Tarun Das Lecture BOP-3

8/9/2019 Tarun Das Lecture BOP-3

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UNSIAP TARUN DAS SESSION 11-12 BOP 1

Accounting of Balance of PaymentsTarun Das, Economic Adviser, MOF, India


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Contents

1. BOP Standard Accounting Tables

2. Case Study for India3. Workout Session-2


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1.1 Balance of Payments Accounting

The standard components of BOP comprisetwo main groups of accounts:

The current account pertains to goods

and services, income, and currenttransfers.

The capital and financial account pertainsto (i) capital transfers and acquisition or

disposal of nonproduced, nonfinancialassets and (ii) financial assets and liabilities.


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1.2 Balance of Payments Accounting

A. Current Account Account is closed by theend of the year. These are non-assettransactions and have no future obligations.

B. Capital Account-Account is not closed withina year and have future obligations. It consists

of financial flows which can be grouped intodebt flows and non-debt creating financialflows. Debt has attendant obligations forrepayment of principal (amortization) andpayment of interest charges. Amortization

appears on capital account while interestcharges appear on current account. Similarlynon-debt financial flows appear on capitalaccount, while dividends, royalties etc. appearon current account.


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1.3 Goods and Services

A.

Goods andservicesa. Goods1. General

merchandise

2. Goods forprocessing3. Repairs on goods4. Goods procured in

ports by carriers

5. Nonmonetary gold5.1 Held as a store ofvalue

5.2 Others

b. Services1. Transportation1.1 Sea transport1.1.1 Passenger1.1.2 Freight1.1.3 Other

1.2 Air transport1.2.1 Passenger1.2.2 Freight1.2.3 Other1.3 Other transport

1.3.1 Passenger1.3.2 Freight1.3.3 Other


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1.4 Services

2. Travel2.1 Business2.2Personal3. Communications

services4. Construction

services5. Insurance services6. Financial services

7. Computer andinformation services

8. Royalties, license fees

9. Other business services9.1 Merchant and other

trade-related services9.2Operational leasing

services9.3 Misc. business,

professional, technicalservices

10. Personal, cultural, andrecreational services

10.1 Audiovisual and

related services10.2Other personal,cultural, and recreationalservices

11. Govt services n.i.e.


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1.5 Income andCurrent Transfers

B.

Income1. Compensation ofemployees

2. Investmentincome

2.1 Direct investment2.1.1 Income on equity2.1.1.1 Dividends and

distributed branchprofits

2.1.1.2 Reinvestedearnings andundistributed branchprofits

2.1.2 Income on debt(interest)

2.2 Portfolio investment

2.2.1 Income on equity(dividends)

2.2.2 Income on debt(interest)

2.2.2.1 Bonds and notes2.2.2.2 Money market

instruments and financialderivatives

2.3 Other investment

C.Current transfers

1. General government2. Other sectors2.1 Workers remittances2.2 Other transfers.


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1.6Capital and Financial Account

A.C

apital account1. Capital transfers1.1 General government1.1.1 Debt forgiveness1.1.2 Other1.2 Other sectors1.2.1 Migrants transfers1.2.2 Debt forgiveness1.2.3 Other2. Acquisition/disposal

of nonproduced,nonfinancial assets

B. Financial account

1. Direct investment1.1 Abroad1.1.1 Equity capital1.1.1.1 Claims on affiliated

enterprises1.1.1.2 Liabilities to affiliated

enterprises1.1.2 Reinvested earnings1.1.3 Other capital1.1.3.1 Claims on affiliated

enterprises

1.1.3.2 Liabilities to affiliatedenterprises


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1.7 Financial Account

1.2 In reportingeconomy1.2.1 Equity capital1.2.1.1 Claims on direct

investors1.2.1.2 Liabilities to

direct investors1.2.2 Reinvested

earnings1.2.3 Other capital1.2.3.1 Claims on direct

investors1.2.3.2 Liabilities to

direct investors

2. Portfolio investment2.1 Assets2.1.1 Equity securities2.1.1.1 Monetary

authorities2.1.1.2 General

government2.1.1.3 Banks2.1.1.4 Other sectors


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2.1.2 Debt securities2.1.2.1 Bonds andnotes

