Balance of Payments

What is balance of payment

 It refers to a statement, showing
value of visible and invisible items
imported and exported by a country in
a specific period of time.
 In other words balance of payments
is a record of overall receipts and
payments of a country in respect of all
its transactions with other countries of
the world.
Types of Balance of Payments
Surplus Balance of Payments
If total receipts exceeds from total payments
Deficit Balance of Payments
If total payments are in excess of total receipts
Equilibrium Balance of Payments
If total payments are equal to total receipts
Items of Balance of Payments
1: Imports and Exports of commodities
2: Interest on capital or investment
3: Banks commission
4: Expenditure on Education
5: Foreign Expenses
6: Political nature expenditure
7: Financial assistance
 1: Imports and Exports of
commodities
Every country of the world
exports and imports some
goods…
By exporting it becomes a creditor
country
By importing it becomes a debtor
country
2: Interest on capital or investment

Wealthy countries of the world

lend their capital to developing
countries. The debtor country have
to pay the annual interest on it.
The interest on capital greatly
affect the balance of payments of
country.
 3: Banks commission
Banks working in foreign countries
earn commission and foreign
country stand as debtor to countries
to which the banks belong.

Bank commission includes in

balance of payments
4: Expenditure on Education
The students of one country
receive education in some
other countries. The
expenditure on foreign
education by these students
affect the balance of payment.
5: Foreign Expenses of travelling

Foreigners may visit a country for

medical purpose and tourism .The
money they spend also affect the
balance of payment.
6: Political nature expenditure

Every country send ambassadors,

political representative and
officials to other countries who
spends money there.
These expenses also affect the
balance of payments.
 7: Financial assistance
Foreign aid or funds usually
received at the time of war, floods,
famines and earthquakes also
included in balance of payments.

These aids also increase income of

a country.
Balance of Payment of country(million
of afs)
Items Receipts Payments Net Balance
Merchandise 358,498 476,174 -117,676

Travel 214.222 338,863 -124,439

Transportation 14,652 23,824 -9,172

Interests 89,991 64,803 +25,188

Medical 16,458 5,855 +10,603

Adverse Balance of Payments
Main cause of adverse balance of
payment is the accurance of dis-
equilibrium in the overall CREDIT …
DEBT situation.

Such a situation arises when total

receipts decreases from the total
payments………….
 Causes of Disequilibrium

1: Increase in the volume

of imports
2: Decrease in the volume
of exports
3: Inflationary trend in the
country
Methods to remove adverse balance
of payments
1: Export promotion
2: Imports restriction
3: Greater production
4: International cooperation
 1: Export promotion
……. To encourage exports it is
necessary for the gov’t to
 search out new markets
 to exchange trade delegation
 to participate in trade fairs and
exhibitions
 2: Imports restriction
…….Imports should be reduced in-order to
remove the disequilibrium in balance of
payments in this connection.

 imports should be discouraged by adopting

quota system or imposing duties.

 Exports should be encouraged by granting

bounties or by giving concessions to
industrialists.
 3: Greater production
……Another remedy to remove
disequilibrium in balance of payments
is to increase production.

 In this way volume of exports will

increase and products which are
substitutes for imports will decrease
the imports level.
5: International cooperation
……In recent times attempts have been
made to maintain equilibrium in
balance of payments by
IMF
World Bank
Are financial institutions that are
helpful in correcting balance of
payments.