1. BBA(Hons.), MBA(Finance), London
Topic # 04
The Balance Of
Payments
The International
Financial
Environment
Zulfiqar Hasan
BBA(Hons.), MBA(Finance), London
Associate Professor

2. Contents
Measure Nation’s levels of international economic activity, and how it is measured by the balance of payments; Examine the economic relationships underlying the two basic sub-components of the balance of payments – the Current and Capital Accounts; Identify the financial dimensions of international economic activity, and how they differ between merchandise & services trade; Identify balance of payment activities by nations in pursuit of domestic and global economic and political policies; Evaluate the history of capital mobility, and conditions that lead to capital flight in times of crisis
ZULFIQAR HASAN

3. What is Balance of Payments?---->
The Balance of payments is the summary statement of all international transactions between one country and all other countries ---- Eiteman
A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world.
The measurement of all international economic transactions between the residents of a country and foreign residents is called the Balance of Payments (BOP)
An accounting record of all transaction made by a country over a certain time period, comparing the amount of foreign currency taken in to the amount of domestic currency paid out.
when we say “a country’s balance of payments” we are referring to the transactions of its citizens and government.
ZULFIQAR HASAN

4. Elements of Balance of Payments Transactions
These transactions include payments for the country's
Exports of goods & services
imports of goods & services
financial capital
financial transfer.
The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned.
Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items.
Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
ZULFIQAR HASAN

5. Importance of The Balance of Payments
Monetary and fiscal policy must take the BOP into account at the national level
Businesses need BOP data to anticipate changes in host country’s economic policies driven by BOP events
Above of these, BOP data may be important for the following reasons
BOP is important indicator of pressure on a country’s exchange rate, thus potential to either gain or lose if firm is trading with that country or currency
Changes in a country’s BOP may signal imposition (or removal) of controls over payments, dividends, interest, etc
BOP helps to forecast a country’s market potential, especially in the short run
ZULFIQAR HASAN

6. Examples of BOP Transactions
An American tourist purchases a T-Shirt in Bangladesh.
A Bangladeshi Tourist purchase a canned coke from Heathrow Airport, London, UK
Nitol Motors, Dhaka, Bangladesh is the distributor of cars manufactured in Japan by its parent, Honda of Japan
BATBC’s subsidiary in Bangladesh pays profits (dividends) back to parent firm in London
A Mexican lawyer purchases a US corporate bond through an investment broker in Cleveland
ZULFIQAR HASAN

7. Balance of Payments Accounts
The balance of payments accounts are those that record all transactions between the residents of a country and residents of all foreign nations.
They are composed of the following:
The Current Account
The Capital Account
Financial Account
The Official Reserves Account
Statistical Discrepancy/ Net Errors and Omissions
Next slide
ZULFIQAR HASAN

8. Structure of The Balance of Payments
A. Current Account
Net exports/imports of goods and services (Balance of Trade)
Net Income (investment income from direct portfolio investment plus employee compensation
Net transfers (sums sent home by migrant and permanent workers abroad)
B . Capital Account
Capital transfers related to purchase and sale of fixed assets such as real estate
Σ (A:E) = Overall Balance
C. Financial Account
Net foreign direct investment
Net portfolio investment
Other financial items
D. Net Errors and Omissions
Missing data such as illegal transfers
E. Reserves and Related Items
Changes in official monetary reserves including gold and foreign exchange reserves
ZULFIQAR HASAN

9. The Current Account Goods Trade – export/import of goods.
Services Trade – export/import of services; common services are financial services provided by banks to foreign investors, construction services and tourism services
Income – predominately current income associated with investments which were made in previous periods. Additionally the wages & salaries paid to non-resident workers
Current Transfers – financial settlements associated with change in ownership of real resources or financial items. Any transfer between countries which is one-way, a gift or a grant, is termed a current transfer
Foreign Aid: Includes unilateral transfers of foreign aid.
Trade Deficit: If the debits exceed the credits, then a country is running a trade deficit.
Trade Surplus: If the credits exceed the debits, then a country is running a trade surplus.
ZULFIQAR HASAN

10. Debit: Bangladeshi firm purchases German machine tools.
Main Component Accounts Of The Current Accounts: One Debit & One Credit Example For Bangladesh.
Trade in goods:
Debit: Bangladeshi firm purchases German machine tools.
Credit: Texmark UK purchase garments products from Dhaka.
Trade in services:
Debit: A Bangladeshi takes a physician advice by paying US$500 in New York
Credit: The Brazilian tourist agency places an ad in The New Age, Dhaka.
Income payments and receipts:
Debit: The Bangladeshi subsidiary of a Abu Dhabi TV manufacturer pays dividends to its parent.
Credit: A British company pays the salary of its executive stationed in Dhaka
Unilateral current transactions.
Debit: The BRAC, Bangladesh pays for a Bangladeshi working on the Afghan border.
Credit: A Srilankan company pays tuition for an employee to study MBA in the University of Dhaka, Bangladesh.
ZULFIQAR HASAN

