The Balance of

Payments BOP
Presented to Dr Ahmed Fekry
 PRESENTED BY

AMIR ANWAR ELSAYED MOHAMED 21121121

HOSSAMELDIN ABDELLATIEF MAHMOUD ABDELLATIEF 21120158

WALEED MOHAMED ELSEBAIE TARAD 21120195

NADA MOSTAFA KAMEL EL DESOLY SHOMAN 21120483

 WHAT ARE WE GOING TO COVER IN THIS
PRESENTATION

The Accounting Of
Introduction & What IS Fundamentals of BOP
Balance Of Payment
BOP? Accounting
(BOP)

The impact of Balance

Trade Balances and
Of Payment (BOP) on
Exchange Rates
Macroeconomic factors
 INTRODUCTION

To understand So, in order to understand the

what's going on In global economy , the activities by
our global nations in pursuit of
economy, macroeconomic policies and to be
Studding the how exchange rate changes and
Growth Domestic volatility influence trade balances
Product (GDP) over time we are going to study
was not enough the Balance of Payments (BOP)
 WHAT IS THE BALANCE OF
PAYMENTS “BOP”

 Is the measurement of all international economic

transactions between the residents of a country and
foreign residents

 Is a method by which countries measure all the

international monetary transactions within a certain
period.
 WHY IS BOP DATA IMPORTANT?

The BOP is an important indicator of pressure on a country’s foreign exchange rate,

and thus of the potential for a firm trading with or investing in that country to
experience foreign exchange gains or losses. Changes in the BOP may predict the
imposition or removal of foreign exchange controls.

Changes in a country’s BOP may signal the imposition or removal of controls over the
payment of dividends and interest, license fees, royalty fees, or other cash
disbursements to foreign firms or investors.

The BOP helps to forecast a country’s market potential, especially in the short run. A
country experiencing a serious trade deficit is not as likely to expand imports as it
would be if running a surplus. It may, however, welcome investments that increase its
exports.
Fundamentals of
BOP Accounting
 WHY IS IT CALLED THE BALANCE OF
PAYMENTS “BOP”

Like the cash flow statement

The BOP is not a balance
with recording international
sheet but it’s the sides must
Cash inflow and Cash out
be equal (balanced)
flow
A rule of thumb that aids in
understanding the BOP is
to “follow the cash flow”
 SO HOW TO KNOW IF ITS A CASH
INFLOW OR CASH OUTFLOW?

The money The money receiver

holder /The buyer Money /The producer –
of the product or holder of the
service/ the product or service/
minces recorded in the Pluses recorded
the BOP in the BOP

Transfer
outflow inflow
CHECK YOUR KNOWLEDGE NOW
 THREE MAIN ELEMENTS OF ACTUAL PROCESS OF
MEASURING INTERNATIONAL ECONOMIC ACTIVITY

Identifying what is/is not an international economic transaction

Understanding how the flow of goods, services, assets, money create debits and
credits

Understanding the book keeping procedures for BOP accounting

 BOP AS A FLOW STATEMENT

Exchange of Real Assets – exchange of goods and services for other goods and
services or for monetary payment

Exchange of Financial Assets – Exchange of financial claims for other financial

claims
 The Accounting Of
Balance Of Payment
(BOP)
 THE CURRENT ACCOUNT

• The current account includes all international economic transactions with income or
payment flows occurring within the year, the current period.

• Goods trade:- The export and import of goods is known as the goods trade.
EX:- Merchandise trade is the oldest and most traditional form of international economic activity.
Although many countries depend on imports of goods (as they should, according to the theory of
comparative advantage), they also normally work to preserve either a balance of goods
trade or even a surplus.

