components of balance of payments

1. INTERNATIONAL FINANCIAL
MANAGEMENT
COMPONENTS OF
BALANCE OF PAYMENTS
By
V S SARMA ,PROF, MBA VJIT
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2. INTERNATIONAL FINANCIAL MANAGEMENT
BALANCE OF PAYMENT (BOP)
 BOP is a statistical record of a country’s international
transactions over a certain time period presented in the
form of double entry book keeping.
 Each country enters into economic transactions the
other countries and hence makes payments and receive
payments.
 BOP is the statement of accounts of these receipts and
payments
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3. INTERNATIONAL FINANCIAL MANAGEMENT
BALANCE OF PAYMENT (BOP)
 Characteristics of BOP:
 Systematic record of R & P
 Fixed time period
 Comprehensiveness i.e. include all transactions viz.
Visible
 invisible
Capital
 revenue etc
Double entry system
 Balancing/adjustment of deference between R & P
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4. INTERNATIONAL FINANCIAL MANAGEMENT
MAJOR COMPONETS OF BOP
 (1) Current Account
 (2) Capital Account
 (3) Official Reserve Account
 (4) Statistical Discrepancy
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5. INTERNATIONAL FINANCIAL MANAGEMENT
(1) CURRENT ACCOUNT
_______________________________________
: :
- VISIBLE INVISIBLE
- Exports - Services
- Imports - Unilateral transfers
- Income
- Official statement
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6. INTERNATIONAL FINANCIAL MANAGEMENT
 Capital Account :
 Direct Investments (FDIs)
 Portfolio Investments
 Loans from other countries
 Banking capital Transactions
 Autonomous and Accommodating items
 Unilateral transactions
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7. INTERNATIONAL FINANCIAL MANAGEMENT
Official Reserve Account
 Gold
 Foreign Currency
 SDRs
 Reserve position in IMF
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8. INTERNATIONAL FINANCIAL MANAGEMENT
Current Account:
 If Debit (out flows) > Credit (inflows) = Trade deficit
If Credit (inflows) > Debit (out flows) = Trade surplus
 Capital Account:
 If Debit(outflows) > Credit(inflows) = Capital deficit
 If Credit(inflows) > Debit(outflows) = Capital surplus
Total flows (both capital and current)
 If total out flows > in flows = BOP deficit
 If total inflows > outflows = BOP surplus
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9. INTERNATIONAL FINANCIAL MANAGEMENT
 Economic transactions (as given in the definition of
BOP)
 Exports
Imports
 Capital Investments( by foreigners)
 Interest earnings
 Unilateral transfers eg. gifts
 loans from foreigners
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10. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENT ACCOUNT: Divided into three categories
(1) Merchandise trade balance : Exports &
Imports of tangible goods
(2) Services Balance :Interest payments,
dividends, Insurance fees, /tourism etc.,
(3) Unilateral transactions: Gifts, Grants, monies
sent by NRIs to their families etc.,
 Entries in this account are current in value as they
do not give rise to future claims
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11. INTERNATIONAL FINANCIAL MANAGEMENT
CAPITAL ACCOUNT:
(a) Loans
(b) Investments
© Other transfers of Fin. Assets and
(d) creation of liability
 A country’s current account deficit is paid :
(1) From official reserve account or
(2) By selling foreign securities or
(3) by borrowing from other countries
 In the absence of Govt. reserve account:
Current account deficit = Capital Account
surplus and vice versa 11

12. INTERNATIONAL FINANCIAL MANAGEMENT
CAPITAL ACCOUNT -- COMPONENTS
 Direct investments
 Portfolio investments
 Other capital flows;
 Short term loans
 short term securities
 Money market investments
 Short term capital accounts change for two reasons:
 (a) Compensatory adjustments: these capital movements are
caused due to(i) Merchandise trade (ii) Services (iii) Unilateral
transfers iv) Investments
(b) Autonomous adjustments: These are short term capital
movements due to diff in: (a) Interest rate changes (b) FE
expected changes among nations
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13. INTERNATIONAL FINANCIAL MANAGEMENT
OFFICIAL RESERVE ACCOUNT
 This account is to adjust deficit/surplus in BOP
 Represents purchase and sale by RBI
 Govt. owned assets
 SDRs
 FE reserves
 Gold
 Incase of deficit BOP:
 Tap reserves by selling some assets or
 go for loans
 In both the above cases receipts are coming and
applied for payments. These receipts are
exhibited in the credit side of the BOP statement
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14. INTERNATIONAL FINANCIAL MANAGEMENT
OFFICIAL RESERVE ACCOUNT (contd…)
 Incase of SURPLUS the RBI :
 Either make fresh purchases of investments
or
 Retire/ repay some country’s loans
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15. INTERNATIONAL FINANCIAL MANAGEMENT
STATISTICAL DISCREPANCIES
 These are omitted and misrecorded transactions
 International transactions are done at different
times and places using different methods
 BOP is constructed on the above limitations and
hence bound to be imperfect
Cross boarder financial transactions bulk being
conducted electronically difficult to track off
 Hence any discrepancy arising out of the above,
will be shown as balancing debit or credit as the
case may be.
 Balance of capital a/c PLUS Statistical discrepancy
= Balance of current account (more or less) 15