2.1.2.1.1 Monetaryauthorities

2.1.2.1.2 Generalgovernment

2.1.2.1.3 Banks2.1.2.1.4 Other

sectors

2.1.2.2 Money marketinstruments

2.1.2.2.1 Monetaryauthorities

2.1.2.2.2 Generalgovernment

2.1.2.2.3 Banks2.1.2.2.4 Other sectors


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2.1.2.3 Financialderivatives2.1.2.3.1 Monetary

authorities2.1.2.3.2 General govt2.1.2.3.3 Banks2.1.2.3.4 Other sectors2.2 Liabilities2.2.1 Equity securities2.2.1.1 Banks2.2.1.2 Other sectors

2.2.2 Debt securities

2.2.2.1 Bonds and notes2.2.2.1.1 Monetary

authorities2.2.2.1.2 General govt2.2.2.1.3 Banks2.2.2.1.4 Other sectors2.2.2.2 Money market

instruments2.2.2.2.1 Monetary

authorities2.2.2.2.2 General govt

2.2.2.2.3 Banks2.2.2.2.4 Other sectors2.2.2.3 Financial derivatives2.2.2.3.1 Banks2.2.2.3.2 Other sectors


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3. Other investment3.1 Assets3.1.1 Trade credits3.1.1.1 General govt3.1.1.1.1 Long-term3.1.1.1.2 Short-term3.1.1.2 Other sectors3.1.1.2.1 Long-term3.1.1.2.2 Short-term

3.1.2 Loans3.1.2.1 Monetary

authorities3.1.2.1.1 Long-term3.1.2.1.2 Short-term3.1.2.2 General govt3.1.2.2.1 Long-term3.1.2.2.2 Short-term3.1.2.3Banks3.1.2.3.1 Long-term3.1.2.3.2 Short -term3.1.2.4 Other sectors3.1.2.4.1 Long-term3.1.2.4.2 Short-term


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1.11Financial Account

3.1.3 Currency anddeposits3.1.3.1 Monetary

authorities3.1.3.2 General govt3.1.3.3 Banks3.1.3.4 Other sectors3.1.4 Other assets3.1.4.1 Monetary

authorities3.1.4.1.1 Long-term3.1.4.1.2 Short-term

3.1.4.2 General govt3.1.4.2.1 Long-term3.1.4.2.2 Short-term3.1.4.3 Banks credits3.1.4.3.1 Long-term3.1.4.3.2 Short-term3.1.4.4 Other sectors3.1.4.4.1 Long-term3.1.4.4.2 Short-term


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3.2 Liabilities3.2.1 Trade credits3.2.1.1 General govt3.2.1.1.1 Long-term3.2.1.1.2 Short-term3.2.1.2 Other sectors3.2.1.2.1 Long-term3.2.1.2.2 Short-term3.2.2 Loans3.2.2.1 Monetary authorities3.2.2.1.1 Use of Fund credit3.2.2.1.2 Other long-term3.2.2.1.3 Short-term3.2.2.2 General govt3.2.2.2.1 Long-term3.2.2.2.2 Short-term

3.2.2.3 Banks

3.2.2.3.1 Long-term3.2.2.3.2 Short-term3.2.2.4 Other sectors3.2.2.4.1 Long-term3.2.2.4.2 Short-term3.2.3 Currency and dep.3.2.3.1 Monetary auth.3.2.3.2 Banks3.2.4 Other liabilities3.2.4.1 Monetary auth.3.2.4.1.1 Long-term

