1 BALANCE OF PAYMENT PREPARED BY: PN AZIZAH ISA UiTM KELANTAN UiTM KELANTAN

2 Balance of Payment (BOP) is a bookkeeping that records all international transactions between our country and other foreign countries in a specific time period, usually in a year. is a bookkeeping that records all international transactions between our country and other foreign countries in a specific time period, usually in a year. is a summation of all inflow and outflow expenditures made by all individuals, firms and government in a country. is a summation of all inflow and outflow expenditures made by all individuals, firms and government in a country. is a record of all the monetary transactions between a country’s residents and the rest of the world during a period of time. is a record of all the monetary transactions between a country’s residents and the rest of the world during a period of time.

3 A favourable BOP BOP account should have a balance spending between the inflow and outflow in the net balance. BOP account should have a balance spending between the inflow and outflow in the net balance. But of course, is impossible to reach a ZERO BALANCE, but at least a small difference between the inflow and outflow. But of course, is impossible to reach a ZERO BALANCE, but at least a small difference between the inflow and outflow. if inflow > outflow SURPLUS if inflow > outflow SURPLUS (favourable BOP) (favourable BOP) if inflow < outflow DEFICIT if inflow < outflow DEFICIT (unfavourable BOP) (unfavourable BOP)

4 Malaysian BOP Structure BOP structure can be divided into 3 parts: BOP structure can be divided into 3 parts: i)Current Account ii) Capital and Financial Account iii) Error and Omission iii) Error and Omission Official Statement Account / Reserves - is to show the net monetary movement. - is to show the net monetary movement. 2 main account

5 CREDIT (CR.) components of BOP inflow (receipts) of money - is represented by a positive (+ve) sign. Some of the items involve are: i) exports of goods and services ii) foreign investment in the country iii) deposits by non-residents in the country iv) various loans made to the country. v) paying back loans made by non-residents to country’s bank (take this note)

6 DEBIT (DR.) components of BOP outflow (payment) of money - is represented by a minus (-ve) sign. outflow (payment) of money - is represented by a minus (-ve) sign. Some of the items involve are: i) imports of goods and services ii) county’s investment abroad. iii) deposit of money abroad by the country’s residents. iv) various loans to non-residents made by the country’s bank. v) paying bank loans made by the country’s residents to foreign bank. (take this note)

7 1. CURRENT ACCOUNT It records all payments and receipts for goods and services and any transfers of money to and from abroad. It is normally divided into three parts: i. i. Goods account (Trade Balance) ii. ii. Service account iii. iii. Income iv. iv. Net transfers (Current Transfers/ Unilateral Transfers)

8 i) Trade Balance Also known as: Merchandise Balance or Goods Balance or Visible Account. Also known as: Merchandise Balance or Goods Balance or Visible Account. It comprises imports and exports of physical goods (tangible commodities): It comprises imports and exports of physical goods (tangible commodities):   Examples of physical exports are: palm oil, rubber and petroleum.   and examples of physical imports are: machineries, computers and construction materials such as cement. 2 condition: Deficit of Trade Balance Surplus of Trade balance.

9 ii) Service Balance Also known as: Invisible Trade Account. Also known as: Invisible Trade Account. It measures the value of services exported minus the value of services imported. It measures the value of services exported minus the value of services imported. Positive value implies that receipts from abroad for that particular item exceeds its payment made. Positive value implies that receipts from abroad for that particular item exceeds its payment made. Negative value implies that payment made to abroad for that particular item exceeds its receipts Negative value implies that payment made to abroad for that particular item exceeds its receipts

10 Service Balance: There are six (6) items in this account: freight and insurance freight and insurance - It includes all charges for transporting goods Other transportation Other transportation - - It includes services such as those provided to foreign ships and receipts by national airline travel (tourism) and education travel (tourism) and education - - It includes spending expenditure by foreign tourists (a credit item) and spending expenditure by Malaysian tourists abroad (a debit item).

11 Government transactions Government transactions - It includes expenditures incurred by foreign embassies in Malaysia (a credit item) and Malaysian embassies abroad (a debit item). Includes also transactions on military expenses. - It includes expenditures incurred by foreign embassies in Malaysia (a credit item) and Malaysian embassies abroad (a debit item). Includes also transactions on military expenses. Other services Other services - It includes consultancy and professional charges receives from or paid abroad - It includes consultancy and professional charges receives from or paid abroad

12 By adding the value of Goods Account Balance and Service Account will give us the Balance of Goods and Services By adding the value of Goods Account Balance and Service Account will give us the Balance of Goods and Services = i) Goods Balance + ii) Service Balance on Goods and Services

13 iii) Income Compensation of employees Compensation of employees Investment income Investment income - includes profits and dividends from: direct investment, - includes profits and dividends from: direct investment, portfolio investment and portfolio investment and other investment other investment which is received from or paid abroad. which is received from or paid abroad.

14 iv) Current Transfers Net transfers are made by both public and private sectors. Net transfers are made by both public and private sectors. Some of the items considered are : Some of the items considered are : a.remittances of immigrants to relatives leaving abroad. b.foreign aid to and from government or charitable agencies abroad. c.personal pensions received from and paid abroad. d. d.gifts of money to and from overseas residents to Malaysian residents.