• Services trade. The export and import of services is known as the services trade.
EX:- Common international services are financial services provided by banks to foreign importers and
exporters, travel services of airlines, and construction services of domestic firms in other countries. For
the major industrial countries, this subaccount has shown the fastest growth
in the past decade.
 THE CURRENT ACCOUNT

• Income. This is predominantly current income associated with investments that were made in previous
periods. Additionally, wages and salaries paid to non-resident workers are also included in this category.
EX:- If a U.S. firm created a subsidiary in South Korea to produce metal parts in a previous year, the
proportion of net income that is paid back to the parent company in the current year (the dividend)
constitutes current investment income.

•
Current transfers. The financial settlements associated with the change in ownership of real
resources or financial items are called current transfers. Any transfer between countries that is one-way—
a gift or grant—is termed a current transfer.
EX:- For example, funds provided by the U.S. government to aid in the development of a less-developed
nation would be a current transfer. Transfer payments made by migrant or guest workers back to their home
countries, the subject of this chapter’s Mini-Case, is another example of a current transfer
 THE CAPITAL ACCOUNTS

The capital account is made up of transfers of

financial assets and the acquisition and disposal of
nonproducer/nonfinancial assets.
This account has been introduced as a separate
component in the IMF’s balance of payments only
recently.
 THE FINANCIAL ACCOUNTS

A financial account consists of four components and is classified either by the maturity of asset or the nature of
ownership.
The four components are:-
• Direct Investment – Net balance of capital which is dispersed from and into a country for the purpose of exerting
control over assets.
EX:- Brown & Green field investments

• Portfolio Investment – Net balance of capital which flows in and out of the country but does not reach the 10%
ownership threshold of direct investment. The purchase and sale of debt or equity securities is included in this
category This capital is purely return motivated.
EX:- Stock Market , T-Bills & T-Bounds

• Financial Derivatives – Mainly it is financial tools used to hedge financial risk

EX:- Options Contract & Forward contract

• Other Investment Assets/Liabilities – Consists of various short and long-term trade credits, cross-border loans,
currency and bank deposits, and other accounts receivable and payable related to cross-border trade
 NET ERRORS AND OMISSIONS

ANet Errors and Omissions Account :-

As previously noted, because current and financial
account entries are collected and recorded separately, errors
or statistical discrepancies will
occur.
The net errors and omissions account ensures that the
BOP actually balances.
 OFFICIAL RESERVES

Total reserves held by official monetary authorities within a country.

• The Official Reserves Account is the total reserves held by official monetary authorities within a country.
These reserves are normally composed of the major currencies used in international trade and financial
transactions (so-called “hard currencies” like the U.S. dollar, European euro, and Japanese yen; gold; and
special drawing rights, SDRs).

• Under a fixed rate regime official reserves are more important as the government assumes the
responsibility to maintain parity among currencies by buying or selling its currency on the open market

• Under a floating rate regime the government does not assume such a responsibility and the importance of
official reserves is reduced
BALANCE OF PAYMENTS ACCOUNTS

