1 BALANCE OF PAYMENT PREPARED BY: PN AZIZAH ISA UiTM KELANTAN UiTM KELANTAN.

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BALANCE OF BALANCE OF PAYMENTPAYMENT

PREPARED BY:PREPARED BY: PN AZIZAH ISA PN AZIZAH ISA

UiTM KELANTANUiTM KELANTAN

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Balance of Payment (BOP)Balance of Payment (BOP) is a bookkeeping that records all is a bookkeeping that records all

international transactions between our international transactions between our country and other foreign countries in a country and other foreign countries in a specific time period, usually in a year. specific time period, usually in a year.

is is a summation of all inflow and a summation of all inflow and outflow expendituresoutflow expenditures made by all made by all individuals, firms and government in a individuals, firms and government in a country.country.

is is a record of all the monetary transactionsa record of all the monetary transactions between a country’s residents and the rest between a country’s residents and the rest of the world during a period of timeof the world during a period of time..

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A favourable BOPA favourable BOP BOP account BOP account should have a balance should have a balance

spending between the inflow and outflowspending between the inflow and outflow in the net balance.in the net balance.

But of course, But of course, is impossibleis impossible to reach a to reach a ZERO BALANCEZERO BALANCE, , but at least a small but at least a small difference between the inflow and outflow.difference between the inflow and outflow.

if inflow > outflow if inflow > outflow SURPLUSSURPLUS

(favourable BOP)(favourable BOP) if inflow < outflow if inflow < outflow DEFICIT DEFICIT

(unfavourable BOP)(unfavourable BOP)

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Malaysian BOP Malaysian BOP StructureStructure

BOP structure can be divided into BOP structure can be divided into 3 parts3 parts::

i)i) Current Account Current Account

ii) Capital and Financial Accountii) Capital and Financial Account

iii) Error and Omissioniii) Error and Omission

Official Statement Account / Reserves Official Statement Account / Reserves

- is to show the net monetary movement.- is to show the net monetary movement.

2 main account

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CREDIT (CR.) components of BOPCREDIT (CR.) components of BOP inflow (receipts) of money - is represented by

a positive (+ve) sign. Some of the items involve are:i)     exports of goods and servicesii)    foreign investment in the countryiii)   deposits by non-residents in the countryiv)   various loans made to the country.v) paying back loans made by non-

residents to country’s bank (take this note)

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DEBIT (DR.) components of BOPDEBIT (DR.) components of BOP outflow (payment)outflow (payment) of money - is represented of money - is represented

by a by a minus (-ve) sign.minus (-ve) sign.Some of the items involve are:i)    imports of goods and servicesii)   county’s investment abroad.iii)  deposit of money abroad by the country’s

residents.iv)  various loans to non-residents made by the

country’s bank.v)   paying bank loans made by the country’s

residents to foreign bank .(take this note)

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1. CURRENT ACCOUNT1. CURRENT ACCOUNT

It records all payments and receipts for goods and services and any transfers of money to and from abroad.

It is normally divided into three parts: i. Goods account (Trade Balance)ii. Service account iii. Incomeiv. Net transfers (Current Transfers/

Unilateral Transfers)

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i) Trade Balance Also known as: Merchandise Balance or Also known as: Merchandise Balance or

Goods Goods Balance Balance or or Visible Account.Visible Account. It comprises It comprises importsimports and and exports exports of physical of physical

goods (tangible commodities):goods (tangible commodities): Examples of physical exports are:

palm oil, rubber and petroleum. and examples of physical imports are: machineries, computers and construction

materials such as cement. 2 condition: Deficit of Trade Balance

Surplus of Trade balance.

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ii) Service Balanceii) Service Balance Also known as: Also known as: Invisible Trade Account.Invisible Trade Account. It measures the value of services exported It measures the value of services exported

minus the value of services imported.minus the value of services imported. Positive value Positive value implies that receipts from implies that receipts from

abroad for that particular item exceeds its abroad for that particular item exceeds its payment made. payment made.

Negative valueNegative value implies that payment made to implies that payment made to abroad for that particular item exceeds its abroad for that particular item exceeds its receiptsreceipts

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Service Balance:Service Balance:There are There are six (6) itemssix (6) items in this account: in this account: freight and insurancefreight and insurance

-- It includes all charges for transporting goodsIt includes all charges for transporting goods Other transportationOther transportation

- - It includes services such as those provided to foreign

ships and receipts by national airline travel (tourism) and educationtravel (tourism) and education

- - It includes spending expenditure by foreign tourists (a credit item) and spending expenditure by Malaysian tourists abroad (a debit item).

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Government transactionsGovernment transactions

- - It includes expenditures incurred by It includes expenditures incurred by foreign embassies in Malaysia (a credit foreign embassies in Malaysia (a credit item) and Malaysian embassies abroad (a item) and Malaysian embassies abroad (a debit item). Includes also transactions on debit item). Includes also transactions on military expenses.military expenses.

