2023 08 CLC Ch3 Can Can TTQT E

ĐẠI HỌC KINH TẾ QUỐC DÂN
VIỆN NGÂN HÀNG - TÀI CHÍNH
Chapter 3
Balance of Payment (BOP)
Hà nội, 08/2023
TS. Phan Thị Thanh Hương

Dr Phan Thị Thanh Hương - School of Banking &
Finance - NEU
◼ Overview of balance of payment

◼ Details of the international balance of payments
◼ Basic analysis about the BOP
◼ Balance of international payments
◼ The balance of payment of Vietnam
Dr Phan Thị Thanh Hương - School of Banking & Finance -

NEU
Definition:
- Is a balance sheet, comparing and contrasting the money
received from abroad with the amount payable to abroad.
- It is a summary of all transactions in and out to other countries
- A statistical report that records and reflects economic
transactions between residents and non-residents (IMF).

NEU
- Reporting period BP
- Residents and non-residents
- Currency used for reporting
➢ Countries with a freely convertible currency :
domestic currency
➢ Countries with non-convertible currencies : USD
➢ International Standard: SDR

NEU
Concept of BOP
- Vertical texture
- Horizontal texture
- Transactions arising from the supply of foreign
currencies
- Transactions that generate demand for foreign
currency

NEU
Classification of international balance of payments
- Year end balance is different from period balance

- Bilateral balance is different from multilateral
balance
- Balance of payments and balance of income

NEU
The role of the international balance of payments
- At the level of macroeconomy:
▪ Forming foreign policy for international trade
▪ Controlling the movement of capital flows: Foreign
investment and capital exports.
▪ Managing exchange rate policy.
- At the micro level :
▪ Generating supply and demand of foreign currency and
forecast exchange rate fluctuations
▪ Enhancing import and export business
▪ Enchancing foreign exchange trading activities
NEU
Data is collected and reflected
- Data is collected from sources provided by State authorities and international financial
institutions such as IMF, WB, ADB, etc. including the following categories:
1. Transactions for goods and services
2. Employee income and investment income, etc.
3. One-way fund transfer
4. Direct and indirect investment
5. One-way capital transfer
- Record and reflect foreign currency supply and demand
1. Transactions that generate foreign currency supply
2. Transactions that generate demand of foreign currency
- Currency used for recording :Domestic currency, USD, SDR

NEU
Principles of double-entry bookkeeping
- The receiver: revenue from non-residents is recorded
“credit” and represented by a “+”: reflecting the increase
in foreign currency supply
- The payer: Expenditures for non-residents are recorded as
“dedit” and indicated by a “-” sign, reflecting an increase
in foreign currency demand
- Book keeping is in accordance with rules and principles
(there are 3 principles)
NEU
Principles of double-entry bookkeeping
Rule 1: Income + and expense -
Rule 2: Double entry
Rule 3: 5 main transactions: Exchange

good / services /financial assets/ one
way of good and financial assets
Dr Phan Thị Thanh Hương - School of

Banking & Finance - NEU
Contents of the international balance of payments
I. Current account
balance
-Balance of trade III. Adjustments
- Service balance and errors
- Balance of income
- One-way current transfer
balance
BOP II. Capital

IV. Official
offsetting balance transfered balance
-Long-term capital balance
- Increase/decrease Bank - Short-term capital balance
Reserve -One-way capital transfered
- Get an IMF loan balance
- Get an other central
bank loan Dr Phan Thị Thanh Hương - School of Banking & Finance -
NEU
I. Current account balance– CA (current account):
I.1 Balance of trade :
• Export of goods
• Import of goods
I.2. Service balance :
• Export services
• Import service
I.3 Balance of income :
• Income paid to employees
• Income from investment capital: Yields, dividends, bonds.
I.4 One way transfer capital Balance:
II. Capital balance:
II.1 Short-term capital balance :
• Business credit
• Trading of short-term valuable papers
II.2 Long-term capital balance :
• Foreign investment in the country
• Investment out from local to overseas
III. Statistical error
IV. Overall balance
= - Official offsetting balance :
Balance of trade
Compare and contrast the revenues from exports recorded
on the “Income” side with a “+” sign and the
expenditures on imports recorded on the “Expense” side
with a “-” sign.
When income from exports is greater than expenditure on

