BALANCE OF PAYMENTS

BALANCE OF PAYMENTS
• A summary statement of all the transactions of
individuals, institutions as well as the government
of one country with the other / rest of the world is
called that country’s “Balance of Payments” or
“BOPs”
• A statement listing receipts and payments in
international transactions of a country in a given
period (usually a year)
• It is based on the concept of double entry book-
keeping where
– credit balance shows the receipts of foreign exchange
from abroad and
– debit balance shows payments in foreign exchange to
foreign residents.
 BALANCE OF PAYMENTS
Credit Debit Balance

A. CURRENT ACCOUNT
a. Merchandise import *******
b. Merchandise export *******
Balance of Trade
Balance of Trade Invisibles
a. Services
b. Unilateral transfers
c. Investment income
Balance of Current Account
B. CAPITAL ACCOUNT
(i) Long-term:
a. Direct investment abroad
b. Direct foreign investment inflows
c. Portfolio investment
d. Loans – official and private
 Contd.

Credit Debit Balance

(ii) Short – terms:

a. Holdings with banks
b. Others short – terms transactions

C. ERRORS AND OMISSIONS

D. OFFICIAL RESERVES
A. CURRENT ACCOUNT

Current Account records the receipts and payments of foreign exchange in the following ways:
Current accounts receipts (Credit side)
1. Merchandise exports
- income from sales of goods to foreign countries
2. Invisibles
- income from services sold to foreign countries
- unilateral transfers from foreign countries
- income received on loans and investments abroad

Current accounts payments (Debit side)

1. Merchandise imports
- payments for goods purchased from abroad
2. Invisibles imports
- payments to services received from abroad
- unilateral transfers to foreign countries
- payments on loans and investments from abroad
 Invisibles
Invisibles includes receipts and payments on accounts
of
– Trade in services such as travel and tourism,
transport, etc
– Investment income, such as interest and dividend,
etc and
– Unilateral transfers include pension, remittances,
gifts and others transfers for which no specific
services are rendered.
They are called unilateral transfers because they
represent flow of funds only in one direction, i.e. the
direction of payments.
 Balance of Trade
Export of goods causes
- flow of foreign exchange into the country
Import of goods causes
- flow of foreign exchange from the country

Difference is known as Balance of Trade

If export exceeds import, balance of trade

turns surplus while excess of import over
export results in a deficit balance of trade.
 Balance of Current Account

If the credit side of the current accounts is

greater than the debit side, the balance of
current account turns surplus otherwise
the balance of current account shows a
deficit.
Difference

Balance of Trade Balance of

Payments

Narrow Term Wider Term

Takes into account Takes into account
only transactions transactions arising
arising out of the out of the export and
export and import of import of both visible
visible items and invisible items
 B. CAPITAL ACCOUNT
Capital account comprises long – terms and short
– terms inflow / outflow of funds.
Long term transactions involve maturity periods of
over one year while short terms flows are affected
for one year or less.
The credit side records
• Official and private borrowings from abroad
• Direct portfolio investment
• Short term investments into the country
• Bank balances of the non-residents held in the
country
The debit side includes
• Disinvestment of capital invested into the country
• The country’s investment abroad
• Loans given to foreign government
• Bank balances held abroad
 C. ERRORS AND OMISSIONS

Errors and omissions, collectively termed as

“statistical discrepancy”, are often found in the
balance of payments statement. They may be
either on debit side or credit side or both but only
the net amount is written on the balance of
payments.
If the overall balance is found to be in deficit, the
monetary authority arrange for capital flows to
cover up the deficit. Such inflows may take the form
of official borrowings or purchases (drawings) form
the IMF
 D. OFFICIAL RESERVES
• Official reserves are held by the monetary authorities
of a country. They consist of
– gold,
– SDR (Special Drawing Rights) allocations by IMF and
– foreign currency assets. (held in the form of balances with
foreign central banks and investment in foreign government
securities)

Special Drawing Rights (SDR):

– An international reserve asset available to member
countries of the IMF
– SDR can be used to settle indebtedness between member
countries
 Note…
• The current account deals with the receipts and
payments in cash as well as non capital items.
The capital account reflects sources and
utilization of funds.