Generic Balance of Payments

Exhibit 4.7 The United States Balance of Payments,
Analytic Presentation, 1995-2005 (billions of U.S. dollars)
Exhibit 4.7 The United States Balance of Payments,
Analytic Presentation, 1995-2005 (billions of U.S. dollars)
 The United States Balance of Payments, Analytic
Presentation, 2005-2021 (billions of U.S. dollars)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Current account (excludes reserves and related items) (749) (817) (737) (697) (380) (432) (455) (418) (339) (370) (408) (396) (361) (440) (446) (620) (846)
Goods, credit (exports) 913 1,041 1,165 1,309 1,070 1,290 1,499 1,563 1,594 1,636 1,511 1,457 1,557 1,677 1,655 1,432 1,761
Goods, debit (imports) 1,696 1,878 1,986 2,141 1,580 1,939 2,240 2,304 2,294 2,385 2,273 2,207 2,356 2,556 2,512 2,346 2,852
Balance on goods (783) (837) (821) (832) (510) (649) (741) (741) (701) (750) (762) (750) (799) (879) (857) (914) (1,090)
Services, credit (exports) 378 423 496 541 522 582 645 685 719 757 769 783 837 866 891 726 795
Services, debit (imports) 312 349 385 421 408 436 458 470 466 491 498 513 548 565 594 467 550
Balance on goods and services (717) (764) (711) (712) (395) (503) (555) (526) (447) (484) (491) (479) (510) (579) (560) (654) (845)
Primary income, credit 536 670 817 820 653 723 791 792 812 846 825 857 995 1,103 1,137 936 1,052
Primary income, debit 492 654 753 708 538 553 589 594 616 646 640 661 738 848 893 773 913
Balance on goods, services, and primary income (672) (748) (647) (600) (279) (333) (352) (328) (251) (284) (306) (283) (252) (323) (316) (491) (706)
Secondary income, credit 65 70 70 85 85 92 102 112 126 141 133 141 161 149 157 165 171
Secondary income, debit 142 139 160 181 186 191 205 202 214 227 236 254 269 265 286 294 312
Capital account (excludes reserves and related items) 1 (7) (6) (0) (6) (7) (9) 1 (7) (7) (8) (7) 12 (4) (6) (6) (2)
Capital account, credit 15 0 1 6 0 0 0 8 0 0 0 0 19 3 0 0 4
Capital account, debit 15 7 7 6 6 7 9 7 7 7 8 7 7 8 7 6 6
Balance on current and capital account (748) (824) (743) (697) (386) (439) (464) (417) (346) (377) (416) (403) (349) (444) (452) (625) (849)
Financial account (excludes reserves and related items) (700) (823) (633) (752) (292) (448) (542) (452) (397) (293) (380) (365) (372) (308) (570) (706) (855)
Direct investment, assets 53 284 524 344 313 350 437 377 393 388 302 300 409 (131) 106 272 422
Equity and investment fund shares 42 254 422 352 261 338 398 321 335 345 292 326 392 (219) 157 291 426
Debt instruments 10 30 102 (8) 52 12 39 56 58 43 10 (26) 17 89 (51) (19) (4)
Direct investment, liabilities 142 298 347 341 161 264 263 250 288 252 511 474 381 215 315 149 448
Equity and investment fund shares 116 188 197 303 156 208 191 211 212 146 426 374 333 319 277 168 381
Debt instruments 26 110 150 38 5 56 72 39 76 106 85 100 48 (104) 38 (19) 68
Portfolio investment, assets 267 493 381 (284) 376 200 85 249 481 583 107 37 541 382 (11) 406 719
Equity and investment fund shares 187 137 148 (39) 64 79 7 104 287 432 197 22 140 171 (25) 396 155
Debt instruments 81 356 233 (246) 312 120 78 145 194 151 (90) 16 401 211 14 10 564
Portfolio investment, liabilities 832 1,127 1,157 524 357 820 312 747 512 698 214 231 791 303 233 947 676
Equity and investment fund shares 89 145 276 127 219 179 123 239 (63) 154 (187) (140) 150 157 (291) 687 (20)
Debt instruments 743 981 881 397 138 641 188 508 575 543 401 371 641 146 525 259 696
Financial derivatives (other than reserves) and employee stock options ... (30) (6) 33 (45) (14) (35) 7 2 (54) (27) 8 24 (20) (42) (5) (42)
Fin. derivatives and employee stock options, assets ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Fin. derivatives and employee stock options, liabilities ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Other investment, assets 257 550 659 (382) (610) 407 (45) (454) (221) (100) (259) (3) 214 174 208 256 24
Other equity 1 2 2 1 2 2 2 2 2 2 2 2 2 1 1 2 1
Debt instruments 256 548 657 (383) (611) 406 (47) (456) (223) (102) (261) (5) 212 172 207 254 23
Other investment, liabilities 303 695 687 (402) (193) 307 408 (365) 252 160 (222) 1 388 194 283 539 853
Other equity ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Debt instruments 303 695 687 (402) (193) 307 408 (365) 252 160 (222) 1 388 194 283 539 853
Balance on current, capital, and financial account (48) (1) (110) 55 (94) 9 78 35 51 (83) (36) (38) 23 (136) 118 81 6
Net errors and omissions 34 (2) 110 (50) 146 (8) (62) (31) (54) 79 30 40 (25) 141 (113) (72) 108
Reserves and related items (14) (2) 0 5 52 2 16 4 (3) (4) (6) 2 (2) 5 5 9 114
Reserve assets (14) (2) 0 5 52 2 16 4 (3) (4) (6) 2 (2) 5 5 9 114
Net credit and loans from the IMF (excluding reserve position) - - - - - - - - - - - - - - - - -
Exceptional financing - - - - - - - - - - - - - - - - -
 The Arab Republic Of Egypt Balance of Payments,
Analytic Presentation, 2020-2021 (Millions of U.S. dollars)
 The Arab Republic Of Egypt Balance of Payments,
Analytic Presentation, 2020-2021 (Millions of U.S. dollars)
✓The positive factors that helped mitigate the aggravation of the current account deficit.
 Workers’ remittances increased by 13.2% to post US$ 31.4 billion (compared with US$ 27.8 billion).
 The oil trade balance deficit improved to register only US$ 6.7 million (compared with US$ 421.0 million), owing to the increase in oil exports by US$ 117.3 million to
US$ 8.6 billion, and the decrease in oil imports by US$ 297.0 million to US$ 8.6 billion.

