INTRODUCTION

1.1 PROBLEM AND PURPOSE This term paper has been basically prepared to fulfill the requirements of International Financial Management course as instructed by honorable faculty Dr. Toufic A. Choudhury. This report is prepared on the topics "Balance of Payment situation of Bangladesh." The term paper has been prepared with special focus on analyzing the balance of payment condition of Bangladesh of previous 3 years. The purpose of this report is to describe the balance of payment situation of the country.

1.2 SCOPE This term paper has been prepared with the aim of establishing a level of understanding of balance of payment situation of a country. Efforts have been made to bring to the forefront certain key issues that are critical in measuring the condition of balance of payment.

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is also used to collect data. The time period plays a vital role and actually the time was comparatively less to obtain all the relevant and necessary data to prepare this report. Another limitation of this report is that data is collected through internet. Information is taken from different articles of that encyclopedia. hampered the collection of data from different internet sources. 2 .4 LIMITATIONS The first problem was of course the deadline of submitting the report. Electricity failure. Data are also collected from internet by surfing different websites. So there may be lack of credibility of the data collected. 1.3 METHODOLOGY This term paper is prepared with the help of publications on Balance of Payment published by the Bangladesh Bank.1. a famous computer based encyclopedia. A soft copy of Microsoft Encarta. which is also a major problem of Bangladesh.

2. if the receipt less payments is positive. government or agencies with the rest of the world. the balance of payments shows a surplus. if the sum of the total payments exceeds that of total receipts. In other words. it is the record of all international payments and international receipts.2 ELEMENTS OF BALANCE OF PAYMENT 3 . Alternatively. For a period. the balance of payments depicts equilibrium. the balance of payments is said to be in deficit and if the difference between these two is zero. All data are recorded by maintaining double entry book keeping system.BALANCE OF PAYMENT: GENERAL CONCEPT 2. In short. Balance of Payments is the relationship between the amounts of money a nation spends abroad and the income it receives from other nations. The balance of payments of a country for any period of time is a complete and systematic statement of all economic and business transactions made by its residents.1 DEFINITION Balance of payment is the record of all international transactions of part of a country with the rest of the world during the particular period of time. The record is done by the central bank of a country. it may be defined as the difference between aggregate receipts obtained by the residents from the foreigners and the aggregate payments made by the residents to the foreigners.

all international transactions are classified into 4 broad groups. interest payments paid to and received from people and firms in other nations. income earned from investments abroad. The first. tracks both loans given to foreigners and loans received by citizens.1 Current account The current account. In detail. and net transfers (gifts and aid) paid to other nations. These groups are  Current account transactions  Capital and financial account transactions  Official reserve account  Statistical discrepancy account 2.2. which records transactions involving the purchase (imports) and sale (exports) of goods and services.The balance of payments is officially known as the Statement of International Transactions and includes two main accounts. Following are recorded under this category 4 . the current account. and transactions on which the government expects no returns. money paid to foreign investors. the capital account. The IMF also provides the information to its members so that they can make informed decisions about investments and trade. Because the balance of payments is one reflection of a nation's financial stability in the world market. The second. the International Monetary Fund (IMF) uses these accounts to make decisions such as qualifying a country for a loan. tracks activity in merchandise trade—exporting and importing.

includes foreign loans and its waivers Banking and non banking claims 2.includes export and import of goods Trading Services – includes travelling costs.2 Capital and Financial account The capital account.2. foreign portfolio investment • Unilateral transfer . the official reserve account is a subdivision of the capital account in which the foreign currency and securities held by the government. medical expenditures. Following are recorded under this category • All types of foreign investment – includes both direct and portfolio investments • • All types of foreign aid . transportation costs.3 Official reserve account This account is basically the government’s account which is maintained by the central bank authority.2. usually by its central bank. • Income out of Foreign investment - includes foreign direct investment (FDI). In many countries. Labor remittances 2. and investments that particular country’s citizen and firms make in other nations.• • Trading goods . Following are recorded under this category 5 . and are used to balance the payments from year to year. which records investments in the one country made by people and firms from other countries. consultancy service etc.Foreign grants.

