INTERNATIONAL

BANKING IN FINANCE

BALANCE OF
PAYMENT

BALANCE OF PAYMENT:
The balance of payments of a country is a
systematic record of all economic transactions
between the residents of a country and the
rest of the world. It presents a classified record
of all receipts on account of goods exported,
services rendered and capital received by
residents and payments made by theme on
account of goods imported and services
received from the capital transferred to nonresidents or foreigners.
- Reserve Bank of India

IMPORTANCE OF THE BALANCE

OF PAYMENTS

BOP records all the transactions that create

demand for and supply of a currency. This
indicates demand-supply equation of the
currency. This can drive changes in exchange
rate of the currency with other currencies.
BOP may confirm trend in economys
international trade and exchange rate of the
currency. This may also indicate change or
reversal in the trend.
This may indicate policy shift of the
monetary authority (RBI) of the country.

BOP may confirm trend in

economys international trade and
exchange rate of the currency. This
may also indicate change or
reversal in the trend.
This may indicate policy shift of the
monetary authority (RBI) of the
country.

The General Rule in BOP

Accounting

a)If a transaction earns foreign

currency for the nation, it is a credit
and is recorded as a plus item.
b)If a transaction involves spending
of foreign currency it is a debit and is
recorded as a negative item.

The various components of a

BOP statement

A.Current Account
B.Capital Account
C.IMF
D. SDR Allocation
E.Errors & Omissions
F.Reserves and Monetary Gold

Current Account

BOP on current account refers to the

inclusion of three balances of namely
Merchandise balance, Services balance
and Unilateral Transfer balance. In
other words it reflects the net flow of
goods, services and unilateral transfers
(gifts). The net value of the balances of
visible trade and of invisible trade and
of unilateral transfers defines the
balance on current account.

Capital Account

The capital account records all

international transactions that
involve a resident of the country
concerned changing either his assets
with or his liabilities to a resident of
another country. Transactions in the
capital account reflect a change in a
stock either assets or liabilities.

The Reserve Account

Three accounts: IMF, SDR, & Reserve and

Monetary Gold are collectively called as The
Reserve Account.
The IMF account contains purchases (credits)
and re-purchase (debits) from International
Monetary Fund.
Special Drawing Rights (SDRs) are a reserve
asset created by IMF and allocated from time
to time to member countries. It can be used to
settle international payments between
monetary authorities of two different countries.

TRENDS IN INDIAS BALANCE

OF PAYMENTS

A country, like India, which is on the

path of development generally,
experiences a deficit balance of
payments situation.
This is because such a country
requires imported machines,
technology and capital equipments in
order to successfully launch and carry
out the programme of industrialization

The Bretton-Woods
Conference

June 1944

Founders

Harry Dexter White

-Chief International
Economist at the U.S.
Treasury
John Maynard Keynes
U. K. Treasury
Advisor

44 Delegate Nations
AustraliaIndia
Belgium Iran
Bolivia Iraq
Brazil
Liberia
Canada Luxembourg
Chile
Mexico
China
Netherlands
ColombiaNew Zealand
Costa RicaNicaragua
Cuba
Norway
CzechoslovakiaPanama
Dominican
Dominican RepublicParaguay
Ecuador Peru
Egypt
Philippines
El SalvadorPoland
Ethiopia Union of South Africa
France Union of Soviet Socialist Republics
(USSR)
Greece United Kingdom
GuatemalaUnited States
Haiti
Uruguay
HondurasVenezuela
Iceland Yugoslavia

Major Accomplishments

International Monetary Fund

International Bank for Reconstruction
and Development

Bretton Woods and the Gold Exchange

Standard

In 1944, representative of the major

Allied powers met at Bretton Woods,
New Hampshire to plan for the future.
General consensus

5-5

Stable exchange rates were desirable.

Floating or fluctuating exchange rates had
proved unsatisfactory.
The government controls of trade,
exchange, and production, that had
developed through WWII were wasteful and
discriminatory.

Bretton Woods and the Gold Exchange

Standard

To achieve its goals, the Bretton

Woods Conference established

The International Monetary Fund (IMF)

The IMF Articles of Agreement entered into
force in December 1945.
From 1945-1971, IMF agreement was the
basis of the international monetary system.

International Monetary Fund

Abandoned objective of fixed exchange rate

1970s
Exercises firm surveillance over exchange
rate policies of members

Board of governors regularly examine policies

and performance
Board reviews economic outlook and exchange
rate developments

Coordinates with the World Bank to correct

economic problems

5-7

World Bank

International Bank for Reconstruction and

Development (IBRD)
Consists of

International Finance Corporation (IFC)

International Development Association (IDA)
Multilateral Investment Guarantee Agency
(MIGA)
International Center for Settlement of
Investment Disputes (ICSID)

Other Multilateral Development Banks

5-8

African, Asian, European, Inter-American

ROLE AND FUNCTION OF

IMF

HISTORY

The International Monetary Fund was conceived

in July 1944 originally with 45 members and
came into existence in December 1945 when 29
countries signed the agreement.

IMF started to make service with IBRD in 1947.

The IMF works to improve the economies of its

member countries.
The conference culminated in the creation of
the famous
twins-IMF & World bank.

International Monetary Fund

IMF is the intergovernmental organization that

oversees the global financial system by following
the macroeconomic policies of its member
countries, in particular those with an impact on
exchange rate and the balance of payments.

It is an organization formed with a stated

objective of stabilizing international exchange
rates and facilitating development through the
enforcement of liberalising economic policies on
other countries as a condition for loans,
restructuring or aid.

International Monetary Fund

The IMF was created to support orderly

international currency exchanges and to help
nations having balance of payment problems
through short term loans of cash.

Its headquarters
States.

are

in

Washington,

United

Who runs the IMF?

Purposes of the IMF

o

Promote international monetary cooperation.

Expansion and balanced growth of

international trade.

Promote exchange rate stability.

The elimination of restrictions on the

international flow of capital.

Make resources of the Fund available to

members

Purposes of the IMF

o

o
o

Help establish multilateral system of

and eliminate foreign exchange
restrictions.

payments

Shorten the duration and lessen the degree of

disequilibrium in international balances of payment.
Foster economic growth and high levels of
employment.
Temporary financial assistance to countries
to help the balance of payments adjustments.

ROLE OF IMF

Promoting research in various areas of

international economics and monetary
economics.
Providing a forum for discussion and
consultation among member countries.
Being in the center of competence.
Focusing on its core macroeconomic and
financial areas of responsibility.
Working in a complementary fashion with
other institutions established.

FUNCTIONS OF IMF

Surveillance (like a doctor) Gathering

data and assessing economic policies
of countries.

Technical Assistance (like a teacher)

Strengthening
human
skills
and
institutional capacity of countries.

Financial Assistance (like a banker)

Lending to countries to support
reforms