IFM IBE Presentation

8/2/2019 IFM IBE Presentation

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BALANCEOF PAYMENTS

Presented By :

VikasRoll No. : 31


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BALANCEOF PAYMENTS ACCOUNTING

All transactions between the citizens of a nationand those of other nations are recorded in thebalance of payments for a given period of time.


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General use of BPaccounting is morerecent, but in 1381

Richard Aylesbury, anEnglishman, had notonly collected suchstatistics, but was

developing analysis asto why the accountsbehaved as the did.



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What kind of records shouldbe kept?

What do you want to findout?

The nature of the recordchanges by what we aretrying to find out.



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What kind of things dogovernments wish to know?

What is the international

demand for our currencydoing to its value?

Do we have enough currency

reserves, or capacity to payfor our trade?

Does our trade promote fullemployment? And so on.



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RECORDING INTERNATIONAL PAYMENTS

How is information recorded in balance ofpayments accounting?

The basic technique is standard, double-entry

accounting

a flow of funds statement that shows changes inassets, liabilities and net worth over time.


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RECORDING INTERNATIONAL PAYMENTS

Purpose:

The balance of payments statement is to informgovernment authorities of the international positionof the country to assist them with monetary-fiscalquestions as well as trade and payments policies.


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DEBITS, CREDITS, AND INTERNATIONALPAYMENTS

Debits: A debit records a transaction increasingassets or reducing liabilities.

A debit results from some kind of transactionrequiring an immediate out-payment.

A debit arises from the purchase of goods, claims,or reserve assets and represents an inflow of value.


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DEBITS, CREDITS, AND INTERNATIONALPAYMENTS

Credits: A credit records a transaction reducingassets or increasing liabilities.

It results from some kind of transaction requiring animmediate in-payment.

A credit arises from the sale of goods, claims, orreserve assets and represents an outflow of value.


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SOURCESAND USESOF FUNDS

The sources of funds, the supply of foreign exchange,are :

Exports

Investment income Transfer payments received

Long-term and short-term borrowing


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BALANCE OF PAYMENTS ACCOUNTS

These accounts are to summarize payments a countryreceives from other nations and payments it must make toother nations.

They consist of the following five categories:

1. MERCHANDISE OR TRADE BALANCE:

(Exports minus imports )


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2. GOODS AND SERVICES BALANCE:

(Just add services)

3. NET UNILATERAL TRANSFERS(Gifts)

Government transfers to foreigners

(E.g., Foreign aid or wheat from stockpiles)

Private remittances of wages earned abroad, and Lots of other transfers.


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4. NET CHANGES IN FOREIGN HOLDINGS OFASSETS

Flows of financial assets and similar claims,or

Foreign direct and other investments orPrivate capital flows.

5. NET OFFICIAL INTERNATIONAL RESERVETRANSACTION


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BALANCEOF PAYMENTS ACCOUNTS

The balance of payments accounts are those thatrecord all transactions between the residents of acountry and residents of all foreign nations.

They are composed of the following: The Current Account

The Capital Account

The Official Reserves Account Statistical Discrepancy


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THE CURRENT ACCOUNT

Includes all imports and exports of goods andservices.

Includes unilateral transfers of foreign aid.

If the debits exceed the credits, then a country isrunning a trade deficit.

If the credits exceed the debits, then a country isrunning a trade surplus.


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THE CAPITAL ACCOUNT

The capital account measures the differencebetween a country sales of assets to foreignersand its purchases of foreign assets.

The U.S. enjoys about a $444,000,000,000capital account surplusabsent of U.S.borrowing from foreigners, this finances ourtrade deficit.

The capital account is composed of ForeignDirect Investment (FDI), portfolio investmentsand other investments.


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STATISTICAL DISCREPANCY

Theres going to be some omissions andmisrecorded transactionsso we use a plugfigure to get things to balance.

Exhibit 3.1 shows a discrepancy of $0.73 billion in2000.


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THE OFFICIAL RESERVES ACCOUNT

Official reserves assets include gold, foreigncurrencies, SDRs, reserve positions in the IMF.


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To here, we are looking at theCURRENT ACCOUNT BALANCE

(Net flows of goods, services and gifts).