15 As a conclusion, Current Account: is derived by adding all the four components discussed; is derived by adding all the four components discussed; Goods A/C + Service A/C + Income + Net Transfers

16 2. CAPITAL and FINANCIAL ACCOUNT 2 items; 2 items; i) Capital Account: i) Capital Account: - capital transfers - capital transfers - non-produced and non-financial assets. - non-produced and non-financial assets. ii) Financial Account: ii) Financial Account: - Direct Investment (abroad or in Malaysia; such as foreign companies (FDI) setup new factories here.) - Direct Investment (abroad or in Malaysia; such as foreign companies (FDI) setup new factories here.) - Portfolio Investment ( the buying of shares and bonds.) - Portfolio Investment ( the buying of shares and bonds.) - Other Investment (Official Sector or Private sector) - Other Investment (Official Sector or Private sector)

17 iii) ERROR & OMISSION Statistical discrepancy that occurs due to late payment, wrong calculation, return payment and other information gathered which is mistaken in estimating figures and data. Statistical discrepancy that occurs due to late payment, wrong calculation, return payment and other information gathered which is mistaken in estimating figures and data. (take this note)

18 OVERALL BALANCE (Total currency flows of money.) (Total currency flows of money.) = CURRENT ACCOUNT = CURRENT ACCOUNT + CAPITAL & FINANCIAL A/C + CAPITAL & FINANCIAL A/C + ERRORS & OMISSIONS. + ERRORS & OMISSIONS. which give rise to a surplus or deficit of the Balance of Payment. which give rise to a surplus or deficit of the Balance of Payment.

19 BANK NEGARA RESERVE (international reserve) (official financing) If BOP is surplus (positive); is an increased in value. So an addition is stated as negative in the reserve account, showing that there is an inflow of foreign reserve. If BOP is surplus (positive); is an increased in value. So an addition is stated as negative in the reserve account, showing that there is an inflow of foreign reserve. If BOP is deficit (negative); is a reduction in value. So a decrease or drawings is stated as positive in the reserve account, showing that there is an outflow of foreign reserve. If BOP is deficit (negative); is a reduction in value. So a decrease or drawings is stated as positive in the reserve account, showing that there is an outflow of foreign reserve.

20 NET CHANGE IN BANK NEGARA INTERNATIONAL RESERVE This year’s reserve is added to the last year’s total net reserve. This year’s reserve is added to the last year’s total net reserve.

21 PERSISTENT DEFICIT IN THE BALANCE OF PAYMENT Deficit means a greater payment than receipt - due to a large outflow of money paid to other countries. Deficit means a greater payment than receipt - due to a large outflow of money paid to other countries. Persistent Deficit - for a country which experience a pro-longed deficit from year to years is discouraged and need to be solved. Persistent Deficit - for a country which experience a pro-longed deficit from year to years is discouraged and need to be solved.

22 Some of the Effects of BOP deficit are: 1.Reduces economic growth – once the economy cannot maintain a high exports compared to imports - reduces aggregate demand and will result to a less multiplier effect on the real output and GDP will falls.

23 Some of the Effects of BOP deficit are: 2.Reduces the competitiveness of domestic prices – once export is less compared to import, demand for RM is less compared to foreign currency forced RM to depreciated. Malaysian goods will look like more expensive compared to others in the global market. Malaysian goods will look like more expensive compared to others in the global market.

24 Some of the Effects of BOP deficit are: 3.Increases debtedness – larger volume of loans might have been taken to develop the economy. This will lead to deficit in the capital and financial market. Repayment of loans with the larger interest for longer period of repayment.

25 Some of the Effects of BOP deficit are: 4.Reduces reserves – larger exports increases demand for foreign reserve, thus Bank Negara Reserve account has to be debited.

26 Some of the Effects of BOP deficit are: 5.Depreciating the exchange rate – import is larger than export, thus less demand for RM will depreciate its value.

27 POLICIES TO REDUCE BOP DEFICIT: 1.Reducing the volume of imports and increase exports – by introducing the protectionist policy or encouraging the public to buy local goods.

28 POLICIES TO REDUCE BOP DEFICIT: 2.Expenditure switching policy – substituting imported goods to exported goods. Any policy to encourage consumers in buying domestic products such as a policy which can reduce the price of domestic goods and become more competitive, so that it could attract more buyers to it. - Also to promote investors to produce more goods for export and at the same time to reduce import. Subsidies and grant were given to help them, instead more tax exemption to support this exporting firms.

29 POLICIES TO REDUCE BOP DEFICIT: 3.Deflationary Policy – this is a policy to reduce aggregate demand. To make a fall in aggregate demand is aim at reducing consumers demand on imported goods and at the same time to make domestic prices lower and becomes more competitive in the global market, thus larger demand for Malaysian export.

30 POLICIES TO REDUCE BOP DEFICIT: 4.Devaluation/Depreciation of Ringgit – a government’s policy to depreciate the country’s currency lower than the par value (for countries with Pegged exchange rate regime.) While for those country’s using the Flexible exchange rate regime can forced the value to depreciate by the controls at the FOREX market, whereby reserves were used to change the market forces of demand and supply at the FOREX market. Thus, exports becomes cheaper in the eyes of foreigners (with the assumption that there’s no retaliation)

31 POLICIES TO REDUCE BOP DEFICIT: 5. A policy of budget surplus – reduces the government spending thus lowering the competition for loans. This will reduce interest rate and depreciating the value of Ringgit and thus affected the import volume.

32 POLICIES TO REDUCE BOP DEFICIT: 6.Contractionary monetary policy – to reduce money supply (liquidity in the hands of the public) and increases interest rate on loans to reduce investment facilities. Usually public will buy more imported goods when they are rich therefore by making a fall in their income there will be less imports.