11. The Capital/Financial Account
Capital account is made up of transfers of fixed assets such as real estate and acquisitions/disposal of non-produced/non-financial assets
Financial account consists of three components and is classified either by maturity of asset or nature of ownership. The three components are
Direct Investment:
Net balance of capital which is dispersed from and into a country for the purpose of exerting control over assets. This category includes foreign direct investment
Portfolio Investment
Net balance of capital which flows in and out of the country but does not reach the 10% ownership threshold of direct investment. The purchase and sale of debt or equity securities is included in this category. This capital is purely return motivated
Other Investment Assets/Liabilities
Consists of various short and long-term trade credits, cross-border loans, currency and bank deposits and other accounts receivable and payable related to cross-border trade
ZULFIQAR HASAN

12. The Other Accounts
Net Errors and Omissions – Account is used to account for statistical errors and/or untraceable monies within a country
Official Reserves – total reserves held by official monetary authorities within a country.
These reserves are typically comprised of major currencies that are used in international trade and financial transactions and reserve accounts (SDRs) held at the IMF
ZULFIQAR HASAN

13. Examples 01: BOP’s Current Account
Assumptions (millions of US dollars)
2011
2010
2009
Using the data from the table, answer the following questions:
What is the balance on goods?
What is the balance on services?
What is the balance on goods and services?
What is the current account Balance?
Goods: exports
682
672
687
Goods: imports
876
917
1030
01. Balance on goods
(194)
(245)
(343)
Services: credit (exports)
255
261
270
Services: debit (imports)
167
183
191
02. Balance on services 88 78 79
03. Balance on Goods & Services
(106)
(167)
(264)
Income: credit (Receipts)
257
258
276
Income: debit (Payments)
251
265
295
04. Balance on income 6
(7)
(19)
Current transfers: credit 8 9 9
Current transfers: debit 49 53 57
05. Balance on current transfers
(41)
(44)
(48)
Balance on current Account = ( )
-141
-218
-331
ZULFIQAR HASAN

14. Practice 02: BOP Current account
Using the data from the table, answer the following questions:
What is the balance on goods?
What is the balance on services?
What is the balance on goods and services?
What is the current account services?
Assumptions (millions of US dollars)
2005
2006
2007
2008
2009
2010
Goods: exports
55,884
56,096
64,052
63,676
65,099
70,577
Goods: imports
61,215
65,857
68,865
61,890
70,530
85,946
Balance on goods ?
Services: credit
16,181
17,399
18,677
16,689
17,906
21,205
Services: debit
17,272
18,330
18,388
16,948
18,107
21,638
Balance on services
Income: credit
6,532
7,394
8,984
8,063
8,194
9,457
Income: debit
17,842
18,968
19,516
18,332
19,884
24,245
Balance on income
Current transfers: credit
2,651
3,003
2,622
2,242
2,310
2,767
Current transfers: debit
2,933
3,032
2,669
2,221
2,373
2,851
Balance on current transfers
ZULFIQAR HASAN

15. Practice 03: Balance of Payments
Find out (a) the balance of trade and (b) balance of current account, if: inflow on account of services: $1000; outflow on account of services: $800; Outflow of dividend, royalty, etc, $1100; inflow of dividend, etc. $560; export of goods: $10000; import of goods: $12000, Remittances: $1200
Items
Amounts
Goods: exports
10000
Goods: imports
-12000
Balance on goods
-2000
Services: credit
1000
Services: debit
-800
Balance on services
200
Inflow of Dividend
560
Outflow of Dividend
-1100
Investment income
-540
Remittances
1200
Balance on current transfers
-1140
ZULFIQAR HASAN

16. Debit: Nitol Motor Company builds a factory in Nepal.
Main Component Accounts of The Capital & Financial Accounts: One Debit & One Credit Example For Bangladesh
Direct investment.
Debit: Nitol Motor Company builds a factory in Nepal.
Credit: Nitol Motor Company sells its factory in Srilanka to Srilankan investors.
Portfolio investment.
Debit: A Bangladeshi buys shares of stock of a European food chain on the Frankfurt Stock Exchange.
Credit: The government of Korea buys Bangladesh Bank Treasury bills to hold as part of its foreign exchange reserves.
Other investment.
Debit: A Bangladeshi firm deposits $1 million in a bank balance in London.
Credit: A Bangladesh firm generates an account receivable for exports to Canada.
ZULFIQAR HASAN

17. Classify the following as a transaction reported in a sub-component of the current account or the capital and financial accounts of the two countries involved:
A U.S. food chain imports wine from Chile.
Current Account
Debit to U.S. goods
Credit to Chilean goods
A U.S. resident purchases a euro-denominated bond from a German company.
Portfolio part of financial account;
Debit to U.S.
Credit to German
Singaporean parents pay for their daughter to study at a U.S. university.
Current transfers in current account
Credit to U.S.
Debit to Singapore
ZULFIQAR HASAN

