BALANCE OF PAYMENT

SUBMITTED BY:NADEEM AHMAD FM/11/009

INTRODUCTION

BALANCE OF TRADE:- The balance of trade is the

difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap.

BALANCE OF PAYMENT:- Balance of payments

(BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency.
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BALANCE OF PAYMENT OUTLINE

Balance of Payments Accounting of Payments Accounts

Balance

The Current Account The Capital Account Unilateral Transfer Account Official Reserves Accountant

The

Balance of Payments Identities.

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BALANCE OF PAYMENT ACCOUNTING

DEFINATION:- The Balance of Payment is the statistical record of a countrys international transactions over a certain period of time presented in the form of double-entry bookkeeping.

when we say a countrys balance of payments we are referring to the transactions of its citizens and government.
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EXAMPLES OF BALANCE OF PAYMENT

Suppose

that Hero Bicycle in India, imports Rs.1,00,000 worth of bicycle frames from Mercian Bicycles in Darby England. There will exist a Rs.1,00,000 credit recorded by Mercian that offsets a Rs.1,00,000 debit at Indias bank account. This will lead to a rise in the supply of Rupees and the demand for British pounds.
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BALANCE OF PAYMENT PURPOSE

1)

Keeping track of the countrys foreign receipt and payments. Strength and weakness. Gain and Loss. Facilitating in future policy formulation.
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2)

3)

4)

BALANCE OF PAYMENT ACCOUNTING

Ques.)What kinds of transactions represent the basic focus of balance of payments accounting? Ans. All transactions between the citizens of a nation and those of other nations are recorded in the balance of payments for a given period of time.

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RECORDING INTERNATIONAL PAYMENTS

How is information recorded in balance of payments accounting? The basic technique is standard, double-entry accounting, a flow of funds statement that shows changes in assets, liabilities and net worth over time
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RECORDING INTERNATIONAL PAYMENTS

The balance of payments statement is to inform government authorities of the international position of the country to assist them with monetary-fiscal questions as well as trade and payments policies.

Balance of Payment

BOP ACCOUNTS
There are 4 types of accounts involved in making a BOP : Current

A/c Transactions.

Capital A/c Transactions. Unilateral Transfer A/c. The

official reserves A/c.

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Debits, Credits, and International Payments

What is the meaning of a debit in a balance of payments account? A debit records a transaction increasing assets or reducing liabilities. A debit results from some kind of transaction requiring an immediate out-payment. A debit arises from the purchase of goods, claims, or reserve assets and represents an inflow of value.

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Debits, Credits, and International Payments continued

A credit

records a transaction reducing assets or increasing liabilities. It results from some kind of transaction requiring an immediate in-payment. A credit arises from the sale of goods, claims, or reserve assets and represents an outflow of value.

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SOURCES AND USES OF FUNDS

The sources of funds, the supply of foreign exchange, are :transfer payments received, long-term and short-term borrowing.

1. 2.

Credit entries reflect the sources, debit entries indicate the uses of foreign exchange.
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TYPES OF ACCOUNTS 1) CURRENT ACCOUNT

Includes

all imports and exports of goods and services. Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit. If the credits exceed the debits, then a country is running a trade surplus.
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1) CURRENT ACCOUNT
CREDIT
VISIBLE:1. 2. Merchantise exports. Sell of goods. 1. 2.

DEBIT
VISIBLE:Merchantise imports. Purchase of goods.

INVISIBLE:1. 2. Transfer and Insurance services sold abroad. Foreign tourist expenditure in the country. Incomes received on loans and investment abroad.

INVISIBLE:1. 2. Transfer and Insurance services sold abroad. Foreign tourist expenditure in the country. Incomes received on loans and investment abroad.
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3.

3.

2) CAPITAL ACCOUNT

Capital accounts deals with the accounts related to cash or liquid assets. Capital account includes :1. Short term capital movements:Purchase of short-term securities. Cash balance held with Foreign countries for a time period less than a year.

2. Long term capital movements:

Direct investments in shares, bonds, real-estate, plant, building, etc. Cash balance held with Foreign countries for a time period more than a year.
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2) CAPITAL ACCOUNT
CREDIT
Foreign Long-Term investment in Home country
a) b)
c)

DEBIT
Long-Term investment Abroad
a) b) c) Direct investment abroad. Investment in Foreign securities. Government LOAN to foreign
countries.

Direct investment in home country. Foreign investment in Domestic securities. Foreign corporate loan to the home country.

Foreign Short-Term investment In Home country

a) b) Purchase of shares of foreigners. Short-term loans. (for less than 1 yr)

Foreign Short-Term investment In Home country

a) b) Sales of shares abroad . Short-term loans.(for less than 1 yr)

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3) UNILATERAL TRANSFER ACCOUNT

These accounts deal with the transactions related to the donation factors like, DISASTER RELIEF GIFTS FROM GOVERNMENT

CHARITIES. Etc.

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4) OFFICIAL SETTLEMENT ACCOUNTS

CREDIT
Official sales of foreign currencies or other reserve assets abroad.

DEBIT
Official purchase of foreign currencies or other reserve assets.

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DISEQUILLIBRIUM OF BoP

MEANING:-

Though the credit and debit are written balanced in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium. Disequilibrium may take place either in the form of deficit or in the form of surplus.

DEFICIT:- Disequilibrium of Deficit arises when our receipts from

the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an 'unfavourable balance'.

SURPLUS:- Disequilibrium of Surplus arises when the receipts of the

country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as 'favourable balance'.
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CAUSES OF DISEQUILLIBRIUM
A number of factors may cause disequilibrium in the

balance of payments. These various causes may be broadly categorized

into:
(i) Economic factors (ii) Political factors and (iii) Sociological factors.
POPULATION GROWTH IS A DIRECT CAUSE OF DISEQULLIBRIUM IN BoP.