Other servicesOther services

- - It includes consultancy and professional It includes consultancy and professional charges receives from or paid abroadcharges receives from or paid abroad

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By adding the value of Goods Account By adding the value of Goods Account Balance and Service Account will give Balance and Service Account will give us the Balance of Goods and Servicesus the Balance of Goods and Services

=i) Goods

Balance+

ii) Service

Balance

Balance on Goods and Services

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iii) Incomeiii) Income

Compensation of employeesCompensation of employeesInvestment incomeInvestment income

-- includes profits and dividends from: includes profits and dividends from: direct investment,direct investment,

portfolio investment and portfolio investment and

other investmentother investment

which is received from or paid abroad.which is received from or paid abroad.

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iv) Current Transfersiv) Current Transfers Net transfers are made by both public and Net transfers are made by both public and

private sectors.private sectors. Some of the items considered are :Some of the items considered are :

a.a. remittancesremittances of immigrants to relatives leaving abroad. of immigrants to relatives leaving abroad.

b.b. foreign aidforeign aid to and from government or charitable to and from government or charitable agencies abroad. agencies abroad.

c.c. personal personal pensionspensions received from and paid abroad. received from and paid abroad.

d. gifts of money to and from overseas residents to Malaysian residents.

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As a conclusion,As a conclusion, Current Account:Current Account:

is derived by adding all the four is derived by adding all the four components discussed; components discussed;

Goods Goods A/CA/C+ Service A/C+ Service A/C

+ Income+ Income

+ Net + Net TransfersTransfers

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2. 2. CAPITAL and CAPITAL and FINANCIAL ACCOUNTFINANCIAL ACCOUNT

2 items;2 items; i) Capital Account:i) Capital Account:

- - capital transfers capital transfers - - non-produced and non-financial non-produced and non-financial assets.assets.

ii) Financial Account:ii) Financial Account: - - Direct InvestmentDirect Investment (abroad or in Malaysia;(abroad or in Malaysia;

such as foreign companies (FDI) setup new such as foreign companies (FDI) setup new factories herefactories here.).)

- - Portfolio InvestmentPortfolio Investment ( (the buying of shares the buying of shares and bonds.)and bonds.)

- - Other InvestmentOther Investment (Official Sector or (Official Sector or Private sector)Private sector)

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iii) ERROR & OMISSIONiii) ERROR & OMISSION

Statistical discrepancyStatistical discrepancy that occurs that occurs due to late payment, wrong due to late payment, wrong calculation, return payment and calculation, return payment and other information gathered which is other information gathered which is mistaken in estimating figures and mistaken in estimating figures and data.data.

(take this note)(take this note)

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OVERALL BALANCEOVERALL BALANCE (Total currency flows of money.)(Total currency flows of money.)

= CURRENT ACCOUNT= CURRENT ACCOUNT

+ CAPITAL & FINANCIAL A/C+ CAPITAL & FINANCIAL A/C

+ ERRORS & OMISSIONS.+ ERRORS & OMISSIONS.

which give rise to a which give rise to a surplussurplus or or deficitdeficit of the Balance of Payment. of the Balance of Payment.

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BANK NEGARA RESERVEBANK NEGARA RESERVE(international reserve)(international reserve)

(official financing)(official financing) If If BOP is surplus (positive)BOP is surplus (positive); is an ; is an

increased in value. So an addition is increased in value. So an addition is stated as stated as negative in the reserve negative in the reserve account,account, showing that there is an inflow showing that there is an inflow of foreign reserve.of foreign reserve.

If If BOP is deficit (negative)BOP is deficit (negative); is a reduction ; is a reduction in value. So a decrease or drawings is in value. So a decrease or drawings is stated as stated as positive in the reserve positive in the reserve accountaccount, showing that there is an , showing that there is an outflow of foreign reserve.outflow of foreign reserve.

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NET CHANGENET CHANGE IN IN BANK NEGARA BANK NEGARA

INTERNATIONAL INTERNATIONAL RESERVERESERVE

This year’s reserve is added to This year’s reserve is added to the last year’s total net reserve. the last year’s total net reserve.

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PERSISTENT DEFICIT IN PERSISTENT DEFICIT IN THE BALANCE OF THE BALANCE OF

PAYMENTPAYMENT DeficitDeficit means a greater payment means a greater payment

than receipt - than receipt - due to a large outflow due to a large outflow of money paid to other countries. of money paid to other countries.

Persistent DeficitPersistent Deficit - for a country - for a country which which experience a pro-longed experience a pro-longed deficit from year to years is deficit from year to years is discourageddiscouraged and need to be solved. and need to be solved.

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Some of the Effects of Some of the Effects of BOP deficit are:BOP deficit are:

1.1. Reduces economic growthReduces economic growth – once – once the the economy cannot maintain a economy cannot maintain a

high high exports compared to imports exports compared to imports - reduces - reduces aggregate demand and aggregate demand and will result to will result to a less multiplier effect a less multiplier effect on the on the real real output and GDP will output and GDP will falls.falls.

