BOP Analysis Raw

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INTRODUCTION

1.1 PROBLEM AND PURPOSE

This term paper has been basically prepared to fulfill the requirements of

International Financial Management course as instructed by honorable

faculty Dr. Toufic A. Choudhury. This report is prepared on the topics

"Balance of Payment situation of Bangladesh." The term paper has been

prepared with special focus on analyzing the balance of payment condition

of Bangladesh of previous 3 years. The purpose of this report is to describe

the balance of payment situation of the country.

1.2 SCOPE

This term paper has been prepared with the aim of establishing a level of

understanding of balance of payment situation of a country. Efforts have

been made to bring to the forefront certain key issues that are critical in

measuring the condition of balance of payment.

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1.3 METHODOLOGY

This term paper is prepared with the help of publications on Balance of

Payment published by the Bangladesh Bank. Data are also collected from

internet by surfing different websites. A soft copy of Microsoft Encarta, a

famous computer based encyclopedia, is also used to collect data.

Information is taken from different articles of that encyclopedia.

1.4 LIMITATIONS

The first problem was of course the deadline of submitting the report. The

time period plays a vital role and actually the time was comparatively less

to obtain all the relevant and necessary data to prepare this report. Another

limitation of this report is that data is collected through internet. So there

may be lack of credibility of the data collected. Electricity failure, which is

also a major problem of Bangladesh, hampered the collection of data from

different internet sources.

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BALANCE OF PAYMENT: GENERAL CONCEPT

2.1 DEFINITION

Balance of payment is the record of all international transactions of part of

a country with the rest of the world during the particular period of time. In

other words, it is the record of all international payments and international

receipts. The record is done by the central bank of a country. The balance

of payments of a country for any period of time is a complete and

systematic statement of all economic and business transactions made by

its residents, government or agencies with the rest of the world.

Alternatively, it may be defined as the difference between aggregate

receipts obtained by the residents from the foreigners and the aggregate

payments made by the residents to the foreigners. For a period, if the

receipt less payments is positive, the balance of payments shows a surplus,

if the sum of the total payments exceeds that of total receipts, the balance

of payments is said to be in deficit and if the difference between these two

is zero, the balance of payments depicts equilibrium. All data are recorded

by maintaining double entry book keeping system. In short, Balance of

Payments is the relationship between the amounts of money a nation

spends abroad and the income it receives from other nations.

2.2 ELEMENTS OF BALANCE OF PAYMENT

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The balance of payments is officially known as the Statement of

International Transactions and includes two main accounts. The first, the

current account, tracks activity in merchandise tradeexporting and

importing; income earned from investments abroad; money paid to foreign

investors; and transactions on which the government expects no returns.

The second, the capital account, tracks both loans given to foreigners and

loans received by citizens. Because the balance of payments is one

reflection of a nation's financial stability in the world market, the

International Monetary Fund (IMF) uses these accounts to make decisions

such as qualifying a country for a loan. The IMF also provides the

information to its members so that they can make informed decisions about

investments and trade. In detail, all international transactions are classified

into 4 broad groups. These groups are

Current account transactions

Capital and financial account transactions

Official reserve account

Statistical discrepancy account

2.2.1 Current account

The current account, which records transactions involving the purchase

(imports) and sale (exports) of goods and services, interest payments paid

to and received from people and firms in other nations, and net transfers

(gifts and aid) paid to other nations. Following are recorded under this

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Trading goods - includes export and import of goods

Trading Services includes travelling costs, transportation costs,

medical expenditures, consultancy service etc.

Income out of Foreign investment - includes foreign direct

investment (FDI), foreign portfolio investment

Unilateral transfer - Foreign grants, Labor remittances

2.2.2 Capital and Financial account

The capital account, which records investments in the one country made by

people and firms from other countries, and investments that particular

countrys citizen and firms make in other nations. Following are recorded

under this category

All types of foreign investment includes both direct and portfolio

investments

All types of foreign aid - includes foreign loans and its waivers

Banking and non banking claims

2.2.3 Official reserve account

This account is basically the governments account which is maintained by

the central bank authority. In many countries, the official reserve account is

a subdivision of the capital account in which the foreign currency and

securities held by the government, usually by its central bank, and are used

to balance the payments from year to year.Following are recorded under

this category

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Gold holding of government

IMF reserve i.e. SDR holding

Foreign currency holding by the government

2.3 PURPOSES OF BALANCE OF PAYMENT

Balance of payment statistics are regularly compiled, published and are

continuously monitored by companies, banks and government agencies. A

set of BOP accounts is useful in the same way as a motion picture camera.

