External Sector - Balance of Payment

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Balance of Payment
Similar to budget account. It is account of external Sector (Credit & Debit of Foreign exchange).
  • BOP is a country’s transactions with the outside world
  • The balance of payments of a country is a systematic record of all economic transactions between the residents of a country and the rest of the world.
  • It is a double entry book keeping
  • It is composed of all receipts on account of goods exported, services rendered and capital received by residents and payments made by them on account of goods imported, services received and capital transferred to non-residents or foreigners.
  • If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit.






The Current Account
  • Current Account transactions are similar to Revenue account of Budget
  • They are single time transactions and One way
  • In transaction either receipt or payment happens once and transaction ends there
Trade Account
  • Export - Import
Invisibles
  • Services
    • Export and Import of Services
    • Travel, transport, Insurance, banking, brokering, IT and ITES services etc
  • Income
    • Income from Investments in the form of dividends, profit, interest, rent, wages, Remittances
  • Transfers
    • Unilateral Transfers Are Gifts, Grants,
    • It is called Unilateral transfer payments because there is no need of making any present or future payments in return
    • Unilateral Transfer payments could be official or private
Current Account Balance = Trade Balance + Net Invisibles
Twin Deficit Challenge: For Macroeconomic stability, maintain fiscal deficit & Current Account deficit is to under control.
Trade in goods includes items such as:
  • Manufactured goods
  • Semi-finished goods and components
  • Energy products
  • Raw Materials
  • Consumer goods
    • Durable goods
    • Non-durable goods e.g. foods
  • Capital goods (e.g. equipment).
When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.
The Capital Account
  • The capital account records all international purchases and sales of assets such as stocks etc.
  • The transactions here are in the nature of capital import or export.
  • Transactions that create liability like borrowings
  • The foreign investment may be either direct investment or portfolio investment.
  • If a foreign company comes to India and sets up a factory or a shop to do business directly with the Indian people, it is direct investment.
  • On the other hand, if the foreigner simply invests in shares and bonds floated by Indian companies, it is portfolio investment.
External Assistance
  • Bilateral Loans: Loans from another country.
  • Multilateral Loans: Loans from Multilateral agencies like World Bank, IMF, ADG etc…
External Commercial Borrowings
(Loan Bought by Private Sector form Foreign)
  • An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings).
  • ECBs cannot be used for investment in stock market or speculation in real estate.
Types of External Commercial Borrowings
  • Bonds and other securitized instruments. (Release Bond to abroad and get Money)
    • With Collateral – Secured Bond.
    • Without Collateral - Debentures Bond. (all debentures are bonds, All bonds not debentures)
      • Foreign denominated Bond – Principle & Interest payment in Foreign Currency.
      • Rupee denominated Bond or Masala Bond- Principle & Interest payment in Indian Rupee.

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