Again:1. MERCHANDISE OR TRADE BALANCE:

2. GOODS AND SERVICES* BALANCE:3. NET UNILATERAL TRANSFERS


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BALANCEOF PAYMENTS

There is also a set of asset flows referred to as theCAPITAL ACCOUNT BALANCE

4. NET CHANGES IN FOREIGN HOLDINGS OF ASSETS

Flows of financial assets and similar claims,or

Foreign direct and other investments orPrivate capital flows.

(Note that we are talking direct and portfolio investmentshere).


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BALANCEOF PAYMENTS

5. NET OFFICIAL INTERNATIONAL RESERVETRANSACTION

Foreign official holdings of assets, holdings of officialreserve (gold and foreign exchange) assets or, Officialasset flows.


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THE BALANCEOF PAYMENTS IDENTITY

BCA + BKA + BRA = 0

where

BCA = balance on current account

BKA = balance on capital account

BRA = balance on the reserves account

Under a pure flexible exchange rate regime,

BCA + BKA = 0


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BALANCEOF PAYMENTS

THE BALANCE OFPAYMENTS IS, THEREFORE,THE SUM OF THE CURRENTAND CAPITAL ACCOUNTBALANCES.


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SERVICESINTHE BALANCEOF PAYMENTS

Note:*Services include travel andtourism, trade transportation,insurance, education, financial,

technical, telecommunicationsand other business andprofessional services.

In addition there are royalties,payments for capital servicesbesides interest, such asdividends, payments for foreignlabor, etc.


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OVERALL SURPLUSESAND DEFICITS

Balance of payments surplus

A surplus is when the sum of the current accountplus the private capital account is counterbalancedby an accumulation of official net assets, so officialreserve assets increase.


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OVERALL SURPLUSESAND DEFICITS

Overall balance of payments deficits:

It is in deficit , the sum is counterbalanced by anaccumulation of official net liabilities, so the countrysees its official reserve assets decline.


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INDIASBALANCEOF PAYMENTCRISIS

Presented By :

Ankaj MohindrooRoll No. : 04


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Topics of Discussion

Indias BOP till the Early Nineties

Structure

Drivers

The BOP Crisis of 1991-92

TriggersResponse

Current BOP Trends

Structural shifts

Drivers

Straight line projectionsSWOT Analysis


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Indias BOP till the Early Nineties: Structure

Current Account

Physical Trade Deficit

exceeding 3.5% of GDP

Slightly positive, butnegligible, balance of less

than .5% of GDP in

Invisible Trade

Current Account deficit in

excess of 3% of GDP

Capital Account

Foreign Aid and external

commercial borrowings used

to balance current account

deficit

Negligible non-debt Flows

Relatively large (10%) short-

term and concessional

(multilateral) debt.

Substantial rupee trade withSoviet bloc reduced hard

currency financing

requirements.

No build up of FC reserves


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Indias BOP till the Early Nineties: Drivers

Current Account

POL imports accounted

for one fourth of imports.

Substantial Defense

imports, captured in

central bank flow data,

but not in DGCIS data

Over-valued (fixed)exchange rate made for

implicit anti-export bias.

Capital flight through

trading channels?

Capital Account

Fiscal deficit spilt over into

external sector

Liberal ECB policy in the

eighties leads to sharp

increase in commercial

and short term component

of debt.

External debt/ GDP ratio

rises to over 35%, the

lagged impact of persistent

CAD.


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The BOP Crisis of 1991-92 : Triggers

Growing fiscal deficits spilling over into external sector.

Deteriorating external balances: rapid build up of debt, especially

commercial and short-term.

The Gulf war and Oil Price Shock

Very low FC reserves (poor liquidity) to absorb external shock.

Liquidity not solvency crisis.

Credit rating degradation and loss of international

confidence: Inability to roll-over short-term debt and loss of market

access. (only Aid and export credits accessible).

Flight of NRI investments.

Real threat of default on external debt repayments.


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GOVERNMENT DEFICIT


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Current Account balances


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FOREX RESERVES


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EXTERNAL DEBT


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EXPECTED

DEVALUATION

PAYMENTSOF IMPORTS

ANDEXPORTS

WITHDRAWLBY

FOREIGNERS

FURTHERDROP IN

RESERVES

EXPECTATIONOF DEFAULT

Th BOP C i i f 1991 92 R


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The BOP Crisis of 1991-92 : Response

BOP management the biggest success story of the Indian economic

reform process.