Net inflows of the capital and financial account rose to US$ 23.4 billion in FY 2020/2021, (compared with US$ 5.4 billion a year earlier), as a result of the following main
developments:
Portfolio investment in Egypt reversed to a net inflow of US$ 18.7 billion (against a net outflow of US$ 7.3 billion).
FDI in Egypt retreated, realizing a net inflow of only US$ 5.2 billion (against US$ 7.5 billion). Such a retreat came in line with the decrease in global FDI as a
natural effect of investors’ fears due to the continuing COVID-19 pandemic worldwide, as illustrated hereunder:
First: Foreign direct investment in the oil sector:
Investment in the oil sector reversed into a net outflow of US$ 1.2 billion, against a net inflow of US$ 1.1 billion in the preceding year. This was driven by achieving inflows of
US$ 5.1 billion by foreign oil contractors minus outflows of US$ 6.3 billion (as a cost recovery for the exploration, development and operations previously incurred by foreign
partners).
Second: Foreign direct investment in the non-oil sectors:
FDI in non-oil sectors slightly increased by US$ 70.2 million, achieving a net inflow of US$ 6.4 billion with a growth rate of 1.1%. This was a combined result of the
rise in:
A.Inflows for greenfield investment by 24.7% to reach US$ 77.8 million.
B.Net retained earnings and credit balances surplus by 11.5% to amount to US$ 4.4 billion.
 The Arab Republic Of Egypt Balance of Payments,
Analytic Presentation, 2020-2021 (Millions of U.S. dollars)

and the decline in:

• 1- Net inflows for capital increases of existing companies by US$
• 259.6 million to post only US$ 1.2 billion.
• 2- The proceeds from selling local entities to non-residents by US$
• 89.2 million to record US$ 54.5 million.
• 3- Inflows for real estate purchases in Egypt by non-residents by US$
• 49.8 million, to stand at US$ 616.4 million.
 Medium- and long-term loans and facilities recorded a net disbursement of US$
6.4 billion (against US$ 6.6 billion).
 Short-term trade credit realized a net disbursement of US$ 1.5 billion
(against a net repayment of US$ 2.0 billion).
 The Arab Republic Of Egypt Balance of Payments,
Analytic Presentation, 2020-2021 (Millions of U.S. dollars)
Balance of Payments (US$ m.)

