BALANCE OF PAYMENTS

An Effort By : Butta Singh

Roll No. 5723
MBA-I ‘C’

School Of Management Studies, Patiala

Introduction: Balance Of
Payments

Balance of payments is
a statistical statement
that summarizes
transactions between
residents & non-
residents during a
period.
IMF
 Features of BOP
Systematic Record
Fixed period of time
Comprehensiveness:
Double entry system
Self-balanced
Adjustment of Differences
All items-Government and
Non-Government
 Balance of Trade & BOP
BOP BOT
1. Includes BOT Narrow Term

2. Visible & Invisible Visible Items

Items

3. Always Balanced Favorable/unfavorable

4. More Significant Less Significant

5. Complete Record Partial Record

 Components Of
BOP

Current Capital Financial

Account Account Account
 Current Account: The current account combines the
transactions of the trade account and the services account.

apital Account: The capital account records all internatio

ansactions that involve a resident of the country concerned chang
ther his assets with or his liabilities to a resident of another count

Financial Account: The financial account (or Official

reserve account) is the net change in foreign ownership of
domestic financial assets
Another Terms Related To
BOP
The Official Settlement Concept
Balance of Invisible Trade
Balance of Visible Trade
Errors and Omissions
Unilateral Transfers
Capital Account Convertibility (CAC)
Structure of Balance of
Payments
Credits Debits

Current A/ c:
Current A/ c:
Imports of goods (Visible items)
Imports of goods (Visible items)
Imports of services (Invisibles)
Imports of services (Invisibles)
Unrequited payments ( gifts,
Unrequited payments ( gifts,
remittance, indemnities etc. to
remittance, indemnities etc. to
foreigners)
foreigners)
Capital A/ c:
Capital A/ c:
Capital payments (lending to ,
Capital payments (lending to ,
capital repayments to , or
capital repayments to , or
purchase of assets from
purchase of assets from
foreigners, reduction in stock
foreigners, reduction in stock
of gold and reserves of foreign
of gold and reserves of foreign
currency etc.)
currency etc.)

Total Receipts Total Payments

Major Concerns: BOP

Meaning of “DEFICIT” & “SURPLUS” in

BOP
In The Accounting sense BOP always
balances…
Methods to Measure Balance of
Payments

Basic Balance
Net liquidity Balance
Official Settlement Balance
Disequilibrium (B = R – P) in the
Balance of Payments: Types

Cyclical disequilibrium.
Structural disequilibrium.
Short run disequilibrium.
Long – run or secular disequilibrium
Economic Political
Causes Causes

Causes Of
Disequilibri
um

Social Causes
Methods to correct BOP
disequilibrium
Non-Monetary
Monetary Measures
Measures
1. Deflation 1. Discouraging Imports
2. Exchange 2. Export Promotion
Control 3. Encouragement To Foreign
3. Devaluation Investment
4. Exchange 4. Attraction To Foreign
Control Tourists
5. Liberal Industrial Policy
Importance of BOP
Statements

What is happening In Economy

Foreign Transactions
Policy planning
Foreign Investment
Helpful To International Financial Institutions
Table 1: Major Items of 's Balance of Payments

 (US$ million)

April-June July-September October-December

Item
2008-09 2009-10 2008-09 2009-10 2008-09 (PR) 2009-10 (P)
(PR) (PR) (PR) (PR)

1 2 3 4 5 6 7

1. Exports 57,454 37,910 53,630 41,915 39,436 44,648

64,804 73,810 73,484 75,374

2. Imports 82,731 92,752
-26,894 -31,895 -34,049 -30,726
3. Trade Balance (1-2) -25,277 -39,121

4. Invisibles, net 22,003 20,534 26,546 19,955 22,381 18,696

5.Current Ac Balance(3+4) -3,274 -6,360 -12,575 -11,940 -11,668 -12,030

6,475 21,358 -6,214 13,797
6. Capital Ac Balance* 5,509 7,841

7. Change in Reserves# -2,235 -115 4,734 -9,418 17,881 -1,767

(-Indicates increase;+ indicates            

decrease)
 *: Including errors and omissions.           #: On BOP basis (i.e., excluding valuation).
P: Preliminary.      PR: Partially Revised.
 India’s BOP 2009-2010
Exports recorded a growth of 13.2 % during Q3(Oct-Dec) of
2009-10
Imports registered a growth of 2.6 % in Q3 of 2009-10 after
recording consecutive declines in the last three quarters.
Despite low trade deficit, the current account deficit was
higher at US$ 12.0 billion during Q3 of 2009-10 mainly due
to lower invisibles surplus.
The current account deficit during April-December 2009 was
higher at US$ 30.3 billion as compared to US$ 27.5 billion
during April-December 2008.
Continued…
Surplus in capital account increased sharply to US$
43.2 billion during April-December 2009 (US$ 5.8
billion during April-December 2008) mainly on
account of large inflows under FDI, Portfolio
investment, NRI deposits and commercial loans.
(As the surplus in capital account exceeded the current
account deficit, there was a net accretion to foreign
exchange reserves of US$ 11.3 billion during April-
December 2009 (as against a drawdown of US$ 20.4
billion during April-December 2008).
Conclusion
Balance of Payments plays a very important role while
judging economic conditions, Foreign Transactions, &
formulating Economic Policies. So, Care should be taken
in calculation.
Corporate finance managers must monitor the BOP data
being put out by government agencies on a regular basis
because they have both short term and long term
implications for a host of economic and financial variables
affecting the fortunes of the company