Contents of imports, the balance of trade is in surplus and (deficit)
vice versa.
the balance of -The balance of trade has a great influence on the
trade international balance of payments and directly affects to
the supply, demand, commodity prices and exchange rate
fluctuations, resulting in changing both domestic supply,
demand, currency and inflation.

NEU
Factors affecting the balance of trade
Exchange
rate Inflation
correlation
Consumer
psychology Balance of trade
People's
income
International
Commodity trade policy
prices
NEU
Service balance
Including incomes and expenditures on service activities:
transportation, finance, telecommunications, healthcare,
education and other services.
Details of the -Services provided to non-residents will increase the
balance of supply of foreign currency, recorded in the side “income"
services with a "+" sign and vice versa, services provided for
generating demand for foreign currency will be recorded
on the side "Expense" ” with a “-” sign.
-The balance of services of countries has an increasing size
and proportion in the total value of the international balance
of payments.
NEU
Factors affecting service balance
Exchange
rate Inflation
correlation
Consumer
psychology
Service Family
balance income
Commodity Psychological,
prices political and
social factors
NEU
Balance of income
-Includes employee earnings (salaries, bonuses),
investment income and interests of residents and non-
residents.
Details of the -Incomes paid by non-residents will increase the supply
balance of
of foreign currency, so it will be recorded in the “Income”
income
with a “+” sign. Otherwise, payments to non-residents
will generate demand for foreign currency, which will be
recorded in the “Expense” with a “-” sign.

NEU
Factors affecting the balance of income
Rate of return
from investment
Salary and
activities
bonus
Balance of
income
Economic,
political and
social Interest rate
environment
NEU
3. Balance of Payment (BOP)
One-way current transfer balance
-Includes grants, gifts and other transfers in cash and in
kind for consumption between residents and non-
residents: Reflects income redistribution
-Receipts (receiving) arising from foreign currency
Details of one- supply/local currency demand should be recorded in the
way current “Income” with a “+” sign. On the contrary, expenditures
transfer balance (for) arising from the demand for foreign currency/supply
of domestic currency should be recorded in the
“Expense” side with a “-” sign.
-The size and status of the one-way current transfer
balance depends mainly on factors belonging to the
economic, psychological, emotional, socio-political and
diplomatic environment between countries.
NEU
Factors affecting one-way current transfer balance
Cooperation Socio-economic
between development
countries
One-way
current
transfer
Issues about balance
history, Political
population, institutional
ethnicity environment

NEU
Long-term capital transfered balance
-Includes capital inflows and outflows from the private

and public sectors in the form of direct, indirect and other
long-term investments.
Details of long-
-Inflow of capital reflects an increase in Capital Source
term capital
(Credit), but increases the supply of foreign currency, so
mobility it is still recorded as “Income” with a “+” sign. On the
balance contrary, capital outflow reflects the increase in assets
(Debit) but increases the demand for foreign currency, so
it is still recorded in the “expense" side with a "-" sign.

NEU
Factors affecting the balance of long-term capital movement
Long-term expected Marginal

