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4. Balance of Payments, International Monetary Fund, Asian Development Bank
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4. Balance of Payments, International Monetary Fund, Asian Development Bank



The presentation starts with a case study on political risks in Russia. It also discusses the components of balance of payments, difference between balance of trade and balance of payment, functions ...

The presentation starts with a case study on political risks in Russia. It also discusses the components of balance of payments, difference between balance of trade and balance of payment, functions and role of International Monetary fund in the recent economic crisis, World Bank and Asian Development Bank.



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4. Balance of Payments, International Monetary Fund, Asian Development Bank 4. Balance of Payments, International Monetary Fund, Asian Development Bank Presentation Transcript

  • AGENDA Case Study on Investing in Russia International Financial Management Mrs. Charu Rastogi, Asst. Prof. Balance of trade and Balance of payment International Monetary fund Asian Development Bank World Bank Introduction to export and import finance Methods of payment in international trade International financial instruments
  • CASE STUDY: INVESTING IN RUSSIA Since the end of the Cold War in 1989, Russia has been making overtures towards a free market economy. During the early 1990s annual economic growth rates among developed countries such as Mrs. Charu Rastogi, Asst. Prof. the US, Germany, and Japan dropped from an average of 5% down to 2%. At the same time Eastern European and the Russian economies fell much more sharply, with annual growth rates tumbling from 4 per cent in 1988 to - 10 in 1991 ! Clearly, the Russian economy was in big trouble.
  •  Investment from the West was seen as a way to improve the economy. However, significant changes needed to take place to reduce political risk in Russia. Initially, five steps were recommended by outside experts:  (1) change the relationship between the national government and the republics in order to set up a federal political system in which central powers are limited; Mrs. Charu Rastogi, Asst. Prof.  (2) eliminate or slash most state subsidies, including defense spending, and create a uniform sales tax and personal and corporate income tax system;  (3) establish a commercial banking system, boost interest rates, and create an independent bank that will halt current inflationary practices;  (4) break up state monopolies and industrial cartels: and  (5) free the price of most goods immediately and gradually add to this list those changes that must be phased in more slowly: energy, public transportation, housing, and basic consumer goods such as milk, bread, and meat.
  •  By the mid-1990s things looked good; the republics had become more autonomous from the Central Government and new private banks had begun to emerge. Most importantly, by 1997, the private sector accounted for more than half of Russia‘s output. Some 18,000 industrial firms had been privatized and over 1 million new businesses were created. The old Russia, its ideology and institutions, had ceased to Mrs. Charu Rastogi, Asst. Prof. exist. Yet the late 1990s proved to be a wake-up call to foreign investors in Russia. The Asian crisis left many feeling Russia could be next and it would have been had the IMF and the World Bank not been ready to bail the country out. The Russian Government had pegged the ruble to the US dollar and used interest rates to defend the exchange rate. This led to skyrocketing interest rates that reached over 50 per cent in peak periods. When the government allowed the ruble to float, investors lost on the devaluation what they had earned on interest rates.
  •  What brought this about? While Russia‘s steps towards liberalization have been significant, the country is only mid- way to becoming a truly democratic free market. The new private banks are not real banks. They offer no real credit system. They lack credibility, which makes Russians more likely to hold currency or send their savings to foreign banks than to deposit them in these new banks. A large bureaucratic Mrs. Charu Rastogi, Asst. Prof. web still exists and a small corrupt mafia is proving difficult to police. Despite all setbacks, Russia is bound to turn itself around. In 2001, for the first time since the end of communism Russia had a balanced budget, a trade surplus, reserves, and a growing economy. In 2000, the economy grew by 8 per cent. This growth, however, has done little to lure foreign investors who would rather flock to the Chinese market than face the volatility and corruption of the Russian economy.
  • QUESTIONS What political risks do MNEs face in Russia? Identify and describe three of them. What strengths would a consumer goods manufacturing firm Mrs. Charu Rastogi, Asst. Prof. bring to the country ? What Russian needs would it help to meet? How could this manufacturer employ integrative or protective / defensive techniques in the country ? Identify and describe one approach that could be used for each.
