Balance of Payments (BoP)

▪️BoP of a country summarizes all transactions that a country’s individuals,

companies and government bodies complete with individuals, companies and government bodies

outside the country. These transactions consist of import and exports of goods, services and capital as

well as transfer payments such as foreign aid and remittances.

▪️The BOP is composed of three subaccounts :

▫️The current account consists of revenue obtained through merchandise trade, services, income

receipts, and one-way transfers.

▫️The capital account includes transfers of financial assets such as debt payments and transfers of

titles to assets.

▫️The financial account records trade in stocks, bonds, commodities, and real estate.

▪️Factors that give rise to adverse BoP :

1) Economic Factors

▫️Higher levels of imports than exports resulting in a deficit in the BOP account.

▫️Inflation in the domestic economy => foreign goods become relatively cheaper as

compared to domestic goods, which increases imports.

▫️Cyclical fluctuations, like recession or depression.

▫️Fall in demand for country’s goods in the foreign markets leads to fall in exports, thereby adversely

affecting the BoP.

▫️Import of Services from other countries.

2) Political Factors

▫️Political instability may lead to large capital outflows and reduce the inflow of foreign funds.

3) Social Factors

▫️An unfavourable change for the domestic goods leads to a deficit in the BoP.

▫️High population growth in poor countries adversely affects their BOP because it increases the needs

of the countries for imports and decreases their capacity to export.

▪️Remedial measures to correct imbalance in BoP are :

▫️The foreign earning should be increased by export led growth. Exports should be encouraged by

taking measures that make them competitive, including subsidies, duty drawbacks, logistics

improvements, etc.

▫️Control on unnecessary imports like gold in times when CAD comes under severe pressure.

▫️Inflation discourages exports and encourages imports. Therefore, inflation should be kept in check.

▫️Taking steps to check currency manipulation and arrest the volatility in currency exchange rate,

which will encourage foreign investment and thus, capital flows into the country.