rate of return Efficiency of
Investment
Long-term
capital
balance
Investment Investment
attraction policy environment
NEU
3. Balance of Payment (BOP)
Short-term capital movement balance
-Also includes capital coming in or out of the private
sector (accounting for a large proportion) and the public
sector but in many different forms: commercial credit,
Contents of the bank credit, activities trading in foreign exchange and
balance of short-term valuable papers including speculative capital
flows.
short-term -The inflow of capital reflects the increase of asset, as
capital mentioned, due to the increase in foreign currency supply,
movements it is still recorded as “Income” with a “+” sign. On the
contrary, capital outflow reflects the increase of assets but
increases the demand for foreign currency, so it is still
recorded in the “Expense" side with a "-" sign.
NEU
Factors affecting the balance of short-term capital movement
Exchange rate
differences
Investment Interest
policy rate
Short term
capital
Economic, transfer
political and Short-term
social expected rate of
environment return
NEU
International balance of payments (BOP)
One-way capital mobility balance
- Includes one-way capital transfers such as grants for
investment purposes, written-off debts.
-When receiving grants and debt forgiveness, similar to the
inflow of capital, increasing the supply of foreign currency
Contents of should be recorded “Income" with a "+" sign. On the contrary,
one-way when providing aid or debt relief for non-residents, the capital
capital mobility outflow that increases the demand for foreign currency should
be recorded on the “Expense" side with a "-" sign.
balance
-Unlike the capital balances above, the scale and status of the
one-way capital transfer balance depends mainly on diplomatic
relations and socio-economic cooperation between countries
with common interests. and special friendship.
NEU
Some fundamental analysis

- Current balance = Tangible balance + invisible
balance
- Basic balance = Current balance + long-term capital
mobility balance
- Overall balance = Current balance + Capital
movement balance + Errors
- Official offsetting balance = - Overall balance
NEU
Overall balance surplus (unit: billion USD)
and %GDP (right column value) of Vietnam for the period
2016 - 2021
Source: SBV, Dept of Statistics, 2022

NEU
Refer to the data of the State Bank in Q1/2023

NEU
Overall balance deficit and surplus

• The state of the overall balance is very important and directly affects
the economy and the operation of macro policies, especially when
the overall balance is in deficit.
• The solutions to balance it when in surplus are not only not difficult
but always bring positive effects, both in the short and long term.
• In contrast, balancing measures when the position is in deficit are
not only more difficult, but the negative side effects are often very
heavy, and can even bring long-term consequences.
• Balancing the overall balance requires carefulness and
implementation of solutions.

NEU
Deficit and surplus

◼BOP=(X-M+Se+Ic+Tg)+(Kl+Ks)+(∆R+L+≠)
X: Export Kl: Long-term net capital

M: Import flow
Se: Net Service Ks Short-term net capital
Ic: Net income flow
Tg: Net current transfer ∆R: Change in reserve
value +L: Loans

Trade balance deficit and surplus
- Trade balance deficits and surpluses often determine
the state of the current account
- To balance, the main measures commonly applied will
affect the quantity of imported and exported goods
through the form of tariffs, quotas, domestic
consumption policies, etc., and affect psychology.
public consumption of imported goods.

Current account deficit and surplus
- The current account includes the balance of trade

(tangible), the balance of services, income and current
transfers (invisible).
- Analysis of the current account balance is very important
in macroeconomic management because the position of
the balance directly affects the exchange rate, interest
rate, economic growth, inflation and ultimately affects the
overall balance.
- In order to affect the position of the current account, more
comprehensive fiscal and monetary solutions are needed
than just solutions on international trade policy and
impact on consumer sentiment.
Basic balance deficit and surplus
• The basic balance includes the current account and the long-
term capital mobility balance.
• The position of basic balance has an ambiguous impact on
the economy depending on the approach.
• For developing countries, which are essential for
industrialization and modernization, a basic balance surplus
is generally seen as a positive sign.
• Policies to attract investment capital, especially direct
investment, are the basic solution to this problem.
Overall balance deficit and surplus
• The position of the overall balance is very important and

directly affects the economy and the operation of macro
policies, especially when the overall balance is in deficit.
• The solutions to balance the overall balance when in
surplus are not only not difficult but always bring positive
effects, both in the short and long term.
• In contrast, balancing measures when in a state of deficit
are not only more difficult, but the negative side effects are
often very heavy, and can even bring long-term
consequences.
• Balancing the overall balance requires carefulness and
implementation ofDrsolutions.
Phan Thị Thanh Hương - School of
• International balance of payments
• When the balance of international payments is in surplus
• When the balance of payments is in deficit

