Presentation on Balance of Payment

Concepts and Definition Difference between BoP and BoT BoP accounts BoP situation of Bangladesh Policy 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 BoP a. 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 countrys 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 Account b. Capital Account c. 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 as 1.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 of a.) current account b.) capital account Reserves consist of 1. gold 2. convertible securities Net Effects: . Sum of all transactions must be zero: 1. current account 2. capital account 3. official reserves

Example of Current Account and Capital Account Transactions

International Trade Transaction JC Penney purchases stereos produced in Indonesia that it will sell in its US retail stores The Mexican Government pays US Consulting Firm for consulting services provided by the firm US Cash Entry on US flow position BoP Account US Cash outflow Current A/C Debit

US Cash inflow

Current A/C Credit

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

International Income Transaction A US investor receives dividend payment from a French Firm in which She purchased stocks The US Treasury sends an interest payment to a German Insurance Company that purchased US Treasury Bonds one year ago US AID provides grants to India US Cash Entry on US flow position BoP Account US Cash inflow Current A/C Credit

US Cash outflow

Current A/C Debit

US Cash outflow

Current A/C Debit

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

International Capital Transaction A UK Company established an Oil Refinery Plant in US US investors purchase shares of UK Company based in London US Cash Entry on US flow position BoP Account US Cash inflow US Cash outflow Capital A/C Credit 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 implies that 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 = imports X-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 - Protectionism Currency 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 Effect states that a decline in currency value will initially worsen the deficit before improvement. Protectionism Trade Barriers used: -Tariffs -Quotas -Quantitative Restriction Results: 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 countrys exports are anothers imports, it is not possible for 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

Commodity group wise export

Readymade garments Jute manufactures

80.6% 3.8% 2.2% 3.8% 1.8% 1.1%

Fish, shrimps and prawns

Leather and leather manufactures Home Textile Raw jute

Petroleum and petroleum products

0.9%

Terry Towel Bicycle

0.3%

Pharmaceutical products

Handicraft
Tea Fertilizer Others

0.3%

5.1%

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

(in million US$) Country U.S.A Germany U.K. France Spain Canada Italy Turkey India Netherlands Japan Belgium Belgium Hong Kong Denmark Sweden Australia China, P.R. April-June, 2013 January-March, 2013 April-June, 2012

U.S.Dollar 1008 830 563 323 254 234 215 163 156 144 126 125 125 122 105 101 100 96

U.S.Dollar
980 814 504 332 232 209 213 121 137 132 105 130 130 80 99 101 104 86

U.S.Dollar
969 756 492 289 208 182 189 118 148 132 85 124 124 64 76 79 85 91

Source: Statistics Department, Bangladesh Bank.

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

U.S.A Germany U.K. France Spain Canada Italy Turkey India Netherlands Japan Belgium Belgium Hong Kong Denmark Sweden Australia China, P.R.

Country-wise Remittance
3% 8% Kuwait 4% 2% Qatar
Oman Bahrain

K.S.A.

26% U.A.E. 20%

Libya Iran Australia Hongkong Italy Malaysia

7% 2%Singapore 3% U.K. 7% U.S.A. 13%

Germany Japan S.Korea

4%

Others

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

Thank you all