes

• Narrow Base Exports• International Debts• Consumption Oriented society• Agriculture• Foreign Exchange Reserve’s• Less Modernize Machinery• Sick-Industrial units• Devaluation

Causes (Cont)

• Inflation• Competition• Increased Inputs Prices (Electricity)• Technical Barriers• Political In-stability• Rise in Oil prices• Import Oriented society

Causes (Cont)

• Limited Foreign Trade• Frequent Changes in Fiscal Policy• Backward Technology• Dependent on External Resources• Less Value-Added goods Production• Inflow Remittance• Defense Needs

Solutions

• Agriculture• Free Trade-Zone’s• Foreign Exchange Reserve’s• Labor Intensive Industries• Finished Goods• Reduction in Export Duties• Quality Products• Export Marketing

Solutions (Cont)• Immoral Practices• Goods Pricing• Packing• Joint Venture• Import Essential Items• Exchange Control• Import Items Substitutes• Decrease Foreign goods Consumption• Control Smuggling

Solutions (Cont)

• Education & Skills• Population Control• Remittance