  • 1. POLITICAL RISKS IN RUSSIA• Political risks  Arises due to events or actions by host governments Mrs. Charu Rastogi, Asst. Prof. ● Loss of assets ● Loss of earning power ● Loss of managerial control ● Government takeovers ● Acts of violence• Government takeovers• Tariffs, quotas, taxes• Terrorism, political instability• Laws, regulations
  • POLITICAL RISKSMacro risk factors: Freezing the movement of assets out of the host Mrs. Charu Rastogi, Asst. Prof. country Placing limits on the remittance of profits or capital Devaluing the currency Refusing to abide by the contractual terms of agreements previously signed with the MNC Industrial piracy (counterfeiters) Political turmoil Government corruption
  • POLITICAL RISKSMicro risk factors: ―Some MNCs are treated differently than others‖ Industry regulation Mrs. Charu Rastogi, Asst. Prof. Taxes on specific types of business activity Restrictive local laws Impact of WTO and EU regulations on American MNCs Government policies that promote exports and discourage imports Expropriation  The seizure of businesses by a host country with little, if any, compensation to the owners Indigenization laws  Laws that require nationals to hold a majority interest in an operation
  • STRENGTHS THAT CONSUMER GOODSMANUFACTURING FIRM WOULD BRING AND NEEDSIT WOULD HELP TO MEET IN RUSSIA Lesser need to import from foreign countries: Preserve precious foreign exchange Employment to local population Mrs. Charu Rastogi, Asst. Prof. Development of ancillary industry Standard of living of locals rises due to access to better goods Russia has the worlds largest reserves of mineral and energy resource and is the largest producer of oil and natural gas globally : better utilization of the same and monetary benefit would accrue to the country Oil, natural gas, metals, and timber account for more than 80% of Russian exports abroad. A consumer goods industry would enable Russia to diversify its exports
  • INTEGRATIVE OR PROTECTIVE / DEFENSIVETECHNIQUES Political risk is the likelihood that a business‘s foreign investment will be constrained by a host government‘s policy Mrs. Charu Rastogi, Asst. Prof. Integrative, protective, and defensive techniques are a way of managing political risk  Integrative techniques help the overseas operation become a part of the host country‘s infrastructure  Developing good relations with the host government and other local political groups  Producing as much of the product locally as possible with the use of in-country suppliers and subcontractors  Creating joint ventures and hiring local people to manage and run the operation  Doing as much local research and development as possible  Developing effective labor–management relations
  • INTEGRATIVE OR PROTECTIVE / DEFENSIVETECHNIQUES Protective and defensive techniques discourage the host government from interfering in operations  Doing as little local manufacturing as possible and conducting all Mrs. Charu Rastogi, Asst. Prof. research and development outside the country  Limiting the responsibility of local personnel and hiring only those who are vital to the operation  Raising capital from local banks and the host government as well as outside sources  Diversifying production of the product among a number of countries
  • BALANCE OF PAYMENTS Balance of payments (BoP) accounts are an accounting record of all monetary transactions Mrs. Charu Rastogi, Asst. Prof. between a country and the rest of the world. These transactions include payments for the countrys exports and imports of goods, services, financial capital, and financial transfers. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
  • COMPONENTS OF BOP : CURRENT ACCOUNT Current Account  Goods – exports (credits)  Goods are tangibles. In this case, sold to overseas nations and Mrs. Charu Rastogi, Asst. Prof. produced in India  Goods – imports (debits)  Goods are tangibles. In this case, produced overseas and purchased by Indians.  = Net goods (X-M)  Service – exports (credits)  Services include transport, travel, insurance charges, telephone calls, tourist accommodation, education, computer information services, etc.  In this case, provided by Indians and sold to overseas nations.  Service – imports (debits)  As above, but provided by other nations and purchased by Indians.  = Net services (X-M) Balance of Trade = net goods + net services
  • COMPONENTS OF BOP : CURRENT ACCOUNT Factor income credits  Incomes paid to Indians from overseas sources, Earnings on investment i.e. income (rent, profits, dividends), Royalties, Interest Mrs. Charu Rastogi, Asst. Prof. Factor income debits  As above, but incomes paid by Indians to overseas sources  Net factor income = credits – debits Current transfer credits  Transfers of funds into India for things such as:  payouts on insurance claims, aid from overseas governments/nations, pensions received from foreign governments to Indian residents, money sent from overseas relatives, gifts from charities in other countries, work remittances from people working overseas. Current transfer debits  As above, but transfers of funds out of India.  Net current transfers = credits – debits Balance on Current Account = Balance of trade + Net income + Net transfers
  • COMPONENTS OF BOP : CAPITAL ACCOUNT Capital transfers, direct / portfolio investments – credits  Money coming in to India for things like:  people migrating and bringing money with them Mrs. Charu Rastogi, Asst. Prof.  aid from overseas where addition is made to the capital stock of the recipient  purchase and sale of intellectual property rights, including patents, copyrights, trademarks, franchises, works of art  movements of government savings offshore (into Indian reserves). Capital transfers, direct / portfolio investments…debits  As for credits, but money going out of India Reserve Assets (Money moved by RBI)  Includes: monetary gold, Special Drawing Rights (―paper gold‖. Created by the IMF to improve the foreign reserves of member nations), IMF transactions. Total on capital account = credits – debits
  • Mrs. Charu Rastogi, Asst. Prof.