• The sum of the current account and capital

account as reflected in the BOPs will be zero;
any surplus or deficit in the current account is
matched and cancelled out by an equal surplus
or deficit in the capital account.
PARTICULARS OF BOP

CURRENT ACCOUNT

1.EXPORT OF GOODS

2.IMPORT OF GOODS

3.BALANCE OF TRADE IN GOODS (1-2)

4.EXPORT OF SERVICE

5. IMPORT OF SERVICE

6.BALANCE OF TRADE IN SERVICE (4-5)

7.INCOME RECEIPT

8.INCOME PAYMENT

9.NET INCOME RECEIPTS (7-8)

10.CURRENT TRANSFER (NET)

11.NET INCOME FLOWS (9-10)

12.CURRENT ACCOUNT BALANCE (3+6+11)

CAPITAL ACCOUNT

13. CAPITAL ACCOUNT TRANSACTIONS (NET)

FINANCIAL ACCOUNT

14. DIRECT INVESTMENT (NET)

15.PORTFOLIO INVESTMENT (NET)

16.RESERVE ASSET FUNDING

17.ERRORS & OMISSION

18.CAPITAL AND FINANCIAL ACCOUNT BALANCE

 DISQUILIBRIUM IN BOPs

Generally BOP should be in equilibrium i.e.

import & export of goods and services
should be equal. But it is not so in reality.

When import > export, BOPs in unfavorable

Deficit Budget

When export > import, BOP is favorable

Surplus budget
 CAUSES / FACTORS RESPONSIBLE FOR
DISEQUILIBRIUM

• Economic Factors
– Development Disequilibrium
– Cyclic Disequilibrium
– Secular Disequilibrium
– Structural Disequilibrium
• Political Factors
• Social Factors
 METHODS OF CORRECTION OF
DISEQUILIBRIUM
• Automatic Corrections
• Deliberate Measures
– Monetary Measures
• Reductions in Money Supply
• Devaluation
• Exchange Control
– Trade Measures
• Export Promotional Measures
• Import Control Measures
– Miscellaneous Measures
 Barriers to Trade

• Tariff • Non Tariff

– Export Tariff – Quotas
– Import Tariff – Subsidies
– Transit Tariff – Others
• Product and Testing Standards
• Embargoes
• Local Content Requirements
• Administrative Delays
• Currency Controls
 Tariff
• Tax imposed on goods involved in
international trade

– Export Tariff : Tariff imposed on goods exported

– Import Tariff : Tariff imposed on goods imported

– Transit Tariff : Tariff imposed as goods passed

through one country bound for another
 Non Tariff

• Trade barriers that restrict trade but are

not in the usual form of a tariff

• Government interventions on international

trade
 Quotas
• Numerical limits on the quantity of goods
that may be imported into a country during a
specified period.

• The quantity of goods that may be imported

is stated in a licence issued.

• The importer has to pay a penalty if the

quantity imported exceeds the one specified
in the licence.
 Subsidies
• Government payment to a domestic producer
in the form of
– Low interest loans
– Tax breaks
– Government equity participation in local firms

• Subsidies help domestic producers

– to compete against low cost foreign imports
– Gain access to export markets
 Others Barriers
• Product and Testing Standards:
– Foreign goods should meet a county’s domestic
product or testing standards before they can be
offered for sale in the country.
• Embargo:
– Complete ban on trade in one or more products
with a particular country.
• Local Content Requirements :
– Restrictions to indigenization efforts of the
government such that local labour, components or
inputs should be used in the production of goods.
 Others Barriers
• Administrative Delays :
– Regulatory controls or bureaucratic rules
designed to impair the flow of imports into a
country.

• Currency Controls :
– Restrictions on the convertibility of a currency
into other currencies.
– Government can declare that companies desiring
such a currency apply for a licence to obtain it.