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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.
BALANCEOF PAYMENTS ACCOUNTING
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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.
BALANCEOF PAYMENTS ACCOUNTING
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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.
BALANCEOF PAYMENTS ACCOUNTING
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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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BALANCE OF PAYMENTS ACCOUNTS
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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BALANCE OF PAYMENTS ACCOUNTS
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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BALANCE OF PAYMENTS ACCOUNTS
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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