Notes on Balance of Payment (BOP)

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”.