The accounts do not tell us what is good or bad, nor do they tell us what is

causing what. But they do let us see what is happening so that we can

reach our own conclusions. Below are 3 instances where the information

provided by balance of payment accounting is very necessary

1. Judging the stability of a floating exchange rate system is easier with

BOP as the record of exchanges that take place between nations help track

the accumulation of currencies in the hands of those individuals more

willing to hold on to them.

2. Judging the stability of a fixed exchange rate system is also easier with

the same record of international exchange. These exchanges again show

the extent to which a currency is accumulating in foreign hands, raising

questions about the ease of defending the fixed exchange rate in a future

crisis.

3. To spot whether it is becoming more difficult for debtor counties to repay

foreign creditors, one needs a set of accounts that shows the accumulation

of debts, the repayment of interest and principal and the countrys ability to

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earn foreign exchange for future repayment. A set of BOP accounts supplies

this information.

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BALANCE OF PAYMENT SITUATION IN

BANGLADESH

3.1 BALANCE OF PAYMENT: BANGLADESH PERSPECTIVE

The Bangladesh bank prepares balance of payments positions (BOP) of the

country following the IMF Balance of Payments Manual. The data are

derived from various sources such as foreign exchange transaction records

of authorized dealers, documents of the Ministry of Food on import of food

grain by the government, documents of Ministry of Finance on imports

financed through foreign loans and grants, and custom records for the

preparation of BOP. Bangladesh received a substantial amount of

assistance under various facilities of the International Monetary Fund to

correct her balance of payment disequilibrium position. The adjustment

policies that Bangladesh pursued under various facilities of the IMF brought

about some positive changes in the economy. The aggregate demand

management policies initiated by IMF through streamlining fiscal and

monetary systems proved largely successful. The exchange rate and

interest rate policies of Bangladesh brought about positive results. The

Fund's arrangements for high conditional loans also worked as a 'seal of

approval' for enhanced foreign assistance to Bangladesh.

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3.2 ELEMENTS RECORDED IN BOP ACCOUNT

All payments to and receipts from international transactions are recorded

under (i) current account, (ii) capital account. Trade balance is determined

from the differences of export and import which is recorded under current

account. Bangladesh receipts foreign currency through exporting of

products such as raw jute, jute goods, tea, leather goods, frozen shrimps

and fish, woven garments, knitwear products, fertilizer, terry towels etc.

U.S.A topped the list of potential buyers of goods from Bangladesh.

Germany ranked 2nd

and U.K ranked 3rd

as the potential buyers of goods

from Bangladesh. Bangladesh pays for import of rice, wheat, milk and

cream, spices, oil seeds, edible oil, pulses, sugar, clinker, crude petroleum,

pharmaceuticals products, fertilizer, textile, raw cotton, capital machinery

etc. Under current account payments to and receipts from service account

are also recorded. Balance of service account is difference between

payments to receipts from service related field which includes

transportation, communication service, construction service, financial

service, computer and information service etc. Balance of income account

is also recorded under current account which includes compensation of

employees, direct investment and portfolio investment. Under capital

account amount of capital transfer, amount of direct investment and

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amount of portfolio investment are recorded. Reserve assets are mentioned

under the capital and financial account.

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3.3 ANALYSIS & FINDINGS

Interpretation: It is found that trade balance throughout year 2008, 2009 &

2010 is negative. It indicates that we are always in trade deficit with the

rest of the world. In 2008-09 the value of this trade deficit was $5330

million which reduced in 2009-10 but again goes up in 2010-2011 by

48.76%. This is because of we have reduced in our export on the other

hand we have increased in our import as a result trade deficit goes us with

a big percentage.

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Interpretation: It is found that export throughout the year 2008, 2009

&2010 is in increasing trend. But the rate of increasing is not very high.