3.2.4.1.2 Short-term3.2.4.2 General govt3.2.4.2.1 Long-term3.2.4.2.2 Short-term


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3.2.4.3 Banks3.2.4.3.1 Long-term3.2.4.3.2 Short-term3.2.4.4 Other sectors3.2.4.4.1 Long-term3.2.4.4.2 Short-term4. Reserve assets4.1 Monetary gold4.2 Special drawing

rights4.3 Reserve position in

the Fund

4.4 Foreign exchange4.4.1 Currency and

deposits4.4.1.1 With monetary

authorities4.4.1.2 With banks4.4.2 Securities4.4.2.1 Equities4.4.2.2 Bonds and

notes4.4.2.3 Money market

instruments/derivatives

4.5 Other claims


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1.14 Selected Supplementary Items

1. Liabilities for foreignauthorities reserves1.1 Bonds and other

securities1.2 Deposits

1.3 Other liabilities

2. Exceptionalfinancing trans.

2.1 Transfers2.1.1 Debt forgiveness2.1.2 Other inter-

governmental grants2.1.3 Grants from Fund

subsidy2.2 Direct investment2.2.1 Invest along with

debt2.2.2 Other2.3 Portfolio

investment:


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2.4 Other investmentliabilities2.4.1 Drawings on new

loans by authorities2.4.2 Rescheduling of

existing debt2.4.3 Accumulation ofarrears

2.4.3.1 Principal on STdebt

2.4.3.2 Principal on LTdebt2.4.3.3 Original interest2.4.3.4 Penalty interest

2.4.4 Repayments ofarrears

2.4.4.1 Principal2.4.4.2 Interest2.4.5 Rescheduling of

arrears2.4.5.1 Principal2.4.5.2 Interest2.4.6 Cancellation of

arrears2.4.6.1 Principal2.4.6.2 Interest


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3. Other transactions3.1 Portfolioinvestment income

3.1.1 Monetaryauthorities

3.1.2 General govt3.1.3Banks3.1.4 Other sectors3.2 Other (than direct

investment) income3.2.1 Monetary

authorities3.2.2 General govt

3.2.3Banks3.2.4 Other sectors3.3Other investment

(liabilities)3.3.1 Drawings on

long-term tradecredits

3.3.2 Repayments oflong-term tradecredits

3.3.3Drawings onlong-term loans

3.3.4 Repayments oflong-term loans


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4. Services sub-items4.1 Travel (personal)4.1.1 Health-related4.1.2 Education-

related4.1.3 Other4.2 Misc. business,

professional, andtechnical services

4.2.1 Legal,accounting,managementconsulting, andpublic relations

4.2.2 Advertising,market research, andpublic opinion polling

4.2.3 R&D4.2.4Architectural,

engineering, andother technicalservices

4.2.5 Agricultural,mining, and on-siteprocessing

4.2.6 Other


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2.1 Derived Measures- Current A/C

A.1 Trade AccountTrade balance = Goods balance + services

balanceGoods Balance = Merchandise exports minus

merchandise importsServices Balance = Services exports minus

Services importsA.2 Invisibles Account- A.2.1 to A.2.4A.2.1 (Non-factor) Services = Travel +

Transportation + Insurance + Govt n.i.e +Miscellaneous business and professionalservices (including software, BPO etc.)

A.2.2 Factor incomes(interest,rent,dividend,wage)A.2.3 Private transfers (remittances)A.2.4 Official transfer (foreign grants)


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2.2Capital andFinancial Account

B.1 Non debt creating financial flows

B.1.1 Foreign Investment = Foreign DirectInvestment (FDI) + Portfolio Investment

B.2 Debt Flows- B.2.1 to B.2.5

B.2.1 External Assistance = Loans obtained frommultilateral organizations and bilateralcountries

B.2.2 External Commercial Borrowing

B.2.3 Short-term credits (trade credits)

B.2.4 Banking capital (deposits and others)

B.2.5 Other capital


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3.1 Case Study for India: The following datarelate to Indian BOP in 2005-06