Scraping the barrel: pawning of gold reserves.

Conscious decision to avoid default on external debt payments.

IMF structural adjustment loan with attendant conditionalities.

Tight control on sovereign guarantees.

Major economic restructuring and opening up

Float of the rupee and sharp depreciation.

Industrial delicensing

Fiscal adjustment

Tight caps on external commercial borrowing and short-term debt.

Mobilizing non-debt creating capital account flows: opening up the

foreign investment regime

C t BOP T d St t l Shift


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8

Current BOP Trends: Structural Shifts

Current Account

POL imports still account for one

fourth of imports.

Physical trade shifts away from

East Europe towards US, Asia

and OPEC.

Market-determined exchange rate

removed anti-export bias. Impact

felt mostly in services exports,

notably IT.

Technology exports and NRI

remittances have made the

current account surplus

Relatively high tariffs, weakinfrastructure, inflexible labour

policies and other factors continue

to constrain physical export

performance. Physical trade

deficit as percentage of GDP no

better than early nineties.

Capital Account

Negative Aid and debt flows in

the decade following 1991-92.

External debt/GDP ratio down

to 20%. Fiscal deficits do not

spill over into external sector.

Short-term debt less than 5%

of total debt.

Elimination of rupee trade with

East Europe.

Sharp increase in FE reservesto about US $ 70 billion

because of equity flows:

adequate to cover one years

imports plus outstanding stock

of portfolio investment.

Current BOP Trends: Drivers


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Current BOP Trends: Drivers

FC reserves accumulating @ over 1 billion every month.

Good liquidity to cushion oil price shock impact of possible

middleeastern war.

Current account increasingly driven by invisible trade. From less

than 15% of the Current Account, it now accounts for over 35%,

and is rising sharply. Robust technology and service exports, and

NRI remittances the main drivers. Services also the major driver of increase in GDP growth rates

over the last decade.

Invisible flows appreciating the rupee: Negative fall-out on

physical exports: a Dutch Disease variant?

Capital Account driven by non-debt creating flows.Indias credit rating continues to be sub-investment grade despite

robust BOP because of Rating Agency fears that uncontrolled

budget deficits might spill over into external sector.

Importance of US economy: single largest trading partner and

foreign investor, and absorbs about 2/3 of IT exports.


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Current BOP Trends: SWOT Analysis

Strengths

Invisible Exports on currentaccountEquity flows on capital accountAdequate Liquidity to defendcurrencySelf-adjusting Market determined

exchange rateLow NPV of long-term debt andnegligible short-term debt.

Opportunities

Capital account convertibilityPre-payment of costly debt

Supplement domestic savings toboost growth ratesBoost infrastructural investmentsUpward revision of credit rating

Weaknesses

Dependence on POL importsPhysical exports

Increase in public debt tosterilize increased moneysupply

Ability of domestic

investmentto absorb large FC inflows.

Threats

Instability in Middle East

Volatility induced by

portfolioflows

Rupee appreciation

Fiscal deficit


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BALANCE OF PAYMENTOF INDIA

Presented By :

Vivek SaratkarRoll No. : 34


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HIGHLIGHTSOF BOP DEVELOPMENTSDURING2010-11 (EXPORTAND IMPORTS)

Higher exports, imports, invisibles, trade, CAD andcapital flows in absolute terms as compared to fiscal2009-10.

Both exports and imports showed substantial growth of

37.3 per cent and 26.8 per cent respectively in 2010-11over the previous year.

In the first half of financial year 2011-12, exports andimport growth was 40.6 percent and 34.3 percent

respectively. The trade deficit increased by 10.5 per cent in 2010-11

over 2009-10. In the first half of fy 2011-12 the deficitincreased by 24.51 percent.


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319558

423791

497521 483086

631529

190670 257629

308520 300644

381061

128888166162

189001 182442

250468

FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY 10-11

Balance of Payment (Merchandise)

Total Imports Exports


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HIGHLIGHTSOF BOP DEVELOPMENTSDURING2010-11 CONT.

The CAD (Current Account Deficit) widened to US$ 45.9billion in 2010-11 from US$ 38.2 billion in 2009-10.