NEU
Balance of Payments (BOP)
International Balance of payments
International International
balance of payment balance of payment
surplus deficit

When the balance of international payments is in surplus
Balance
Impact
measure
Increase imports of consumer Improving living standards and
goods and means of domestic production conditions
production
Special reduction in imports of raw Maintain national resources and

materials protect the environment
Improve the efficiency of capital

Increase capital export use, promote influence, expand the
market
Increase the flexibility of the Central
Increase foreign exchange reserves Bank in regulating the foreign
and debt buy Dr Phan Thị Thanh Hương - School of
back Banking & Finance
exchange market - and reducing
NEU
foreign debt

NEU
When the balance of payments is deficit
• Operating international trade policies in the direction of increasing exports

and restricting imports: economic limitations of patronage policies
• Operating fiscal policy in the direction of tightening the State budget: the
policy of "austerity"
• Operate monetary policy in the direction of tightening the money supply
• Currency devaluation to boost exports while reducing imports: the limits
of currency devaluation
• Reducing international reserves through selling valuable papers and
exporting gold
• Borrowing foreign debt to pay debts become due: debt restructure and debt
growth (deficit) in the long term.
• Declaration of insolvency or insolvency of foreign debts.
NEU
International balance of payments
of some developing countries and Vietnam
o General characteristics of developing countries
o Demand for imported goods
o Capital needs and international credit participation
o Deficit international balance of payments

NEU
Research questions and discussion
1. Analyze the role of trade balance, short-term and long-term
capital movement balance in the economic development of
countries
2. Analyzing the development trend of the balance of services
structure in the international balance of payments and the
significance of the research problem
3. Analyze the effects of the international balance of payments
from different points of view and the significance of the
research problem.
4. Current status of Vietnam's international balance of payments
2018-2022 and recommendations.

◼ 1. The Paris Club decided to reduce Vietnam's

debt by 50 million USD
◼ 2. Hai Chau Company imports goods with
deferred payment from Japan value of US$15
million.
◼ 3. Vietnamese commercial banks buy USD
100 million of international bonds issued by
Thailand Investment Company
◼ 4. Bank for Foreign Trade of Vietnam borrows

from City bank Hanoi amount USD 15 million
for 9 months.
◼ 5. Song Da Construction Corporation invested
in building a power plant in Laos amount $100
million by machinery and equipment.


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ĐẠI HỌC KINH TẾ QUỐC DÂN

VIỆN NGÂN HÀNG - TÀI CHÍNH

TS. Phan Thị Thanh Hương

◼ Overview of balance of payment

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of Banking & Finance -

- Year end balance is different from period balance

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Rule 1: Income + and expense -

Rule 2: Double entry

Rule 3: 5 main transactions: Exchange

Dr Phan Thị Thanh Hương - School of

BOP II. Capital

When income from exports is greater than expenditure on

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of Banking & Finance -

-Includes capital inflows and outflows from the private

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Long-term expected Marginal

Some fundamental analysis

Source: SBV, Dept of Statistics, 2022

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Refer to the data of the State Bank in Q1/2023

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Overall balance deficit and surplus

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Deficit and surplus

X: Export Kl: Long-term net capital

Dr Phan Thị Thanh Hương - School of

Dr Phan Thị Thanh Hương - School of

- The current account includes the balance of trade

• The position of the overall balance is very important and

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of

Special reduction in imports of raw Maintain national resources and

Improve the efficiency of capital

Dr Phan Thị Thanh Hương - School of Banking & Finance -

• Operating international trade policies in the direction of increasing exports

Dr Phan Thị Thanh Hương - School of Banking & Finance -

Dr Phan Thị Thanh Hương - School of

◼ 1. The Paris Club decided to reduce Vietnam's

◼ 4. Bank for Foreign Trade of Vietnam borrows

Dr Phan Thị Thanh Hương - School of

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