Balance Of Payments

1The balance of payments is one of the major indicators of a country's status in international trade.

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 foreign residents.

BALANCE OF PAYMENTSBalance of Payments (BoP), being a record of the monetary transactions over a period with the rest of the world, reflects all payments and liabilities to foreigners and all payments and obligations received from foreigners. In this sense, 2Receipts and payments are compartmentalized into 2 headsCurrent 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.It is the part of BOP showing the flow of real 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. CURRENT ACCOUNT4Current account receiptsExport of goodsInvisiblesServicesUnilateral transfersInvestment incomeNon-monetary movement of gold

Current account paymentsImport of goodsInvisiblesServicesUnilateral transfersInvestment incomeNon-monetary movement of goldExport 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 one direction. 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. Non monetary movement of gold

There are 2 types of sale and purchase of gold.One is termed as monetary sale and purchase that influence the international monetary reserves.The other is non monetary sale and purchase of goldthis is for industrial purposes and is shown in the current account, either separately from or along with trade in merchandise.

The debit and credit sides of two accounts- trade in merchandise and invisibles are balanced.If credit side>debit side current account surplusIf debit side> credit side current account deficit

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

Capital account transactions takes place in the following ways:

Capital account receiptsLong term inflow of fundsShort term inflow of funds

Capital account paymentsLong term outflow of fundsShort term outflow of funds

CAPITAL ACCOUNTThe flow of capital account is long term as well as short term.Long term flows involves maturity over one yearShort term flows are effected for one year or less.

The credit side records The official and private borrowing from abroad net of repaymentsDirect and portfolio investment Short term investments into the country The bank balances of non residents held in the country.

The debit side includes disinvestment of capitalcountrys investment abroadloans given to the foreign government or a foreign party the bank balances held abroad.

The difference between credit side of the current account along with the credit side of long term capital account transactions is compared with the transactions on the debit side of current account and the long term account is known as the basic balance, which may be negative or positive.

As per the practice adopted by the RBI, basic balance is not shown in the BOP statement.

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 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

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 accountsIt arises because of the difficulties involved in collecting BOP Data. There are different sources of data, which sometimes differ in their approach..

The movement of funds may lead or lag the transactions that they are supposed to be finance.

Certain figures are derived on estimates

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

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(Director general 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 estimatesFor 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

13After the statistical discrepancy is located,the overall balance is arrived at.

Overall balance represents the balancing between the credit items and the debit items appearing on the current account, capital account, and the statistical 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 is transferred to the official reserves account.

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

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

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

Accommodating or compensatory capital flow is the inflow of foreign exchange to meet the balance of payments deficit, normally from the IMF . On other words, it aim at putting the balance of payments in equilibrium.

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

OFFICIAL RESERVES ACCOUNTIf 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.

Balance of Trade= Export of Goods Import of Goods

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

Balance of Capital Account = Foreign Exchange Inflow Foreign Exchange outflow, on account of foreign investment, foreign loans, banking transactions, and other capital flows

Overall Balance of Payments = Balance of Current Account + Balance of Capital Account + Statistical DiscrepancyBALANCE OF PAYMENTSDevelopments in Indias BoP during October-December 2013India returned to a surplus of $19.1 billion for October-December, much higher than a nearly $800 million surplus a year agoThe current account deficit for the quarter narrowed to $4.2 billion, or 0.9 percent of gross domestic product (GDP), from $31.9 billion a year ago, or 6.5 percent.Gold imports slumped to $3.1 billion in the December quarter, compared to $17.8 billion last year, improving the balance of paymentsForeigninstitutional investorshave bought a net $484.2 million in Indian shares so far this year, after buying a net $20 billion last year.The gold import curbs also helped narrow India'strade deficitin the October-December period to $33.2 billion compared with $58.4 billion a year ago.India'sbalance of paymentsswung back into surplus during the October-December quarter, helped by government curbs in gold imports, after two quarters in deficit.Less than a year ago thecurrent account deficithad surged to a record high, eroding foreign investors' confidence and the value of the rupee. The latest data could help to improve the image of the governing Congress party in polls next month.India returned to a surplus of $19.1 billion for October-December, much higher than a nearly $800 million surplus a year ago, Reserve Bank of India figures showed on Wednesday.The current account deficit for the quarter narrowed to $4.2 billion, or 0.9 percent of gross domestic product (GDP), from $31.9 billion a year ago, or 6.5 percent.The government raised duties on gold imports to as high as 10 percent last year to defend the rupee which was hitting record lows.General elections are set to kick off on April 7. Polls have shown Congress losing support because of concerns about its economic management and corruption scandals."Going forward, our projection is we will get about 2 percent current account (deficit) as a percentage of GDP (for thefiscal yearending March 2015), but it is still early days because it is very contingent now on the outcome of the election and the policies that are followed after that," said Saugata Bhattarcharya,chief economistat Axis Bank.Gold imports slumped to $3.1 billion in the December quarter, compared to $17.8 billion last year, improving the balance of payments.The current account deficit hit a record high of 4.8 percent of GDP in the year ended in March 2013. Since then,foreign investorshave returned, allowing the rupee to rebound 11.5 percent from a record low of 68.85 in late August.Foreigninstitutional investorshave bought a net $484.2 million in Indian shares so far this year, after buying a net $20 billion last year.However import curbs on gold have proved unpopular in a country where the metal is sought after a hedge against inflation and as a traditional gift.That is raising expectations the government, mindful of its electoral standing and the rise in gold smuggling, could look to ease some of the import curbs. Finance Minister P. Chidambaram said on Wednesday the decision will be taken after the full fiscal year 2013/14 current account deficit number becomes clear."I don't expect any risks to emerge on the current account deficit ... because even if the (gold) curbs are eased this will likely be done very gradually to ensure the current account is not hit," said Siddhartha Sanyal India, an economist at Barclays.The gold import curbs also helped narrow India'strade deficitin the October-December period to $33.2 billion compared with $58.4 billion a year ago.While the capital and financial account surplus fell sharply to $4.8 billion versus $30.8 billion a year ago, economists expect foreign investors to remain strong buyers.(Editing by Rafael Nam/Ruth Pitchford)

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Indias BOP

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