From 2008 to 2009 the rate of increasing was 2.68% where from 2009 to

2010 the rate of increasing was 41.84%. on the other hand import was also

increasing throughout the year 2008-2010. And the rate of increase in

import was at a very high rate. From 2008 to 2009 the rate negative ( it

was -0.39%) but from 2009 to 2010 it raises with a bang. The increasing

arte of import from 2009 to 2010 was 42.82% which caused negative trade

balance in 2010-11 fiscal year.

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Interpretation: Service balance is also found in negative trend from year

2008 to 2010 in 2008-09 fiscal year it was negative $1525 million dollar

which raises to $2229 million in 2010-11 fiscal year. 46.16% increased in

service deficit.

Interpretation: We have found that from 2008 to 2009 payment decreases

by 2.6% but from 2009 to 2010 payment increases by 36.13% . On the

other hand receipt decreases in 2009 from 2008 with 7.56% but it increases

from 2009 to 2010 by 31.52% which causes negative balance in service

sector in 2010-11 fiscal year.

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Interpretation: Income balance throughout the year 2008-2010 is negative

for Bangladesh. This negative balance increases from 2008 to 2009 by

27.56% where from 2009 to 2010 it decreases by 4.96% but still we have

negative balance in income sector.

Interpretation: Throughout the year 2008 2010 payments raises with a

low rate but and receipts falls from 2008 to 2009 but again raises in 2010

from $50 million to $110. But still we have negative balance in income in

2010-11 fiscal year which is $1205 million. This is because the percentage

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raises in income receipt is lower than the percentage increases in

payments.

Interpretation: Current transfer balance for Bangladesh is positive

throughout the year 2008-2010. And this positive trend is in increasing

percentage. From 2008 to 2009 percentage increase in current transfer was

24.95% but this increasing percentage fall in 2010 to 4.31%. though current

transfer increases from 2009 to 2010 but the rate on increase was very low

which is not a good sign for Bangladesh and it must have a negative impact

on BOP of Bangladesh.

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Interpretation: We have found that the current transfer was positive

throughout the year 2008 to 2010 and this is because of increase in foreign

remittance. From 2008 to 2009 foreign remittance increased by 27.54% but

from 2009 to 2010 the percentage increase was very low which was 5.11%.

as a result we did not get much higher positive balance in current transfer.

Interpretation: Though we have positive current account balance

throughout the year 2008-2010 but this has a ups and downs in this three

year. From 2008 to 2009 current account balance increased by 322.50%

but from 2009 to 2010 it falls by 79.46%. This is because of sudden world

economic crisis and fall in foreign remittance.

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Interpretation: We have found that we have negative in trade balance,

negative in income balance, negative in service balance but we have

positive in current account throughout the year 2008-2010. This is because

of all of ours negative is backed by our bigger positive current transfer of

which worker remittance play a vital role in this sector. But there is a

matter of concern that this current transfer falls in 2010 with a bigger

percentage and if this falling continues then we may fall in negative current

account balance in future.

Interpretation: Throughout the year 2008-2010 we have positive balance in

capital transfer but in this element there is not much growth. From 2008 to

2009 capital transfer falls by 90.72% but from 2009 to 2010 it raises by

39.40%. We have positive balance but we should take care in this area so

that we will get positive BOP.

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Interpretation: We have negative financial account balance throughout the

year 2008 2010 and the percentage of this is higher day by day. From

2008 to 2009 financial account increased by 59.23% but from 2009 to

2010 it falls by 283.97%. This is not a good sign for balance of payment of

Bangladesh.

Interpretation: We have found positive balance of payment in 2008-09 &

2009-10 fiscal year but in 2010-11 fiscal year we have found a negative

trade balance of $747 million which is really not a good sign for

Bangladesh. We are losing our foreign reserve due to this negative balance.

Due to world economic crisis and fall in foreign remittance & increase in

import causes this negative BOP for Bangladesh.

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Interpretation: In 2008-2009 fiscal year we have increased our foreign

reserve and from 2008 to 2009 fiscal year this increase was 703.92%

higher but in 2010 fiscal year it falls with a higher percentage and causes to

reduce in foreign reserve by $747 million. This is not a good indication for

our countrys economy. Our government and we also should take necessary

steps in this situation.

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BOP Analysis Raw

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