Balance of Payments Analysis
Balance of Payments
It is a systematic record of all economic transactions that take place between the residents of the reporting country and the rest of the world (ROW) during a specific period of time.
Balance of Payments
Double entry book keeping system All transactions that involve a transfer of title or ownership
Nationals of the reporting country : individuals,
business organisations, government departments etc
Generally one year
The structure of BOP Accounts
Current Account : current transactions involving import and export of goods and services Capital Account : Capital transactions resulting in increase or decrease in countys total stock of capital Official Settlement Account :Changes in Foreign Exchange reserves and reserves of monetary gold held by monetary authorities
Current Account
Export and Import of merchandise / visibles / goods
Export and Import of invisibles / services Incomes on investments interest and dividends paid and received
Unilateral transfers gifts and charities
Current Account
Invisible transactions
Travel on account of business, education , health Insurance premium and payments of claims
Incomes from services like advertising, commissions, pensions, patent fees, royalties, membership fees, subscription to periodicals etc
Capital Account
Long term capital movements :
direct investment in shares or bonds, real estate, physical assets like plant, building, equipment etc Portfolio investments in government securities or securities of firms
Amortisation of capital
Capital Account
Short term capital movements:
Purchase of short term securities such as treasury bills, commercial bills etc Speculative purchases of foreign currencies Cash balances held by foreigners
Official Settlement Account
Gold and Foreign Exchange Reserves
To impart stability to the exchange rate
To enable payments of dues
Assistance provided by international financial institutions like the IMF, World Bank etc
Indias Balance of Payments
Items
1 1.1 1.2 Current Account Merchandise Invisibles
Credit Debit
Net
a. Services b. Transfer Payments c. Investment Income
2. 2.1
Capital Account Foreign Investment a. Direct b. Portfolio
2.2
Loans
a. External Assistance b. Commercial borrowings c. Short Term Borrowings 2.3 2.4 2.5 Banking Capital Rupee Debt Service Other capital
3. 4.
Errors and Omissions Balance of payments
5.
5.1 5.2
Official reserve Account* IMF Position
Foreign Exchange Reserve
*decrease +; increase -
Balance of Trade
Difference between the value of import and export of merchandise or visible items
Exports > imports : Favourable Balance of Trade Exports < Imports : Adverse Balance of Trade
Balance on Current Account
Balance of Trade
+ Balance on Services
+ Net income on Investment
+ Net Unilateral Transactions
A deficit on Current Account implies that the reporting country is a net debtor i.e. it owes money to the rest of the world.
Balance on Capital Account
Net long term borrowings + Net short term borrowings + Net change in the Foreign Exchange Reserves + Net change in the stock of monetary gold
+ Errors and omissions
Overall Balance
Balance on Current Account + Balance on Capital Account
Balance of Payments always balances
Double entry accounting system Any adverse balance on current account is made good by a surplus on current account and viceversa This is the accounting point of view
The Economic Point of View
There are two types of transactions
Autonomous Transactions : these are genuine transactions of current or capital nature. They are guided by long term considerations and are intended at optimisation of returns
Accommodating Transactions : these are short term adjustments, induced transactions
Basic Balance
Basic Balance = Balance on Autonomous Transactions = Balance on Current Account + Net long term capital movements
BOP Equilibrium
Balance of payments is said to be in Equilibrium when the Basic Balance is zero. i.e. Balance on Current Account + Net long term capital movements = 0
Disequilibrium in BOP
The BOP is said to be in disequilibrium when a countrys autonomous payments are not equal to the autonomous receipts
Disequilibrium in BOP implies a non-zero basic Balance
Causes of Disequilibrium in BOP
Huge Amounts of Developmental Expenditure
Population growth
Import of technology Imports for price stabilisation
Business cycles
Changes in demand for exports
Primary goods market is not very attractive
Heavy External Borrowings leading to increasing debt servicing
Causes of Disequilibrium in BOP
Inflation
More imports and less exports
Flight of capital
Capital account convertibility
Speculative movement of capital
International demonstration effect Non-tariff barriers
Countervailing duties in the name of Social clause Child labour content
Measures to correct Disequilibrium
1.
1. 2. 3. 4.
Monetary measures
Deflation Depreciation Devaluation Exchange control
Non-monetary measures
Export promotion measures Import control measures
Trade Policy
Export and Import Policy
It influences: Volume Direction, & Composition of Trade
Objectives
Balanced Growth Price Stability Exchange Rate Stability BOP Equilibrium
Two Theoretical Policy options
Free Trade: No Artificial Restrictions on Import and Export Protection/ Protective Trade Policy: Barriers to Free Trade
Tools/Instruments of Trade Policy
Quantitative Tools
Qualitative Tools
Export Promotion Policies Child Labour content Environmental considerations Preferential Buying by the Government
Tariffs: Import Duties/ Custom Duties Quotas Subsidies: Land, electricity, lower interest rates, Tax concessions, other facilities at lower than market rates
Advantages of Free Trade
Optimum Allocation of Global Resources Greater Employment, income, consumption leading to Greater Welfare Availability of wider variety of goods and services at cheaper rates Greater Competition and no monopoly Greater Equality of Incomes and wealth
Greater Interdependence leading to Stability and World Peace
Arguments in Favour of Protection
Diversification of Industry Argument
Employment Promotion Argument
BOP Argument Balanced Growth Argument Cheap Labour Argument Anti- Dumping Argument
Self Sufficiency Argument
Defence Argument
