CHAPTER 18
BALANCE OF PAYMENTS
(BOP)
WHAT IS BALANCE OF PAYMENT?
The BOP of a
country is a systematic record of all economic transactions between the
residents of one country and residents of foreign countries during a given
period of time. Economic transactions are referred to as payments and receipts
of imports and exports respectively.
Balance of
Payment of any country at a given may assume any one the THREE positions:
1. Balanced BOP – Export
= Import
2. Positive / Favourable / Surplus BOP – Export > Import / Import < Export
3. Negative / Unfavourable / Deficit BOP – Export < Import / Import > Export
The economic transaction
in the balance of payments is recorded either on credit side or on the debit as
shown in the table below:
|
Credit
|
Debit
|
|
1. Exports of Goods
2. Exports of
Services
3. Unilateral
Transfer Receipts (gifts, indemnities from foreigners)
4. Capital
Receipts (borrowings, capital repayments by or sale of assets to foreigners)
|
1. Import of Goods
2. Imports of
Services
3. Unilateral
Transfer Payments (gifts, indemnities to foreigners)
4. Capital
Payments (lending, capital repayments to or purchase of assets from
foreigners)
|
COMPONENTS OF
BALANCE OF PAYMENT
1.
Current Account Transaction
It refers to all current
transactions that deal with exports and imports of goods (visible items) and services
(invisible items) like shipping, insurance, banking, interest, government
expenses, gifts and grants etc.
2.
Capital Account Transaction
It includes both short term as well as long
term capital transfers such as international borrowings and lending, gold
transactions and foreign exchange.
3.
Overall Balance of payment
It is the total
of country’s current account and capital account. In accounting sense, it is
always balanced (equilibrium). Hence, in actuality, balance of payments may be
normally in deficit or surplus.
Balance of Payment = Current Account
+ Capital Account
4.
Balance of Trade
It shows the balance of
imports and exports of visible items (goods) OR it shows the income from
exports of goods and expenditure on imports of goods.
BALANCE
OF PAYMENT IN BHUTAN
In Bhutan BOP is always remaining
negative / unfavourable. The export of goods and services are less than import
of goods and services. Therefore, it leads to disequilibrium in BOP.
CAUSES OF ADVERSE / DISEQUILIBRIUM
IN BALANCE OF PAYMENT IN BHUTAN
1.
Development Activities of
the Government
For developmental activities, Government of Bhutan is
importing raw materials, machines, tools, modern technologies etc. from other
countries. Thus, the value of imports exceeded the value of exports, making
balance of payment unfavourable.
2.
Import of Services
Bhutan is forced to import services and capital from
other countries to work in different sectors because in Bhutan the numbers of
trained and skilled people are very less. Consequently, our country had to pay
huge amount of money as interest, salaries, and profits for these services
which in turn, led to the disequilibrium in the balance of payment.
3.
Fall in Demand
This may be due to changes in tastes and fashions of
the consumers or because of rising cost of production, natural factors and
foreign competition. As a result, exports decrease making the balance of
payment unfavorable.
4.
Natural Factors
Bhutan’s export is dominated by agricultural products,
and these products are influenced by natural factors like flood, drought, pest,
etc. This lowers our exports and hence, balance of payment becomes
unfavourable.
5.
Demonstration Effect
As many people of our
country try to imitate the consumption pattern, particularly with regard to
luxuries like cars, air-conditioners, etc., of the developed countries. This
will lead to large increase in imports, causing disequilibrium in our balance
of payment.
6.
Inflationary Pressure
A high rate of inflation at home encourages imports by
making these relatively cheaper. It also leads to decrease in country’s
exports. Thus, balance of payments becomes unfavorable.
7.
Population Growth
A rapid increase in population has increased demand
for all types of consumer goods leading to a fall in export earnings.
REMEDIAL MEASURES TO CORRECT
DISEQUILIBRIUM IN BALANCE OF PAYMENTS
1.
Deflation
By deflation we can increase the demand of commodities
in domestic and foreign market because deflation leads to decrease in the price
of the commodities. If demand increases in the foreign market, it is useful to
achieve favourable balance of payment.
2.
Depreciation
Depreciation implies the automatic fall in the value
of home currency against the foreign currencies. For instance, if Ngultrum
depreciates it means that Bhutanese pay more Ngultrum for a dollar.
Depreciation will make imports costlier in terms of the domestic currency. As a
result, imports fall.
3.
Devaluation
It refers to the increase in the value of foreign
currency or fall in the value of domestic currency. If the country devaluate
its currency, domestic consumer has to pay higher price on imported goods. So
similar to depreciation, devaluation also makes imports costlier leading to
decrease in imports.
4.
Discouraging Imports and
Encouraging Exports
A country can discourage imports levying duties, tariffs
and by fixing imports quotas. Similarly, Government can encourage exports by
reducing duties, giving subsidies and financial assistances in order to get
favorable balance of payment.
5.
External Debt
Government can also correct its balance of payment
position by securing loans from abroad or international financial organization.
6.
Tariff
If Government impose higher tariff on importing
commodities, it leads to increase in the price of commodities, and thereby
decrease in import.
7.
Tourism
It is an important method to earn foreign currency.
Our country is very keen on promoting eco-tourism based on the principle of “Low Volume, High Value”.