published and are continuously monitored by companies. Judging the stability of a fixed exchange rate system is also easier with the same record of international exchange. To spot whether it is becoming more difficult for debtor counties to repay foreign creditors. A set of BOP accounts is useful in the same way as a motion picture camera. banks and government agencies. 3. one needs a set of accounts that shows the accumulation of debts. raising questions about the ease of defending the fixed exchange rate in a future crisis.e. Judging the stability of a floating exchange rate system is easier with BOP as the record of exchanges that take place between nations help track the accumulation of currencies in the hands of those individuals more willing to hold on to them. 2. the repayment of interest and principal and the country’s ability to 6 .3 PURPOSES OF BALANCE OF PAYMENT Balance of payment statistics are regularly compiled. nor do they tell us what is causing what. These exchanges again show the extent to which a currency is accumulating in foreign hands. Below are 3 instances where the information provided by balance of payment accounting is very necessary 1. The accounts do not tell us what is good or bad. But they do let us see what is happening so that we can reach our own conclusions.• • • Gold holding of government IMF reserve i. SDR holding Foreign currency holding by the government 2.

A set of BOP accounts supplies this information.earn foreign exchange for future repayment. 7 .

and custom records for the preparation of BOP. Bangladesh received a substantial amount of assistance under various facilities of the International Monetary Fund to correct her balance of payment disequilibrium position. The data are derived from various sources such as foreign exchange transaction records of authorized dealers. The exchange rate and interest rate policies of Bangladesh brought about positive results. The Fund's arrangements for high conditional loans also worked as a 'seal of approval' for enhanced foreign assistance to Bangladesh. The adjustment policies that Bangladesh pursued under various facilities of the IMF brought about some positive changes in the economy.BALANCE OF PAYMENT SITUATION IN BANGLADESH 3.1 BALANCE OF PAYMENT: BANGLADESH PERSPECTIVE The Bangladesh bank prepares balance of payments positions (BOP) of the country following the IMF Balance of Payments Manual. documents of Ministry of Finance on imports financed through foreign loans and grants. 8 . documents of the Ministry of Food on import of food grain by the government. The aggregate demand management policies initiated by IMF through streamlining fiscal and monetary systems proved largely successful.

U.3. Germany ranked 2nd and U. milk and cream. pharmaceuticals products. Bangladesh receipts foreign currency through exporting of products such as raw jute. amount of direct investment and 9 . jute goods. tea. woven garments. sugar.2 ELEMENTS RECORDED IN BOP ACCOUNT All payments to and receipts from international transactions are recorded under (i) current account. construction service. crude petroleum. capital machinery etc. communication service. leather goods. frozen shrimps and fish. spices. edible oil. wheat. textile. Trade balance is determined from the differences of export and import which is recorded under current account. clinker. fertilizer. computer and information service etc. Balance of income account is also recorded under current account which includes compensation of employees. raw cotton. Under capital account amount of capital transfer.A topped the list of potential buyers of goods from Bangladesh.S.K ranked 3rd as the potential buyers of goods from Bangladesh. (ii) capital account. terry towels etc. direct investment and portfolio investment. Bangladesh pays for import of rice. knitwear products. pulses. Balance of service account is difference between payments to receipts from service related field which includes transportation. oil seeds. Under current account payments to and receipts from service account are also recorded. financial service. fertilizer.

10 . Reserve assets are mentioned under the capital and financial account.amount of portfolio investment are recorded.

76%. It indicates that we are always in trade deficit with the rest of the world.3 ANALYSIS & FINDINGS Interpretation: It is found that trade balance throughout year 2008. 2009 & 2010 is negative. In 2008-09 the value of this trade deficit was $5330 million which reduced in 2009-10 but again goes up in 2010-2011 by 48.3. This is because of we have reduced in our export on the other hand we have increased in our import as a result trade deficit goes us with a big percentage. 11 .