*2019/20 2020/21*
Trade Balance -36465.1 -42059.6
Exports 26376.0 28676.5
Petroleum
8479.9 8597.2
Other Exports
17896.1 20079.3
Imports -62841.1 -70736.1
Petroleum -8900.9 -8603.9
Other Imports -53940.2 -62132.2
Services Balance (net)
8972.5 5119.0

Receipts
21288.9 15995.1

Transportation
7881.1 7527.7
of which: Suez Canal dues
5805.7 5911.2
Travel
9859.4 4861.5
Government Receipts
758.5 513.1
Other
2789.9 3092.8

Payments
12316.4 10876.1

Transportation
2050.1 1812.2
Travel 3213.0 2708.2
Government Expenditures
975.8 1246.6
The Arab Republic Of Egypt Balance of Payments,
Analytic Presentation, 2020-2021 (Millions of U.S. dollars)
Balance of Payments (cont.) (US$ m.)

2019/20* 2020/21*
Capital & Financial Account 5374.6 23374.0
Capital Account -248.5 -153.0
Financial Account 5623.1 23527.0
Direct Investment Abroad -351.2 -379.1
Direct Investment In Egypt (net) 7453.0 5214.2
Portfolio Investment Abroad(net) -818.1 -750.7
Portfolio Investment in Egypt (net) -7307.3 18742.4
of which: Bonds 4594.9 4548.9
Other Investment (net) 6646.7 700.2
Net Borrowing 4541.6 7964.7
M&L Term Loans (net) 7216.8 4263.7
Drawings 9253.1 6502.4
Repayments -2036.3 -2238.7
MT Suppliers Credit (net) -644.9 2173.6
Drawings 34.3 3304.1
Repayments -679.2 -1130.5
ST Suppliers Credit (net) -2030.3 1527.4
Other Assets -100.4 -6039.4
Central Bank -231.7 -115.4
Banks 4306.4 -5014.6
Other -4175.1 -909.4
Other Liabilities 2205.5 -1225.1
Central Bank -141.0 -2734.9
Banks 2346.5 1509.8
Net Errors & Omissions -2795.1 -3075.9
Overall Balance -8587.2 1861.7
Change in CBE's reserve assets (increase = -) 8587.2 -1861.7
* Preliminary.
The impact of Balance
Of Payment (BOP) on
Macroeconomic factors
 The impact of Balance Of Payment (BOP) on
Macroeconomic factors

Gross domestic product

(GDP)

The exchange rate

Balance Of Payment

Interest rates

Inflation rates
 The impact of Balance Of Payment (BOP) on
Gross domestic product (GDP)

GDP can be represented by the following equation:

GDP = Private Consumption Spending + Investments + Government Spending + Net Trade
(Exports − Imports)

GDP = C + I + G + X – M

C = consumption spending
I = capital investment spending
G = government spending X–M=
X = exports of goods and services Current
M = imports of goods and services account balance
 The impact of Balance Of Payment (BOP) on
Gross domestic product (GDP)

• The balance of trade is one of the key components of a country's GDP

formula.

• GDP increases when there is a Trade Surplus and decreases when there is
Trade Deficit

• Balance of trade surplus or deficit is determined according to the value of

net Goods & Services Export & Import
 The impact of Balance Of Payment (BOP) on The
exchange rate

A country’s BOP can have a significant impact on the level of its exchange rate and
vice versa depending on that country’s exchange rate regime
Current Capital Financial Reserve Balance
Account Account Account Balance of
+ + + =
Balance Balance Balance Payments
(X-M) (CI - CO) (FI - FO) (FXB) BOP

CI = capital inflows
CO = capital outflows
FI = financial inflows
FO = financial outflows
FXB = official monetary reserves
 The impact of Balance Of Payment (BOP) on The
exchange rate

The effect of an imbalance in the BOP of a country works somewhat differently

depending on whether that country has fixed exchange rates, floating exchange rates, or
a managed exchange rate system

• Fixed exchange rate :- the government bears the responsibility to ensure that the BOP is near zero ,
If the sum of current and capital accounts do not approximate zero, the government is expected to
intervene in the foreign exchange market by buying or selling official foreign exchange reserves

