Disequilibrium of Balance of Payment: Ansu Philip Sobha Joseph

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DISEQUILIBRIUM OF
BALANCE OF PAYMENT
BY:
Ansu Philip
Sobha Joseph
BALANCE OF PAYMENTS
2
BOP or Balance of International

Payments is the systematic and summary
record of a country’s economic and
financial transactions with the rest of
the world over a period of time.
As per IMF:
BOP is a statistical statement for a given period showing:

(a) transactions in goods & services and income between
an economy and the rest of the world;
(b) changes of ownership and other changes in that
country’s monetary gold, SDRs, and claims on and
liabilities to the rest of the world; and
(c) unrequited transfers and counterpart entries that are
needed to balance, in the accounting sense any entries
for the foregoing transactions and changes which are not
mutually offsetting. – IMF, Balance of Payments
Manual.
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Difference between BOP and BOT
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Balance of Trade:
only exports and imports of merchandise or
goods , i.e. only visibles.
 Hence does not show the services (shipping,
insurance, payment of interest, royalties, tourist
spendings, etc.)
BOP:
both visibles and invisibles.
Nature of BOP accounting
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 Follows double entry book keeping system.

 Each transaction has a debit and credit
 Has to balance (if not : errors & omissions entry)
Components of BOP
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Various entries grouped under 4 categories or

accounts (parts)
 A) Current Account
 B) Capital Account
 C) Unilateral Payments Account
 D) Official Reserves Account.
Causes of BOP disequilibrium
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 Disequilibrium = there is surplus or deficit in BOP

 Deficit = demand for forex exceeds the supply
 Reasons:
 Economic factors
 Political factors
 Sociological factors
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Economic factors
1. Development Disequilibrium:
--Large scale development expenditure
--Leads to huge imports (also of Capital Goods)
--Hence adverse BOT adverse BOP.
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2. Cyclical Disequilibrium
 Due to cyclical fluctuations in general business
activity.
 If domestic economy experiences a boom, while the
rest of the world not so
--then more purchasing power & demand and higher
domestic prices
--hence more imports
 But exports difficult because of slackness in world
economy.
 Hence disequilibrium occurs
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3. Secular Disequilibrium
 If long term BOP problem, then it is due to
some secular trends in the economy.
 If domestically: persistent high demand and
high domestic prices (eg.USA) then imports will
always be more than exports.
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4.Structural Disequilibrium
Affects exports & imports
 Because of development of alternative sources of
supply,
 discovery of better substitutes,
 exhaustion of productive resources,
 changes in transport routes and costs etc.

II. Political factors
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 Continuous political instability, wars, etc., will lead

to capital outflows and inadequacy of domestic
investment and production
 Hence BOP problems.

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III. Social factors
 Changes in tastes, preferences, fashions etc., will

affect the exports and imports.
 Hence BOP deficit

BOP: INDIA
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 Because of the trade deficit, India has had BOP

deficits in most of the years
 Though its effect has been mitigated to a great
extent by invisible surplus (invisibles receipts -
invisibles payments).
 But this problem has increased the country’s
dependence on external capital markets and
increased its vulnerability to external shocks.
 During the I FYP: no BOP problem because of
the huge sterling balances India had at the time of
independence.
 In 1950-51: our forex reserves were equal to 158%
of our merchandise imports.
 But by 1957-58 the reserves came down to about
1/3 of the level in 50-51 and resulted in shortage.
 So, we got aid from Aid India Consortium and
drawals from IMF.—also stringent import
controls started.
 1966 Rupee was devalued : to improve exports
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 In 1972-73: we had a trade surplus of Rs.104 cr.
 But then came the I Oil Shock: 4 fold increase in
international crude prices between Sept1973 and
April, 74.
 But we managed somehow this and during 1976-
77 to 1979-80: an improvement in BOP.
 In 1976-77, there was even a small trade surplus
of Rs.72 cr.
 main reason for the improvement in BOP was the
sharp increase in inflow of remittances from our
emigrant workers,esp from Gulf.
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 But then came the II Oil Shock in 1979-80: trade
deficit shot up from Rs 2200cr in 78-79 to Rs 6,200
cr in 1980-81.
 Also a gradual decline in net receipts from
invisibles, while the trade deficit widened.
 An important reason for the BOP problem in
1980s and since then is the change in source of
financing the large current a/c deficit.
--Until the beginning of the 80’s; almost the entire
deficit was financed through inflows of concessional
assistance (hence, debt-service burden low)
--this was drastically replaced by commercial debt
—to private creditors ,NRIs etc
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 Invisible surpluses have traditionally financed a large
part of India’s trade deficits
--but there was a steep fall in this since 80’s.
 In 1980-81: net invisibles financed nearly 73% of
trade deficit.
 During 6th Plan(1980-85): it was on an average > 60%.
 But by 1990-91: it dropped to about 13% only.
 Hence, was forced to go for external (commercial)
sources to meet our payments obligations—
crisis….pledging gold….
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 Made worse by the falling trend in net
invisibles
 Why:
Rise in invisibles payments: due to rising
interest and service payments on foreign loans &
credits.
-- In 1990-91, the Debt service ratio was 35.3%.
In 2000-01, it was 17.3%
2004-05, only around 6.2%
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Liberalisation and after
20 With the economic liberalisation: improvement
 And inflow of invisibles
 As a result, there was surplus in the Capital a/c of BOP
(esp. during 1996-97 to 1998-99)
 So, comfortable BOP
 The debt creating flows as % of total capital flows
which averaged 97% during the 7thPlan(85-90) declined
to less than 18% by 94-95.
Recent Trends
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 The year 2001- 02, which recorded a

current account surplus for the first time in
23 years, is a landmark year in the history
of the BOP of India.
 This resulted from the vibrant trends in
respect of the invisibles over the past one
decade or so.
However…
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 After 3 years of surplus, the current a/c reverted

to the previous situation with a deficit or $5.4
bn in 2004-05.
 This was caused by a 147% increase in
merchandise trade deficit which far outstripped
the increase in invisible surplus.
 and continues to be in deficit.
Current Scenario…….
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 shown significant growth during fiscal 2008-09

despite of severe slowdown in the world economy
 the fiscal 2009-10, the net invisibles surplus i.e.

(invisibles receipts - invisibles payments) stood
lower at US$ 39.6 billion during April-September
2009 registering a sign of overall improvement in
Balance of Payment scenario during the first half of
2009-10 over the corresponding period 2008-09
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 RESULT==== the invisible surplus

declined and current account deficit
widened as compared to the corresponding
period last year.
Causes of BOP problem in India
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 1. Large trade deficit

 2. Fall in invisible surplus, caused by
a) increase in invisibles payments
b) slackening of emigrants’ remittances and travel
income.
 3. Sensitive behaviour of foreign creditors and
NRIs
 4. Declining role of concessional external finance.
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1

BOP or Balance of International

BOP is a statistical statement for a given period showing:

 Follows double entry book keeping system.

Various entries grouped under 4 categories or

 Disequilibrium = there is surplus or deficit in BOP

 exhaustion of productive resources,

 changes in transport routes and costs etc.

 Continuous political instability, wars, etc., will lead

 Hence BOP problems.

 Changes in tastes, preferences, fashions etc., will

 Hence BOP deficit

 Because of the trade deficit, India has had BOP

 The year 2001- 02, which recorded a

 After 3 years of surplus, the current a/c reverted

 shown significant growth during fiscal 2008-09

 the fiscal 2009-10, the net invisibles surplus i.e.

 RESULT==== the invisible surplus

 1. Large trade deficit

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