Net capital flows at US$ 62.0 billion in 2010-11 were higherby 20.1 per cent as against US$ 51.6 billion in 2009-10.

Mainly due to higher inflows under ECBs, externalassistance, short-term trade credit, NRI deposits, and bankcapital.

During the first half of 2011-12, CAD in absolute terms washigher than in the corresponding period of the previousyear, mainly due to higher trade deficit.


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CURRENT ACCOUNT

During 2010-11, exports crossed the US$ 200 billion

mark for the first time, increasing by 37.3 per cent fromUS$ 182.4 billion in 2009-10 to US$ 250.5 billion.

This increase was largely driven by engineering goods,petroleum products, gems and jewellery, and chemicalsand related products.

There was also a diversification of export destinationswith developing countries becoming our largest export

market in recent years.


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Like exports, imports also recorded a 26.8 per centincrease to US$ 381.1 billion in 2010-11 from US$ 300.6billion in 2009-10.

Growth in imports has primarily been led by petroleumand related products and pearls and semi-preciousstones.

Oil imports showed an increase of 19.3 per cent in2010-11and accounted for 28.1 per cent of total imports.

The trade deficit increased by 10.5 per cent to US$130.6 billion as compared to US$ 118.2 billion in 2009-10.


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During H1 of 2011-12, exports register a growth of 40.6per cent mainly driven by the buoyancy in items such asengineering goods and petroleum products.

Which resulted from a supportive government policy,focusing on diversification in terms of higher value-added products in the engineering and petroleum

sectors and destinations across developing economies.

Imports recorded an increase of 34.3 per cent during H1of 2011-12 mainly due to rising crude oil prices, alongwith increase in gold and silver prices.

The Trade Deficit widened by 24.5 percent during H1 of2011-12


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INVISIBLES

52217

75731

91604

80022

84647

FY 06-07

FY 07-08

FY 08-09

FY 09-10

FY 10-11

Invisibles

The invisibles reflects theeffect of transactions relatingto international trade inservices, income, labour andproperty, and cross bordertransfers.

The exports of servicesincreased by 38.4 percent in2010-11.

Business services increasedby 113.3 % and financial

services increased by 75.7 %.

Software receipt accounted for41.8 percent of total servicereceipt.


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CAPITALACCOUNT

Capital inflows increased by 20.2 per cent to US$ 62.0billion in 2010-11 vis-a-vis US$ 51.6 billion in 2009-10mainly.

Foreign investment comprising FDI and portfolioinvestment on net basis decreased by 21.4 per cent

from US$ 50.4 billion in 2009-10 to US$ 39.7 billion in2010-11.

Inward FDI showed a declining trend while outward FDIshowed an increasing trend. Inward FDI declined fromUS$ 33.1 billion in 2009-10 to US$ 25.9 billion in 2010-

11. Investment routed through Mauritius remained the

largest component of FDI inflows to India in 2010-11followed by Singapore and the Netherlands.


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As per the latest available information on capital

inflows, FDI inflows were US$ 35.3 billion duringApril-December 2011 (US$ 16.0 billion in thecorresponding period of the preceding year).

Portfolio inflows fell sharply to US$ 3.3 billion duringApril-December 2011 from US$ 31.3 billion a yearearlier mainly reflecting uncertainty and risk in theglobal economy on account of the euro zone crisis.


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FOREIGN EXCHANGE RESERVES

Indias foreign exchange reserves comprise of

foreign currency assets (FCA)

Gold

Special drawing rights (SDRs)

Reserve tranche position (RTP) in the IMF

0

100

200

300

400

1991 1995 2000 2004 2007 2008 2009 2010 2011


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FER shown an increasing trend and reached US$ 304.8billion at end March 2011, up by US$ 25.7 billion fromthe US$ 279.1 billion level at end March 2010.

US$ 12.6 billion was on account of valuation gainsarising out of depreciation of the US dollar against majorcurrencies and the balance US$ 13.1 billion was on BoPbasis.

The reserves increased by US$ 6.7 billion from US$304.8 billion at end March 2011 to US$ 311.5 billion atend September 2011.

Out of this total increase, US$ 5.7 billion was on BoPbasis and the balance US$ 1.0 billion was on account ofvaluation effect


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