 If the sum is greater than zero, a surplus demand for the domestic currency exists in world markets ,
the government will sell domestic currency for foreign currencies or gold.
 If the sum is negative, an excess supply for the domestic currency exists in world markets , the
government must buy domestic currency with its reserve of foreign currencies or gold

The key word here is the reserve of FCY other wise force domestic currency devaluation with no choice
 The impact of Balance Of Payment (BOP) on The
exchange rate

• Floating exchange rate :- the government has no responsibility to peg its foreign
exchange rate.
• The fact that the current and capital account balances do not sum to zero will
automatically alter the exchange rate in the direction necessary to obtain a BOP near zero
• If a country have deficit in current account which will result deficit in BOP , this will cause
excess supply of domestic currency , the domestic currency will fall in value (like other
goods with excess supply)
• Important note : Exchange rate markets do not always follow this theory, particularly in
the short to intermediate term. This delay is known as the J-curve (detailed in an
upcoming section).
• The deficit gets worse in the short run, but moves back toward equilibrium in the long run.
 The impact of Balance Of Payment (BOP) on The
exchange rate

• Managed Floats exchange rate :- Although still relying on market conditions for day-to-
day exchange rate determination, Governments often seek to alter the market’s valuation of
their currency by influencing the motivations of market activity, rather than through direct
intervention in the foreign exchange markets.

• The primary action taken by such governments is to change its currency interest rates
• Interest rate plays an essential role with the short-term component of capital flows
• Net Capital flows can restore an imbalance caused by the deficit in the current account
• This process raises the cost of local borrowing for businesses
 The Balance Of Payment and Interest Rate &
Inflation rate

BOP and Interest Rate

• The overall level of a country’s interest rates compared to other countries has an impact on
the financial account of the BOP.
• Relatively low real interest rates should normally stimulate an outflow of capital seeking
higher interest rates in other country currencies
BOP and Inflation Rate
• Imports have the potential to lower a country’s inflation rate as Imports of lower priced goods
and services place a limit on what domestic competitors charge for comparable goods and
services.
• On the other hand, to the extent that lower-priced imports substitute for domestic production
and employment, GDP will be lower and the balance on the current account will be more
negative.
Trade Balances and
Exchange Rates
 Trade Balances and Exchange Rates

A country’s import and export of goods and services is affected by changes in

exchange rates.

The transmission mechanism is in principle quite simple: changes in exchange rates

change relative prices of imports and exports, and changing prices in turn result in
changes in quantities demanded through the price elasticity of demand.

Although the theory seems straightforward, real global business is more complex.
 Trade and Devaluation

Trade and Devaluation

Countries occasionally devalue their own currencies as a result of persistent and
sizable trade deficits.

Many countries have intentionally devalued their currencies to make their exports
more price-competitive on world markets.

These competitive devaluations are often considered self-destructive, however, as

they also make imports relatively more expensive.
 The J-Curve Adjustment Path

International economic analysis characterizes the trade balance adjustment

process as occurring in three stages:

1. the currency contract period : Adjustment is uncertain due to existing

contracts that must be fulfilled

2. the pass-through period :- Importers and exporters must eventually

pass along the cost changes

3. the quantity adjustment period:- The expected balance of trade is

eventually realized
The J-Curve Adjustment Path
 Capital Mobility

The degree to which capital moves freely cross-border is critically important to a country’s
balance of payments.

Capital inflows can contribute significantly to an economy’s development

 Increase the availability of capital for new projects, new infrastructure development, and
productivity improvements
 Stimulate general economic growth and job creation

For domestic holders of capital, the ability to invest outside the domestic economy may reap
greater investment returns, portfolio diversification, and extend the commercial
development of domestic enterprises.

Important Point : the free flow of capital in and out of an economy can potentially destabilize
economic activity and one of the major factors in the severity of recent currency crises.
Thanks