Balance of payments.ppt
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Transcript of Balance of payments.ppt
“The balance of payments of a country is asystematic record of all economic transactionsbetween the residents of a country and the rest ofthe world.
It presents a classified record of allreceipts on account of goods exported, servicesrendered and capital received by residents andpayments made by them on account of goodsimported and services received and capitaltransferred to non-residents or foreigners.”
–Reserve Bank of India
Balance of payments (BOP)
BOP on Current Account
BOP on Capital Account
Balancing Item - an amount that accounts for any statistical errors
BOP = Current Account – Capital Account +/ - Balancing Item
shows the net amount a country is earning if it is in surplus, or spending if it is in deficit.
Includes payments that do not give rise to future claims
Components:
Visible trade relating to imports and exports of goods
Invisible trade items viz. receipts and payments for such as shipping, banking, insurance, travel etc.
Unilateral transfers such as donations
BOP on Current Account
records the net change in ownership of foreign assets.
Implications of current transactions for the country’s international financial position.
Surplus or deficit of current account are reflected in the capital account
It includes the reserve account (the international operations of a nation's central bank), along with loans and investments between the country and the rest of world
FER (Foreign Exchange Reserves) – an index of current strengths or weaknesses of a country’s international options
BOP on Capital Account
Steady accretion to reserves
Moderate levels of current account deficit (CAD)
Changing composition of Capital inflows
Flexibility in exchange rates
Sustainable external debt levels
Indicators of Strengths of a Nation
a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers.
This situation makes a country a net debtor to the rest of the world.
Developing counties may run a current account deficit in the short term to increase local productivity and exports in the future.
Gross capital inflow must be equal to CAD
Current Account Deficit
The Challenge before the emerging market economies is to leverage foreign savings and to promote domestic growth with out having the long term conences of external payment imbalances.
CAD
investment by the domestic economy in foreign assets is less than foreign investment in domestic assets.
Capital Inflows:• Instruments (Debt or Equity)•Duration (Short term or Long Term)•Nature ( Stable or Volatile)
Capital Account Deficit
Current Account Balance =
Balance of Visible Trade(goods) + Balance of Invisible Trade(services) + Balance of Unilateral transfers
Capital Account Balance = Inflow of foreign exchange – outflow of foreign exchange
Official Reserves: The holdings of foreign reserves and gold by official institutions like the central bank
Overall Balance of Payment =
Current Account Balance+ Capital account balance+
Official Reserve Account
Overall Balance of payments
Overview of Macroeconomic and Monetary situations of the economyStudy on prospects of direct investment to the nationImplications on the exchange rate of the currency Provides data for economic analysis Reveals changes in the composition & magnitude of foreign trade Provides indications of future repercussions of country’s past trade performances Reveals the weak and strong points of a country’s foreign trade relations
Uses of BoP Analysis
Economic factors• Huge development expenditure owing to which there are large
scale imports• Business cycles in terms of recession, depression, recovery and
boom• High rate of inflation running up to large scale imports of
essential goods• Decline of import substitutes which would necessitate and
increase in imports• Change in cost structure of trading partners
Political factors• Political Instability leading to decline in FDI and FII• Populism policies which may encourage imports
Social factors• Change in tastes and preferences leading to demand changes• Cross border prejudices which may lead to expensive sources of
imports
BoP crisis- Factors and causes
• CAD to print 2 per cent of GDP in 2013-14, the lowest since 2007-08...
• The current account deficit, which had touched an all-time high of 4.8 per cent in FY13 - leading to a massive depreciation in the rupee - will improve to the 2 per cent level this fiscal year on a heavy contraction in imports
India's current account deficit seen at 2 per cent of GDP in FY14: Crisil
• Finance Minister P Chidambaram last week said the current account deficit would be contained under $40 billion. During the middle of the year, widening current account deficit was one of the biggest threats to macroeconomic stability and also battered the rupee, which plunged to a life-time low of 68.85 to the dollar on August 28 last year.
• But effective measures taken by the Reserve Bank of India (RBI) and the government saw the rupee rallying back over 12 per cent since then. "The sharp contraction in imports in this fiscal has been the primary factor that has contained the trade deficit.”
• THANK YOU