Finance Bop

8/3/2019 Finance Bop

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BALANCE OF PAYMENTS

It is s a macro level statement showing inflow and outflow of foreign

exchange

The system of recording is based on the concept of double entry book

keeping- where the credit side shows the receipt of foreign exchange from

abroad and debit side shows the payments in foreign exchange to foreignresidents.

Receipts and payments are compartmentalized into 2 heads

Current account

Capital account

Basic distinction between the two is that former represents transfer of

real income and latter accounts only for transfer of funds without effecting

a shift in real income.


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CURRENT ACCOUNT

It is the part of BOP showing the flow ofreal income or foreign

exchange transactions on account of trade of goods and invisibles.

The current account records the receipts and payments of foreign

exchange in the following ways. They are

Current account receipts

1. Export of goods

2. Invisibles

a) Servicesb) Unilateral transfers

c) Investment income

3. Non-monetary movement of gold

Current account payments

1. Import of goods2. Invisibles

a) Services

b) Unilateral transfers

c) Investment income

3. Non-monetary movement of gold


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Export of goods effects the Inflow of foreign exchange into the country,

while import of goods causes outflow of foreign exchange from the country.

The difference between the two is known as the Balance Of Trade.

If export exceeds import ,balance of trade is surplus.

If import exceeds export ,balance of trade is deficit.

Trade in services, the unilateral transfers and the investment income form

the invisibles.

Trade in services includes receipts and payments on account of travel

and tourism, financial charges concerning banking, insurance,

transportation and so on.

Unilateral transfers include pension, remittances, gifts and other

transfer for which no specific services are rendered. They are called

unilateral transfers because they represent the flow of funds only in onedirection. They are unlike export and import, where goods flow in one

direction and the payment flows in the other.

Investment income include interest, dividend and other such

payments and receipts.


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Non monetary movement of gold

There are 2 types of sale and purchase of gold.

1. One is termed as monetary sale and purchase that influence

the international monetary reserves.

2. The other is non monetary sale and purchase of gold

this is for industrial purposes and is shown in the currentaccount, either separately from or along with trade in

merchandise.

The debit and credit sides of two accounts- trade in merchandise and

invisiblesare balanced.

o If credit side>debit side current account surplus

o If debit side> credit side current account deficit


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CAPITAL ACCOUNT

It is the part of bop statement showing flow of foreignloans/investments and banking funds

Capital account transactions takes place in the following ways:

Capital account receipts

1. Long term inflow of funds

2. Short term inflow of funds

Capital account payments

1. Long term outflow of funds

2. Short term outflow of funds


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BALANCE OF PAYMENTS

Balance of Trade= Export of GoodsImport of Goods

Balance of Current Account= Balance Of Trade + Net Earnings on

Invisibles

Balance of Capital Account = Foreign Exchange InflowForeign

Exchange outflow, on account of foreign investment, foreign loans, banking

transactions, and other capital flows

Overall Balance of Payments = Balance of Current Account + Balance ofCapital Account + Statistical Discrepancy


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The capital account balancing is not complete with the basic balance

The debit side and credit side of short term capital transactions are

added to respective sides.

Difference between these sides is known as Capital Account Balance

Errors and omissions is an important item on the BOP statement and

taken into account for arriving at the overall balance.Also known as statistical discrepancy


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Statistical Discrepancy refers to estimate of foreign exchange flow on

account of either variations in the collection of related figures or unrecorded

illegal transaction of foreign exchange.

It arises on different accounts

It arises because of the difficulties involved in collecting BOP Data.

There are different sources of data, which sometimes differ in their

approach.

For example: In India, trade figures compiled by RBI and the DGCIS(Directorgeneral of commercial intelligence and statistics) differ.

The movement of funds may lead or lag the transactions that they are

supposed to be finance.

For example: goods are shipped in March but payments are received in April.

Certain figures are derived on estimates

For example: figures of earning on travel and tourism are estimated on basis of

sample Cases. If sample is defective, errors are sure.

Unrecorded illegal transactions either on debit side or credit side or both


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After the statistical discrepancy is located,the overall balance is arrivedat.

Overall balance represents the balancing between the credit items andthe debit items appearing on the current account, capital account, and thestatistical discrepancy.

If the overall balance of payments is in surplus, the surplus amount is

used for repaying the borrowings from the IMF and then the rest istransferred to the official reserves account.

On the contrary, when the overall balance is found deficit, the monetaryauthorities arrange for capital flows to cover up the deficit.

Such inflows may take the form of drawing down of foreign exchangereserves or official borrowings or purchases from the IMF.


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From this point of view, capital flows are bifurcated into autonomousand accommodating ones.

Accommodating or compensatory capital flow is the inflow of foreignexchange to meet the balance of payments deficit, normally from theIMF . On other words, it aim at putting the balance of payments inequilibrium.

Autonomous capital flow refers to flow of loans/investment in normalcourse of a business.


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Official reserves account

Official reserves are held by the monetary authorities of a country.They comprise monetary gold, SDR allocations by the IMF, and foreign

currency assets.

Foreign currency assets are normally held in form of balances with foreign

central banks and investment in foreign government securities.

If the overall BOP is in surplus,it adds to the official reserves account.

If overall BOP is in deficit, and if accommodating capital is not available,

the official reserves account is debited by the amount of deficit.

Documents

Finance Bop