Chapter 1　Balance of Payments

Lead-in

The International Monetary Fund (IMF)has approved disbursement of USD 1.386 billion as a financial assistance to cash-strapped Pakistan to meet its urgent balance of payment needs stemming from the COVID-19 outbreak.The IMF’s decision comes at the request of Pakistan, which faces an urgent balance of payment crisis.This is in addition to the USD 6 billion bailout package that Islamabad signed with the IMF in July 2019 to stave off a balance of payment crisis.

The cash-strapped Pakistani government has been implementing austerity measures to improve the country’s finances.In July 2019, Pakistan registered a currency reserve of less than USD 8 billion—enough to cover only 1.7 months of imports.Pakistan has so far received billions in financial aid from friendly countries like China, Saudi Arabia and the UAE during the current fiscal year.

Source: The Economic Times, Apr.17, 2020, https://economictimes.indiatimes.com/news/ international/business/covid-19-imf-approves-nearly-1-4-billion-to-pakistan-to-meet-balance-o f-payment-crisis/articleshow/75196782.cms

This chapter shows what the balance of payments is and how it relates to the exchange rate and overall economic activities.We begin with a general presentation of the balance of payments and the major transactions to which it refers.We examine the principles guiding its structure and the interpretation of each type of transaction that is included.Particular attention is paid to concepts of surplus and deficit.Finally, we look at the functional relationship between the balance of payments and the overall economy.