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Some of the Effects of Some of the Effects of BOP deficit are:BOP deficit are:

2.2. Reduces the competitiveness of Reduces the competitiveness of domestic prices domestic prices – once export is less – once export is less

compared to import, demand for compared to import, demand for RM is RM is less compared to foreign less compared to foreign currency currency forced RM to forced RM to depreciated.depreciated.

Malaysian goods will look like more Malaysian goods will look like more expensive compared to others in expensive compared to others in

the the global market.global market.

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Some of the Effects of Some of the Effects of BOP deficit are:BOP deficit are:

3.3. Increases debtednessIncreases debtedness – larger – larger volume volume of loans might have been of loans might have been taken to taken to develop the economy. This develop the economy. This will lead to will lead to deficit in the capital and deficit in the capital and financial financial market. Repayment of market. Repayment of loans with the loans with the larger interest for larger interest for longer period of longer period of repayment.repayment.

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Some of the Effects of Some of the Effects of BOP deficit are:BOP deficit are:

4.4. Reduces reservesReduces reserves – larger – larger exports exports increases demand for increases demand for foreign reserve, foreign reserve, thus Bank Negara thus Bank Negara Reserve account has Reserve account has to be debited.to be debited.

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Some of the Effects of Some of the Effects of BOP deficit are:BOP deficit are:

5.5. Depreciating the exchange rateDepreciating the exchange rate – – import is larger than export, import is larger than export, thus less thus less demand for RM will demand for RM will depreciate its depreciate its value.value.

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POLICIES TO REDUCE POLICIES TO REDUCE BOP DEFICIT:BOP DEFICIT:

1.1. Reducing the volume of Reducing the volume of importsimports and increase exports – and increase exports –

by by introducing the introducing the protectionist protectionist policy or policy or encouraging the public to encouraging the public to buy buy local goods.local goods.

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POLICIES TO REDUCE POLICIES TO REDUCE BOP DEFICIT:BOP DEFICIT:

2.2. Expenditure switching policy –Expenditure switching policy – substituting substituting imported goods to exported goods.imported goods to exported goods.Any policy to encourage consumers in Any policy to encourage consumers in buying domestic products such as a policy buying domestic products such as a policy which can reduce the price of domestic which can reduce the price of domestic goods and become more competitive, so goods and become more competitive, so that it could attract more buyers to it. that it could attract more buyers to it.

- - Also to promote investors to produce more Also to promote investors to produce more goods for export and at the same time to goods for export and at the same time to reduce import. Subsidies and grant were reduce import. Subsidies and grant were given to help them, instead more tax given to help them, instead more tax exemption to support this exporting firms.exemption to support this exporting firms.

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POLICIES TO REDUCE POLICIES TO REDUCE BOP DEFICIT:BOP DEFICIT:3.3. Deflationary Policy Deflationary Policy – this is a policy – this is a policy

to reduce aggregate demand. To to reduce aggregate demand. To make a fall in aggregate demand is make a fall in aggregate demand is aim at reducing consumers demand aim at reducing consumers demand on imported goods and at the same on imported goods and at the same time to make domestic prices lower time to make domestic prices lower and becomes more competitive in and becomes more competitive in the global market, thus larger the global market, thus larger demand for Malaysian export.demand for Malaysian export.

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POLICIES TO REDUCE POLICIES TO REDUCE BOP DEFICIT:BOP DEFICIT:

4.4. Devaluation/Depreciation of Ringgit Devaluation/Depreciation of Ringgit – – a government’s policy to depreciate the a government’s policy to depreciate the country’s currency lower than the par country’s currency lower than the par value (for countries with Pegged exchange value (for countries with Pegged exchange rate regime.) While for those country’s rate regime.) While for those country’s using the Flexible exchange rate regime using the Flexible exchange rate regime can forced the value to depreciate by the can forced the value to depreciate by the controls at the FOREX market, whereby controls at the FOREX market, whereby reserves were used to change the market reserves were used to change the market forces of demand and supply at the forces of demand and supply at the FOREX market. Thus, exports becomes FOREX market. Thus, exports becomes cheaper in the eyes of foreigners (with the cheaper in the eyes of foreigners (with the assumption that there’s no retaliation)assumption that there’s no retaliation)

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POLICIES TO REDUCE POLICIES TO REDUCE BOP DEFICIT:BOP DEFICIT:

5.5. A policy of budget surplus A policy of budget surplus – – reduces the government spending reduces the government spending thus lowering the competition for thus lowering the competition for loans. This will reduce interest rate loans. This will reduce interest rate and depreciating the value of and depreciating the value of Ringgit and thus affected the import Ringgit and thus affected the import volume.volume.

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POLICIES TO REDUCE POLICIES TO REDUCE BOP DEFICIT:BOP DEFICIT:

6.6. Contractionary monetary policy –Contractionary monetary policy – to to reduce money supply (liquidity in reduce money supply (liquidity in the the hands of the public) and hands of the public) and increases increases interest rate on loans to interest rate on loans to

reduce reduce investment facilities. investment facilities. Usually public Usually public will will buy more buy more imported goods when they are imported goods when they are rich rich therefore by making a fall in their therefore by making a fall in their income there will be less imports. income there will be less imports.