Role of BOP in Macroeconomic Stability
Name : Aqsa
Roll no. # MH20BBA009
Topic : Role of BOP in Macroeconomic Stability
In the words of C. B. Kindleberger ; “The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting and the residents of the foreign countries during a given period of time.”
The balance of trade is a statement that records a country’s imports and exports of goods with other countries in a period. Whereas BOP records all the economic transactions performed by that country within a period. A major difference between BOP and BOT is regarding the records they keep.
Macroeconomic stability is a condition of an economy where GDP is growing, Unemployment is less, and there is no situation of Inflation prevailing. These macroeconomic stability factors helps making Balance of Payments favorable for any country.
During July-March FY2021, current account posted a surplus of US$ 959 million (0.5 percent of GDP) against a deficit of US$ 4,147 million last year (2.1 percent of GDP). The main driver of improvement in current account balance was the robust growth in remittances. Even during the global economic crisis due to the COVID-19 pandemic, the inflows accelerated posting a year-on-year growth of 26.2 percent during the period under review over the same period last year and thus defying the general expectation of a decrease.
Concurrently, primary income account also provided cushion to improve current account balance. The lower interest payments and deferment of debt repayment (both interest and principal) under G-20 Debt Service Suspension Initiative (DSSI) have contributed to improve the balance of primary income as the deficit declined from US$ 4.1 billion to US$ 3.6 billion during July-March FY2021.
The services trade deficit shrank by 52.4 percent mainly because of strong demand of telecommunication services amidst lockdown and air travel restrictions. On the contrary, trade deficit in goods is widening owing to escalating imports of capital goods and industrial raw materials, as the economy is reviving from deadly implication of coronavirus lockdown and a rise in international commodity prices. Meanwhile, import of agricultural commodities like sugar, wheat and cotton, due to shortage in production,
is another major contributor in widening of the trade deficit from US$ 15.9 billion to US$ 18.7 billion thus surging the deficit by 17.4 percent.
The better performance of external sector in FY2021 is expected to continue in coming years on account of domestic economic rebound as well as global economic recovery especially in Pakistan’s trading partners. Further government efforts regarding export diversification and exploration of new destinations will help in improving external sector in general and trade balance in particular.