18. The Capital/Financial Account
US Capital/Financial Account, (billions of US$
ZULFIQAR HASAN

19. The Balance of Payments in Total
A. Current Account (140.55) (217.13) (331.48)
Goods exports FOB
Goods imports FOB (876.37) (917.19) ( )
Goods (BOT) (194.72) (244.90) (343.26)
Services exports
Services imports (166.51) (182.68) (191.30)
Services trade balance
Income credit
Income debit (251.16) (264.66) (294.65)
Balance on Income (6.21) (18.48)
Current transfers, credits
Current transfers, debits (49.27) (53.36) (57.43)
_____________________________________________________________
ZULFIQAR HASAN

20. Direct investment abroad (105.02) (146.05) (150.90)
C. Financial Account
Direct investment
Direct investment abroad (105.02) (146.05) (150.90)
Direct investment in the US
Portfolio investment assets (118.98) (136.00) (128.59)
Equity securities (57.58) (101.24) (114.40)
Debt securities (61.40) (34.76) (14.19)
Portfolio investment liabilities
Equity securities
Debt securities
___________________________________________________________
ZULFIQAR HASAN

21. Capital Mobility/Flight
Capital Mobility: The degree to which capital moves freely cross-border is critically important to a country’s balance of payments
Capital Flight: “International flows of direct and portfolio investments under ordinary circumstances are rarely associated with the capital flight phenomenon. Rather, it is when capital transfers by residents conflict with political objectives that the term “flight” comes into general usage.”
ZULFIQAR HASAN

22. False invoicing on international trade transactions
Capital Flight…….
Five primary mechanisms exist by which capital may be moved from one country to another:
Transfers via the usual international payments mechanisms, regular bank transfers are easiest, cheapest and legal
Transfer of physical currency by bearer (smuggling) is more costly, and for many countries illegal
Transfer of cash into collectibles or precious metals, which are then transferred across borders
Money laundering, the cross-border purchase of assets which are then managed in a way that hide the movement of money and its owners
False invoicing on international trade transactions
ZULFIQAR HASAN

23. Balance of Payment of Bangladesh During 1999-2005
In million US$  
Items
(June-July) 1 2 3 4 5 6 7
Trade balance
-1865
-2011
-1768
-2215
-2319
-3297
Export f.o.b. (including EPZ)
5701
6419
5929
6492
7521
8573
Of which : Readymade garments (RMG) 
4352
4860
4584
4912
5686
6418
Import f.o.b. (including EPZ)
-7566
-8430
-7697
-8707
-9840
-11870
Services
-645
-914
-499
-691
-874
-870
Receipts
849
759
865
887
924
1177
Payments
-1494
-1673
-1364
-1578
-1798
-2047
Income
-302
-344
-402
-358
-374
-680 97 50 64 63
116
-399
-441
-452
-437
-796
Of which : Official interest payments
-160
-168
-161
-167
-175
-203
Current transfers
2394
2171
2826
3440
3743
4290
Official
165 72 69 82 61 37
Private
2229
2099
2757
3358
3682
4253
Balance of Payment of Bangladesh During
ZULFIQAR HASAN

24. Current Account Balance
In million US$  
Items
(June-July) - 1 2 3 4 5 6 7
Of which : Workers' remittances
1949
1882
2501
3062
3372
3848
Current Account Balance
-418
-1098
157
176
-557
Capital Account
561
432
410
428
196
163
Capital transfers
Financial Account
-116
682
391
413 78
760
Foreign direct investment (net)
383
550
376
385
776
Portfolio investment -6
Other investment
-499
132 35
-313
-16
MLT loans (excluding suppliers credit)
806
790
733
918
544
940
MLT amortization payments
-396
-416
-435
-452
-397
-449
Other long term loans (net)
127
-13
-42
-20
-41
-46
Other short term loans (net) 71 31 63
142 13
241
ZULFIQAR HASAN

25. Other short term loans (net) 71 31 63 142 13 241 Other capital -190
In million US$  
Items
(June-July)
Other short term loans (net) 71 31 63
142 13
241
Other capital
-190
-114
-87
-125
-182
Trade Credit (net)
-641
-260
-253
-499
-321
-320
Commercial Bank
-276
114 27 14
-200
          Assets
-161
147
-90
217 86
-91
          Liabilities
-115
-33
117
-146
-72
-109
Errors and Omissions
152
-297
-550
-202
-279
-299
OVERALL BALANCE
179
-281
408
815
171 67
Reserve Assets
-179
281
-408
-815
-171
-67
Bangladesh Bank
Assets
-79
302
-887
-235
-225
Liabilities
-100
-21
-132 72 64
158
ZULFIQAR HASAN