12 .84%. on the other hand import was also increasing throughout the year 2008-2010. 2009 &2010 is in increasing trend.39%) but from 2009 to 2010 it raises with a bang.82% which caused negative trade balance in 2010-11 fiscal year. But the rate of increasing is not very high. From 2008 to 2009 the rate negative ( it was -0. And the rate of increase in import was at a very high rate.Interpretation: It is found that export throughout the year 2008.68% where from 2009 to 2010 the rate of increasing was 41. The increasing arte of import from 2009 to 2010 was 42. From 2008 to 2009 the rate of increasing was 2.

56% but it increases from 2009 to 2010 by 31.Interpretation: Service balance is also found in negative trend from year 2008 to 2010 in 2008-09 fiscal year it was negative $1525 million dollar which raises to $2229 million in 2010-11 fiscal year. On the other hand receipt decreases in 2009 from 2008 with 7.16% increased in service deficit. 46.6% but from 2009 to 2010 payment increases by 36.13% . Interpretation: We have found that from 2008 to 2009 payment decreases by 2. 13 .52% which causes negative balance in service sector in 2010-11 fiscal year.

96% but still we have negative balance in income sector. But still we have negative balance in income in 2010-11 fiscal year which is $1205 million. This is because the percentage 14 . This negative balance increases from 2008 to 2009 by 27.Interpretation: Income balance throughout the year 2008-2010 is negative for Bangladesh. Interpretation: Throughout the year 2008 – 2010 payments raises with a low rate but and receipts falls from 2008 to 2009 but again raises in 2010 from $50 million to $110.56% where from 2009 to 2010 it decreases by 4.

15 . And this positive trend is in increasing percentage.31%. Interpretation: Current transfer balance for Bangladesh is positive throughout the year 2008-2010.95% but this increasing percentage fall in 2010 to 4. From 2008 to 2009 percentage increase in current transfer was 24.raises in income receipt is lower than the percentage increases in payments. though current transfer increases from 2009 to 2010 but the rate on increase was very low which is not a good sign for Bangladesh and it must have a negative impact on BOP of Bangladesh.

This is because of sudden world economic crisis and fall in foreign remittance.11%.46%.50% but from 2009 to 2010 it falls by 79.Interpretation: We have found that the current transfer was positive throughout the year 2008 to 2010 and this is because of increase in foreign remittance. From 2008 to 2009 current account balance increased by 322.54% but from 2009 to 2010 the percentage increase was very low which was 5. as a result we did not get much higher positive balance in current transfer. From 2008 to 2009 foreign remittance increased by 27. Interpretation: Though we have positive current account balance throughout the year 2008-2010 but this has a ups and downs in this three year. 16 .

From 2008 to 2009 capital transfer falls by 90. This is because of all of ours negative is backed by our bigger positive current transfer of which worker remittance play a vital role in this sector.40%. negative in service balance but we have positive in current account throughout the year 2008-2010. But there is a matter of concern that this current transfer falls in 2010 with a bigger percentage and if this falling continues then we may fall in negative current account balance in future. We have positive balance but we should take care in this area so that we will get positive BOP. 17 . negative in income balance.72% but from 2009 to 2010 it raises by 39.Interpretation: We have found that we have negative in trade balance. Interpretation: Throughout the year 2008-2010 we have positive balance in capital transfer but in this element there is not much growth.

Interpretation: We have found positive balance of payment in 2008-09 & 2009-10 fiscal year but in 2010-11 fiscal year we have found a negative trade balance of $747 million which is really not a good sign for Bangladesh. We are losing our foreign reserve due to this negative balance. 18 .23% but from 2009 to 2010 it falls by 283. From 2008 to 2009 financial account increased by 59.Interpretation: We have negative financial account balance throughout the year 2008 – 2010 and the percentage of this is higher day by day.97%. This is not a good sign for balance of payment of Bangladesh. Due to world economic crisis and fall in foreign remittance & increase in import causes this negative BOP for Bangladesh.

19 .Interpretation: In 2008-2009 fiscal year we have increased our foreign reserve and from 2008 to 2009 fiscal year this increase was 703. This is not a good indication for our country’s economy. Our government and we also should take necessary steps in this situation.92% higher but in 2010 fiscal year it falls with a higher percentage and causes to reduce in foreign reserve by $747 million.

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