EDEN IAS

BOP

BALANCE OF PAYMENTS (BOP)

Introduction of BOP

BOP Balance of payment refers to the statement of accounts recording all economic transactions of a given country with the rest of the world. In other words, each country enters into economic transactions with other countries of the world. As a result of such transactions, it receives payments from and make payments to other countries. So, balance of payments is a statement of accounts of these receipts and payments.

Balance of payments (positive or negative) is determine considering all economic transactions, viz- visible items, invisible items, and capital transfers. Therefore, balance of payments offers more comprehensive picture of economic transactions of a country with the rest of the world, which can be broadly classified as follows-

  • Visible items- this includes all type of physical goods exported/imported. These goods visible as these are made of some matter or material. These are seen crossing the borders.
  • Invisible items- this includes all type of services like shipping etc., which are invisible and are not made up of any matter or material. These are not seen crossing the borders.
  • Capital transfers- these are concerned with capital receipts and capital payments. These involve the transfer of assets.
                                                ECONOMIC TRANSACTIONS

These are the transactions which cause the transfer of value. In the context of foreign transactions, value is transferred by the resident of one country to the resident of the other country. Example- when export of goods (or of services) are made by country A to country B, value (=export receipts) is transferred by country B to country A. whereas between the countries, value is transferred in terms of foreign exchange (i.e. payments are received and made in terms of foreign exchange).

COMPONENTS OF BALANCE OF PAYMENT BOP

It is made up of 3 components-

  • Current account- it is that account which records imports and exports of goods and services and unilateral transfers. For instance, when a country’s imports are more than the country’s exports than it is called the current account deficit. Whereas in the vice versa situation it is called current account surplus. It records the following transactions-
  • Export and import of goods (or of visible items)
  • Export and import of services (or of invisible items)
  • Unilateral transfers from one country to the other
  • Capital account- it is that account which records all such transactions between residents of a country and the rest of the world which cause a change in the asset or liability status of the residents of a country or it’s government. In other words, it deals with foreign exchange reserves, investments, loans and borrowings such as-
  • Foreign investment
  1. FDI (Foreign direct investment)
  2. Portfolio investment
  • Loans
  1. Commercial borrowings
  2. Borrowings as external assistance
  3. Banking capital transactions
  • Unilateral transfers- these refers to one sided transfer from one country to the other. These are not trading transactions. There is no payment in response to the receipt of unilateral transfers. For instance- gifts, aids, donations.

PURPOSE OF BOP CALCULATION

The BOP plays a several vital roles:

  • Economic indicator– it reveals the nation’s fiscal and economic status.
  • Currency value- helps to determine that whether the country’s currency is appreciating or depreciating.
  • Policy decision- Assists governments in shaping the financial and trade policies.
  • Economic analysis- provide essential data for analyzing a country’s economic interactions with other nations.

UNDERSTANDING THE BOP BALANCE OF PAYMENT CRISIS

The balance of payment crisis occurs when a country experiences severe imbalance in its external account, leading to difficulties in meeting it’s international payment obligations. This typically involves the rapid depletion of foreign exchange reserves, currency depreciation, challenges in accessing external financing, and potential disruptions in trade and capital flows.

These crises highlight the significance of sound economic policies, prudent debt management, and macro-economic stability in avoiding or mitigating BOP crisis.

DIFFERENCE BETWEEN BALANCE OF TRADE AND BALANCE OF PAYMENT BOP

OVERVIEW OF THE BOP TREND

The data on the balance of payments for Q3FY23 reveals a significant improvement in the current account deficit (CAD), which has reduced to 2.2% of gross domestic product (GDP) from the previous quarter’s 3.7%. although the improvement in CAD is driven by a notable reduction in the merchandise trade deficit and a sharp increase in services trade surplus and a net-remittances received, which are at historic high levels.

Source- NCERT, PIB