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8/2/2019 Int Business 1

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Balance of Payments

The balance of paymentsis a

measurement of all transactions between

domestic and foreign residents over a

specified period of time.

Each transaction is recorded as both a

credit and a debit, i.e. double-entry

bookkeeping. The transactions are presented in three

groups a current account, a capital

account, and a financial account.


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The current accountsummarizes the flow of fundsbetween one specified country and all other countries

due to the purchases of goods or services, the provision

of income on financial assets, or unilateral current

transfers (e.g. government grants and pensions, private

remittances).

A current account deficitsuggests a greater outflow of

funds from the specified country for its current

transactions.

The current account is commonly used to assess the

balance of trade, which is simply the difference between

merchandise exports and merchandise imports.

Balance of Payments


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The new capital account(as defined in the

1993 System of National Accountsand the

fifth edition of IMFs Balance of Payments

Manual) is adopted by the Bangladesh in1998 (U.S. in 1999).

It includes unilateral current transfers that are

real shifts in assets, not current income. e.g.,

debt forgiveness, transfers by immigrants, the

sale or purchase of rights to natural

resources or patents.

Balance of Payments (Contd.)


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The financial account(which was called

the capital account previously)

summarizes the flow of funds resultingfrom the sale of assets between one

specified country and all other countries.

Assets include official reserves, other

government assets, direct foreign

investments, investments in securities,

etc.

Balance of Payments (Contd.)


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BOP BangladeshCurrent Account 2005-06 2006-07

Export 10,412 12,053

Import -13,301 -15,511

Trade Deficit -2889 -3458

Services -1023 -1261

Income -702 -883

Current transfers 5,438 6,554

Current Account Balance 824 952

Capital Account 375 490

Financial Account -141 721

Errors and Omissions -720 -670

OVERALL BALANCE 338 1493

Bangladesh Bank -338 -1493

Million US $


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Detailed Financial AccountMillion US $

2005-06 2006-07

Foreign direct investment (net) *743 760

Portfolio investment 32 106

Other investment -916 -145

MLT loans (excluding suppliers credit) 1023 1037

MLT amortization payments -488 -525

Other long term loans (net) -37 -29

Other short term loans (net) -256 493

Of which : Borrowing 487 1289

Repayment -743 -797

Other capital -495 -524

Trade Credit (net) -898 -470

Commercial Bank 235 -127

Net Financial Account -141 721


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Import Composition (Percentage)2006-07

Food grains (Rice 1%, Wheat 2.34%) 3.38Edible oil 4.02Other food items (Like milk, spices, sugar, pulse, etc) 3.94Petroleum 13.02Cement clinker 1.40Raw materials (Chemical, pharmaceutical, Fertilizer, Plastic, iron & Steel) 15.68Dyeing & Tanning 0.94Cotton, yarn, textile article, staple fibre 20.00Capital machinery 11.26Other (Inc. EPZ) 26.36Total 100.


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Export composition 2006-07

Export

Percentage EditedRaw Jute 1.25 3.18Jute goods 3.3 8.48Tea 0.05 0.14Leather 2.9 7.46Fish & shrimp 4.69 12.06RMG 65.74 33.82Naphtha

0.41

1.06

Fertilizer 0.34 0.88Others (Incl EPZ) 21.33 32.92Total 100.00 100


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Credit Lines of World Bank-IMF

Special Drawing Rights

Compensatory Financing

Extended Fund Facility

Structural Adjustment Facility (SAF)

Special Structural Adjustment Facility (SSAF)

Poverty Reduction and Growth Facility

(PRGF)


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Features of IMF Stabilization Package

Abolition of Import control

Import liberalization

Devaluation of the official exchange rate

Familiarization of market mechanism and withdrawl of subsidies

Reduction of government expenditure Promotion of government revenue

Reduction of budget deficit

Control of wage increase

Stringent anti-inflationary program

Greater hospitality to foreign investment

Most of these features are known as globalization. Bangladeshhas become more globalize a country than the comparablecountries like India and Pakistan in consequence of IMF credit.


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Effectiveness of devaluation

Value of $ in taka

Q1 Q2 Q3 Q4

Quantity

E2

E1

S

D

Import decrease

Export increases

Deficit decreases


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Ineffectiveness of Devaluation:Bangladesh case

$1=Tk

O Q1 Q2 Q4 Q3

D1

S

Tk.55

Tk.50

Source Before After Effect

Export OQ1 OQ2 increased slightly

Import OQ4 OQ3 Increased a lot

Deficit Q1Q4 Q2Q3 Increased

D2

Composition of export suggests thatmost of the items have less elasticityof supply. Similarly, composition ofimport shows inelasticity of demand.The demand curve shifts right aswell.

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