CAUSES OF BoP CONTINUED

1.) ECONOMICAL FACTOR
DEVELOPMENTAL CYCLICAL SECULAR STRUCTURAL

Causes due to imports

of technological Equipments and Instruments for

Causes by

Causes in

Causes due high

BUISNESS CYCLE.

developed countries import to change due to high price rates. the structures.

Developing purpose.

CAUSES OF BoP CONTINUED

2) POLITICAL FACTOR:- Certain political factors may also produce a balance of payments disequilibrium. For instance, a country plagued with political instability may experience large capital outflows, inadequacy of domestic investment and production, etc. These factors may sometimes, cause disequilibrium in the balance of payments.
3) SOCIAL FACTOR:- Certain social factors influence the

balance of payments. For instance, changes in tastes, preferences, fashions, etc. may affect imports and exports and thereby affect the balance of payments.

CORRECTIVE MEASURES OF DISEQUILLIBRIUM IN BoP

Every country tries to remove or reduce BoP deficit.

Various measures for correcting BoP disequilibrium can be divided into 2 categories :AUTOMATIC MEASURES

1.

2.

DELEBRATE MEASURES

1) AUTOMATIC MEASURES

This theory says that if market forces of demand and supply are allowed to have free play, than with time equilibrium will be automatically restored.

E.g. If there is a deficit BoP then the demand for foreign exchange exceeds its supply this leads to increase in exchange rates. This means the external value of Domestic currency decreases. This increases the exports and in imports is seen BoP equilibrium is established.
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DELIBRATE MEASURES

These corrective measures are taken deliberately taken to restore equilibrium.

These measures can be divided into 3 groups :1. Monetary measures. 2. Trade measures. 3. Miscellaneous.

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DELIBERATE MESURES CONTINUED

MONETARY MEASURES :MONETARY CONTRACTION :Demand for import and export is influenced by contraction or expansion of money supply in the economy. In the case of BOP deficit if money supply is reduced then the purchasing power and demand for imported products automatically comes down. Also fall in domestic prices increases exports. All these factors lead to correction in BOP.
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DELIBERATE MESURES CONTINUED

2. DEVAUATION : It means reduction of official rates at which one currevcy is exchanged for another. A country with disequilibrium in BOP will devalue its currency to encourage exports and decrease imports. Devaluation makes export cheaper and imports expensive.
3. EXCHANGE CONTROL : Under it govt. or central bank assumes complete control over the foreign exchange reserves and earnings of country. Exporters are required to surrender foreign exchange to the Central Bank. Balance of Payment 28 Govt. also have a control over imports.

DELIBERATE MESURES CONTINUED

TRADE MEASURES :It includes measures to encourage exports and to reduce imports :-

a)

Export Promotions:- Exports are encouraged by removing export duties, providing exports subsidies, monetary, physical and institutional incentives. Import Control:- Imports are controlled by iposing import duties, import quotas, licensing and prohibiting exports for some products.
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b)

DELIBERATE MESURES CONTINUED

MISCELLANEOUS MEASURES :

Measures like obtaining foreign loans. Encouraging foreign investment in home country. Development of Tourism to attract foreign tourists.

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India's Balance of Payments, Q2 2012-13

Indias current account deficit (CAD) widened in Q2 of 2012-13 on account of a larger trade deficit. On a BoP basis, merchandise exports recorded a decline of 12.2 per cent (year-on-year) during Q2 of 2012-13 as against an increase of 45.3 per cent during corresponding quarter of 2011-12. Similarly, on a BoP basis, imports also registered a decline of 4.8 per cent (year-on-year) during the quarter as against an increase of 38.1 per cent during same quarter last year.
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Steeper decline in the exports than that in imports led to the widening of trade deficit to US$ 48.3 billion during Q2 from 44.5 billion during the corresponding quarter previous year. During Q2, net services receipts recorded a rise of 11.4 per cent (year-on-year), led by software, construction, information services, business services. Net receipts under secondary income (private transfers) recorded a moderate increase of 2.9 per cent during the quarter and were partly offset by the net outflow under primary income (investment income).
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Notwithstanding a reasonable increase in net services receipts, net invisibles earnings could finance only a lower proportion of trade deficit a net primary and secondary income flows were relatively smaller. Consequently, the CAD worsened to US$ 22.3 billion in Q2 of 2012-13 as compared to US$ 16.4 billion in the preceding quarter and US$ 18.9 in Q2 of 2011-12. 4

As a proportion of GDP, CAD during Q2 of 2012-13 worked out to 5.4 per cent as compared with 4.2 in Q2 of the previous year.
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Despite the surge in net inflows under the financial account (excluding changes in reserves) during Q2 of 2012-13 led by foreign direct investment (FDI) and portfolio investment, there was a marginal drawdown of reserves by US $ 0.2 billion during the quarter, mainly due to the higher level of current account deficit. In H1 (April-September) of 2012-13, CAD was higher at US$ 38.7 billion as compared to US$ 36.3 billion in the same period of the previous year. As a proportion of GDP, CAD rose sharply to 4.6 per cent in H1 of 2012-13 from 4.0 per cent in H1 of the previous year reflecting slowdown in GDP and a significant depreciation in rupee. Balance of Payment 34

Net inflows under the financial account were lower during April-September 2012 over the corresponding period of previous year mainly due to decline in FDI, external commercial borrowings (ECBs) and banking capital. Moderation in capital inflows coupled with continued elevated level of CAD led to only a marginal accretion of US$ 0.4 billion in the foreign exchange reserves during April September 2012.

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THANK YOU

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