Balance of Payments, Debt, Financial

Crises

Source: Todaro, Michael and Smith, Stephen. (2012).

Economic Development. 11th edition. Pearson.

Powerpoint Templates
Americans buy automobiles from
Japan and have no other transactions
with Japan

Balance of Payments
Powerpoint Templates
 Balance of Payments

- a summary statement of a nation’s

financial transactions with the outside
world.

Powerpoint Templates
 Balance of Payments
The balance of payments is comprised of two
main accounts:
a. current account - the market value of a
country’s “visible” (e.g., commodity trade)
and “invisible” (e.g., shipping services)
exports and imports
b. capital and financial account- private
foreign investment and public grants and
loans that flow into and out of a country over
a given period, usually one year

Powerpoint Templates
 Balance of Payments
Credit increases BOP (inflow)
Debit decreases BOP (outflow)
Current Account:
1. Goods and Services
Export - Credit
Import – Debit
2. Income
Investment Income Receipt – Credit
Debt-Service Payments – Debit
3. Current Transfer (net remittances)
Receipt – Credit
Payments – Debit
Capital Account:
Receipt – Credit
Payments –Powerpoint
Debit Templates
 Balance of Payments
Financial account:
1. Private Direct Investment (long-term)
Debit: Assets, Residents' Investments Abroad
Credit: Liabilities, Non-Residents Investments in the country
2. Portfolio Investment (short-term)
Debit: Assets, Residents' Investments Abroad
Credit: Liabilities, Non-Residents Investments in the country
3. Financial Derivatives
Debit: Assets, Residents' Investments Abroad
Credit: Liabilities, Non-Residents Investments in the country
4. Other Investment
Debit: Assets, Residents' Investments Abroad
Credit: Liabilities, Non-Residents Investments in the country

Powerpoint Templates
 Philippines BOP 2010 (in million US dollars)
Current account (A) 1752 Capital account (B) : -260
1. Goods and Services -2686 1. Private Direct Investment (long-term) 18
Export - Credit 15332 Debit: Assets, Residents' Investments Abroad 86
Import – Debit 18018 Credit: Liabilities, Non-Residents Investments in 104
the country
2. Income 219 2. Portfolio Investment (short-term) -590
Investment Income 1445 Debit: Assets, Residents' Investments Abroad 591
Receipt – Credit
Debt-Service Payments – 1226 Credit: Liabilities, Non-Residents Investments in 1
Debit the country
3. Current Transfer (net 4219 3. Financial Derivatives -26
remittances)
Receipt – Credit 4407 Debit: Assets, Residents' Investments Abroad -110
Payments – Debit 188 Credit: Liabilities, Non-Residents Investments in -136
the country
4. Other Investment 338
Debit: Assets, Residents' Investments Abroad 206
Credit: Liabilities, Non-Residents Investments in 544
the country
NET UNCLASSIFIED ITEM (C) 348
Powerpoint Templates
OVERALL BOP POSITION 1840 (A+B+C)
 Philippines BOP 2018 (in million US dollars)
Current account (A) -7879 Financial account (C) : 7832
1. Goods and Services -38543 1. Private Direct Investment (long-term) 5854
Export - Credit 89142 Debit: Assets, Residents' Investments Abroad 3948
Import – Debit 127686 Credit: Liabilities, Non-Residents Investments 9802
2. Income 3844 2. Portfolio Investment (short-term) -858
Investment Income Receipt – Debit: Assets, Residents' Investments Abroad
Credit 12068 4224
Debt-Service Payments – Debit 8224 Credit: Liabilities, Non-Residents Investments 3366
3. Current Transfer (net 3. Financial Derivatives 53
remittances) 26820 Debit: Assets, Residents' Investments
Receipt – Credit 27607 Abroad -1466
Payments – Debit 787 Credit: Liabilities, Non-Residents Investments -1413
Capital (B) : 65 4. Other Investment 2783
Receipt – Credit 103 Debit: Assets, Residents' Investments -669
Payments – Debit Credit: Liabilities, Non-Residents Investments
38 in the country 2114
NET UNCLASSIFIED ITEM (D) -2324
OVERALL BOP POSITIONPowerpoint
-2305Templates
(A+B+C+D)
Source: http://www.bsp.gov.ph/PXWeb2007/database/SPEI/bop1/bop1_en.asp
 Balance of Payments
Balance of Payments Condition
a. surplus (positive)
b. deficit (negative)
c. balance (zero)

Powerpoint Templates
 The Balance of Payments

• The balance of payments position:

– Surplus: inflows > outflows
– Deficit: outflows > inflows
• Consequence:
– Surplus: increase in cash reserves account
– Deficit: decrease in cash reserves account

Powerpoint Templates
 How to Finance Payment Deficit?

• Increase monetary reserves

– borrow
– Fiscal and monetary policies (tightening)
• Encouraging private and foreign
investment

Powerpoint Templates
 Consequences of BOP Deficit

• Reduce cash reserves account

• Increase Debts
• Exchange Rate-foreign exchange
devaluation
• Inhabit imports: impose tariffs/quotas
• Increase exports: foreign exchange
devaluation

Powerpoint Templates
13-
 Consequences of BOP Deficit
• Impose restrictive fiscal and monetary
policy
– Reduce income expansion to lower
import growth
– Reduce inflation for exports to compete
internationally
• Attract direct foreign investment
• Receive a greater share of the IMF’s “paper
gold” known as the Special Drawing Rights
(SDRs)
• Increase external debt
Powerpoint Templates
13-
Payments Balances on Current Account,
1980–2006 (billions of dollars)

Powerpoint Templates
13-
 Third World Debt Crisis
• The accumulation of external debt Since
early 1980s
• Allocation of a larger percentage of the GDP
(from export earnings) to service external
debt
• Scarcity of development funds: lack of
investment in physical, human, and social
capital

Powerpoint Templates
13-
Dimensions of the LDC Debt Burden,
1970–2008

Powerpoint Templates
13-
 Severely Indebted Countries

• Large outstanding debt

• Debt as a large percentage of GDP and

exports

• High debt service-to-GDP (or GNI) ratio

• High debt service-to-exports ratio

Powerpoint Templates
13-
 The Debt Crisis

• Global recession, reducing demand for LDC

exports

• Lack of confidence in LDCs’ ability to repay

foreign loans

• Substantial amount of capital flight from the

LDCs

Powerpoint Templates
13-
 Global Dimensions of LDC Debt

• Restructuring of short-term to long-term loans

• Debt forgiveness to selected LDCs if they
continue to use IMF stabilization policy
• Debt-for-equity swap: banks exchange loans
for ownership of domestic industries
• Debt-for-nature swap: MDC government
forgive loans if LDCs invest in preserving the
environment
Powerpoint Templates
13-
 Has the Debt Crisis Disappeared?

No! Debt crisis is just postponed!

• LDCs continue to borrow

• LDCs continue to make large debt service
payments
• In addition to the severely indebted LDCs
are greatly dependent on external debt

Powerpoint Templates
13-