Items US$ Billion1 Merchandise Exports f.o.b. 104.8

2 Merchandise Imports c.I.f. 156.3

3. Net travel services 1.4

4. Net transportation services -1.2

5.Net software and other non-factor services

22

6. Inward FDI flows 7.77. Outward FDI flows 2.0

8. Net Portfolio investment 12.5


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3.2 Case Study: The following data relate toIndian BOP in 2005-06

Items US$ Billion9.Factor incomes, net -5.6

10.Private transfers, net 24.1

11.Official transfers, net 0.2

12.External assistance, net 1.4

13. Ext. comm. borrowing, net 1.6

14. Short-term credit, net 1.7

15. Banking capital, net 1.4

16. Other capital flows, net 1.4

17. Foreign exchange reserves atthe beginning of the year

130.9


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3.3 Workout Session: Question on BOP

A. Given above data, estimate thefollowing for Indian BOP in 2005-06:1. Trade balance2. Non-factor services balance

3. Net invisibles4. Current account balance5. Total foreign investment6. Total capital flows

7. Overall balance of payments8. Foreign exchange reserves at the year-endB. Make a SWOT (Strength, Weakness,

Opportunities and Threat) Analysis onIndian BOP.


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3.4 Answer to Numerical Question on IndianBOP situation in 2005-06 (US$ Billion)

1. Trade balance = Merch. exports Merch.imports = 104.8 - 156.3 = (- ) 51.5

2. Non-factor services balance = Net travel +net transportation and other non-factorservices = 1.4 -1.2 + 22 = 22.2

3. Net invisibles = Non-factor services balance+ Net factor incomes + Net privatetransfers + Net official transfers =22.2 - 5.6+ 24.1 + 0.2 = 40.9

4. Current account balance = Trade balance +net invisibles = - 51.5 + 40.9= - 10.6


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3.5 Answer to Numerical Question onIndian BOP situation in 2005-06

5. Total foreign investment = Net FDI + Netportfolio=(Inward FDI Outward FDI) +Net portfolio =(7.7- 2.0)+ 12.5 = 5.7 + 12.5= 18.2

6. Total capital flows= Foreign investment +External assistance + ECB + Short-termcapital + Banking capital + other capital =18.2 + 1.4 + 1.6 + 1.7 + 1.4 + 1.4 = 25.7

7. Overall BOP = Current A/C balance + Total

capital flows = -10.6 + 25.7 = 15.18. Build up foreign exchange reserves = 15.1

Foreign exchange reserve at the year-end =Reserve at the beginning + build-up =

130.9+15.1 = 146


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3.6 SWOT (Strengths, Weakness, Opportunities,

Threats) analysis of the Indian BOP in 2005-06.

1. Indian BOP situation in 2005-06 wasdifficult but not unmanageable.

2. Strengths- (a) Buoyant exports andinvisibles, particularly remittances andsoftware exports (b) On the capital account,substantial inflows of non-debt creatingfinancial flows. (c) Short-term capital flowswere within manageable limits. (d) Build upof foreign exchange reserves to the extent

of US$15.1 billion3. Weakness Substantial trade deficit- needs

to be controlled by export promotion, andenhancing domestic petroleum production.


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3.7 SWOT (Strengths, Weakness, Opportunities,

Threats) analysis of the Indian BOP in 2005-06.

3. Opportunities (a) Indian exports of software,BPO services, and other IT and IT enabledservices (ITES) have high potentials. (b) Indiais also emerging as a favourable destinationfor foreign investment. India needs to maintai

its open door policy in production andinvestment.

4. Threats High international prices of crude oil,POL, metals and minerals may impose greater

burden on Indian imports leading to highinflation, interest rates, and pressure ofexchange rate.


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4.1 BOP Workout Session-2.

The following Excel FileUNSIAP Tarun Das Session-12 BOP Workshop-2

Provides BOP data for India for the year

2006-07. You are required to estimate somesummary measures and express these aspercentage of GDP


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Documents

Tarun Das Lecture BOP-3