Presentation on Balance of Payment

Concepts and DefinitionDifference between BoP and BoTBoP accounts BoP situation of BangladeshPolicy Implications

Concepts and Definition

The balance of payments (BoP)measures all financial and economic transactions of a country with the rest of the world over a specified period of time.

BoP represents summary of transaction between domestic and foreign residents for a specific country over a period of time.(transactions between individual, business and government)

Double-entry bookkeeping system is used for BoPa. Currency inflows = credits

(earn foreign exchange)b. Currency outflows = debits

(expend foreign exchange) BoP is always in balance.

Difference between BoT and BoP

• Balance of Trade(BoT) measures flow of merchandise exports & imports and export & import of services.

• BoP includes BoT and flow of capital.• Movement of Capital not reflected in BoT but in BoP.• BoP shows a comprehensive picture of a country’s external sector.• BoT may be balance(E=M) or surplus(E>M) or deficit(E<M). But BoP is

always balance(Credit=Debit).

BoP Accounts• Three Major Accounts:

a. Current Accountb. Capital Accountc. Official Reserves

• Current Account-records net flow of goods, services, and unilateral transfers.

• Capital Account- records public and private investment and lending.- Inflows = credits- Outflows = debits- Transactions classified as1.portfolio investment(long term financial assets viz. stocks and bonds)

2. direct investment(establish or accusation of foreign company

3. other capital investment (short term i.e money market securities)

BoP Accounts• Balance-of-payment Measures

Basic Balance. consists of current account and long-term capital flows.. emphasizes long-term trends.. excludes short-term capital flows that heavily depend on temporary

factors. Official Reserve Transactions

Balance

- measures adjustments needed by official reserves.

BoP Accounts• Official Reserves Account

1. measures changes in international reserves owned by central banks.

2. reflects surplus/deficit ofa.) current accountb.) capital account

• Reserves consist of 1. gold2. convertible securities

• Net Effects:. Sum of all transactions must

be zero: 1. current account

2. capital account3. official reserves

Example of Current Account and Capital Account Transactions

International Trade Transaction US Cash flow position

Entry on US BoP Account

JC Penney purchases stereos produced in Indonesia that it will sell in its US retail stores

US Cash outflow

Current A/C Debit

The Mexican Government pays US Consulting Firm for consulting services provided by the firm

US Cash inflow

Current A/C Credit

Example of Current Account and Capital Account Transactions(cont.)

International Income Transaction US Cash flow position

Entry on US BoP Account

A US investor receives dividend payment from a French Firm in which She purchased stocks

US Cash inflow

Current A/C Credit

The US Treasury sends an interest payment to a German Insurance Company that purchased US Treasury Bonds one year ago

US Cash outflow

Current A/C Debit

US AID provides grants to India US Cash outflow

Current A/C Debit

Example of Current Account and Capital Account Transactions(cont.)

International Capital Transaction US Cash flow position

Entry on US BoP Account

A UK Company established an Oil Refinery Plant in US

US Cash inflow

Capital A/C Credit

US investors purchase shares of UK Company based in London

US Cash outflow

Capital A/C Debit

Domestic Savings and Investment and the Capital Account

• National Income Accounting -National Income (NI) is either spent (C) or saved (S)

NI = C + S (1) -National spending (NS) is

divided into personal spending (C)and investment (I)

NS = C + I (2) -Subtracting (1) - (2)

NI - NS = S - I (3)If NI >NS, S > I which impliesthat surplus capital spent overseas.

Domestic Savings and Investment and the Capital Account

• In a freely-floating system excess saving = the capital account balance

Implications: -A nation which produces more than it spends has a net capital

outflow producing a capital account deficit. -A nation which spends more than it produces has a net capital

inflow producing a capital account surplus.

-A healthy economy will tend to run a current account deficit.

Domestic Savings and Investment and the Capital Account

• The link between the current and capital accounts; Beginning identity

NI - NS = X - M (4)where X = exports

M = importsX-M=current account balance (CA)

Combining (3) + (4)

S - I = X - M (5)

If S - I = Net Foreign Investment (NFI)NFI = X - M (6)

Domestic Savings and Investment and the Capital Account

• Implications:a. If CA is in surplus, the nation must be a net exporter of

capital.b. If CA is a deficit, the nation is a

major capital importer.c. When NS > NI, the excess must

be acquired through foreign trade.

Solutions for Improving CA deficits

-Raise national income (output)relative to domestic investment (I).-Increase (S) relative to domestic investment (I)

– CA deficit means the nation is not saving enough to finance (I) and the deficit.

- CA Surplus means the nation is saving more than needed to finance its (I) and deficit.

Possible solutions unlikely to Work:- Currency Depreciation- ProtectionismCurrency depreciation- U.S. Experience: Does not improve the trade deficit.

Solutions for Improving CA deficits

Depreciations ineffective because-It takes time to affect trade.

-J-Curve Effectstates that a decline in currencyvalue will initially worsen thedeficit before improvement.

ProtectionismTrade Barriers used:

-Tariffs-Quotas

-Quantitative RestrictionResults:Most likely will reduce both X and M.

Solutions for Improving CA deficits

• One protectionist solution would place limits on or eliminate foreign ownership leading to capital inflows.

• Stimulate national saving change the tax regulations and rates.• Current-account deficits neither bad nor good inherently

-Since one country’s exports areanother’s imports, it is not possiblefor all to run a surplus-Deficits may be a solution to the problem of different

national propensities to save and invest

BoP Accounts Bangladesh

BoP Accounts Bangladesh

Major Export Commodity

Country April-June, 2013 January-March, 2013 April-June, 2012U.S.Dollar U.S.Dollar U.S.Dollar

U.S.A 1008 980 969Germany 830 814 756U.K. 563 504 492France 323 332 289Spain 254 232 208Canada 234 209 182Italy 215 213 189Turkey 163 121 118India 156 137 148Netherlands 144 132 132Japan 126 105 85Belgium 125 130 124Belgium 125 130 124Hong Kong 122 80 64Denmark 105 99 76Sweden 101 101 79Australia 100 104 85China, P.R. 96 86 91

Country-wise export receipts of Bangladesh with the top twenty countries

(in million US$)

Source: Statistics Department, Bangladesh Bank.

Country-wise export receipts of Bangladesh with the top twenty countries

Country-wise Remittance

Policy Recommendation• Provide support services and incentives to Bangladeshi

overseas workers for more remittances.• Channeling remittances to investment.• Create more opportunities for overseas job seekers• Export diversification• Increase domestic investment• Maintain stable exchange rate• Attract more FDI • Attract more foreign investment in capital market i.e

more portfolio investment

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