  • BOT VS BOP Basis Balance of Trade (BOT) Balance of Payment (BOP) Mrs. Charu Rastogi, Asst. Prof. Balance of trade may be Balance of payment is flow of cash defined as difference between domestic country and all otherDefinition between export and foreign countries. It includes not only import of goods and import and export of goods and services services. but also includes financial capital transfer. BOP = BOT + (Net Earning on foreign investment - payment made to foreign investors) + Cash BOT = Net Earning on Transfer + Capital Account +or -Formula Export - Net payment for Balancing Item imports or BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions)
  • BOT VS BOP Basis Balance of Trade (BOT) Balance of Payment (BOP) • Balance of Payment will be favourable, if Mrs. Charu Rastogi, Asst. Prof. you have surplus in current account for paying your all past loans in your capital If export is more than account. import, at that time, BOT • Balance of payment will beFavorable or will be favourable. If unfavourable, if you have currentunfavorable import is more than account deficit and you took more loan export, at that time, BOT from foreigners. will be unfavourable. • After this, you have to pay high interest on extra loan and this will make your BOP unfavourable.Solution of To buy goods and To stop taking of loan from foreignunfavorable services countries.problem from domestic country
  • BOT VS BOP Basis Balance of Trade (BOT) Balance of Payment (BOP) Following are main Mrs. Charu Rastogi, Asst. Prof. factors which affect BOT Following are main factors a) cost of production which affect BOPFactors b) availability of raw a) Conditions of foreign lenders. materials b) Economic policy of Govt. c) Exchange rate c) all the factors of BOT d) Prices of goods manufactured at home
  • Mrs. Charu Rastogi, Asst. Prof. INTERNATIONAL MONETARY FUND
  • IMF The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate Mrs. Charu Rastogi, Asst. Prof. international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Goals of IMF:  promoting international monetary cooperation;  facilitating the expansion and balanced growth of international trade;  promoting exchange stability;  assisting in the establishment of a multilateral system of payments; and  making resources available (with adequate safeguards) to members experiencing balance of payments difficulties More Details: IMF at a Glance
  • ROLE OF IMF IN CURRENT ECONOMICSCENARIO The global economic crisis created the worst recession since the Great Depression of the 1930s. The crisis began in the mortgage markets in the United States in Mrs. Charu Rastogi, Asst. Prof. 2007 and swiftly escalated into a crisis that affected activity and institutions worldwide. The IMF mobilized on many fronts to support its member countries, increasing its lending, using its cross-country experience to advise on policy solutions, and introducing reforms to modernize its operations and become more responsive to member countries‘ needs. As the apex of the crisis shifted to Europe, the Fund has become actively engaged in the region and is also working with the G-20 to support a multilateral approach
  • ROLE OF IMF IN CURRENT ECONOMIC SCENARIO A partner in Europe: The IMF is actively engaged in Europe as a provider of policy advice, financing, and technical assistance Reinforcing multilateralism: The crisis highlighted the tremendous benefits from international cooperation. Without the cooperation spearheaded by the Mrs. Charu Rastogi, Asst. Prof. Group of Twenty industrialized and emerging market economies (G-20) the crisis could have been much worse. At the request of the G-20, the IMF provides the technical analysis needed to evaluate how members‘ policies fit together—and whether, collectively, they can achieve the G-20‘s goals. Rethinking macroeconomic principles: In this context, the IMF is encouraging a wholesale re-examination of macroeconomic policy principles in the wake of the global economic crisis. Stepping up crisis lending: IMF has approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries‘ varying strengths and circumstances. Strengthening the international monetary system Supporting low-income countries: The IMF has upgraded its support for low-income countries, reflecting the changing nature of economic conditions in these countries and their increased vulnerabilities due to the effects of the global economic crisis.
  • FUNCTIONS OF IMF Providing short terms credit to member countries for meeting temporary difficulties due to adverse Mrs. Charu Rastogi, Asst. Prof. balance of payments. Reconciling conflicting claims of member countries. Providing a reservoir of currencies of member- countries and enabling members to bor-row on anothers currency. Promoting orderly adjustment of exchange rates. Advising member countries on economic, monetary and technical matters.
  • ASIAN DEVELOPMENT BANK ADB is a multilateral development finance institution dedicated to reducing poverty and improving living standards of people in Asia and the Pacific. It was Mrs. Charu Rastogi, Asst. Prof. established in 1966, currently comprising 67 members, mostly from the Asia-Pacific region. Its headquarters is located in Manila, Philippines. Whether it be through investment in infrastructure, health care services, financial and public administration systems, or helping nations prepare for the impact of climate change or better manage their natural resources, ADB is committed to helping developing member countries evolve into thriving, modern economies that are well integrated with each other and the world. The main devices for assistance are loans, grants, policy dialogue, technical assistance and equity investments.
  • POSSIBLE QUESTIONS Explain all the modes of payment used in international business. Discuss various types of L/Cs. Write short notes on: Mrs. Charu Rastogi, Asst. Prof.  Balance of payment vs. balance of trade  Asian Development Bank  Balance of payment  Types of Letter of Credit Explain the role played by ‗International Monetary Fund‘, ‗Asian Development Bank‘ and World Bank in promotion of International Trade Explain the functions of International Monetary Fund. What are various methods of payment in International Trade? Discuss the role of World Bank in International Financial Management.
  • Mrs. Charu Rastogi, Asst. Prof.