The Balance of

Payments BOP
Presented to Dr Ahmed Fekry
 Presented By

AMIR ANWAR ELSAYED MOHAME D 21121121

HOSSAMELDIN ABDELLATIEF MAHMOUD ASHOR 21120158

WALEED MOHAMED ELSEBAIE 21120195

NADA MOSTAFA KAMEL EL DESOLY SHOMAN 21120483

 What are We going discus 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 (B_OP
 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
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 Cash inflow and Cash out
must 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

Example Cash inflow Cash outflow

Honda US is the distributor of cars manufactured in Japan by its Honda Japan Honda US
parent, Honda of Japan

US based firm, Fluor Corp., manages the construction of a major US based Bangkok, Thailand
water treatment facility in Bangkok, Thailand

An American tourist purchases a small Lapponia necklace in Finland American tourist

Finland

A Mexican lawyer purchases a US corporate bond through an broker in Cleveland Mexican lawyer
investment broker in Cleveland

US subsidiary of French firm, Saint Gobain, pays profits firm in Paris US subsidiary
(dividends) back to parent firm in Paris
 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 bookkeeping 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)
Balance of Payments Accounts

Generic Balance of Payments

 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.
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. Additionally, wages and salaries paid to nonresident workers are also included in
this category.

•
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.
 The Financial Accounts

• Financial account consists of three components and is classified either by maturity of asset or nature of
ownership.

• The three components are:-

• Direct Investment – Net balance of capital which is dispersed from and into a country for the purpose of
exerting control over assets. This category includes foreign direct investment

• 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 categoryThis capital is purely return motivated

• 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

Account is used to account for

statistical errors and/or untraceable
monies within a country
 Official Reserves

Total reserves held by official monetary authorities within a country.

• These reserves are typically comprised of major currencies that are used in international trade and
financial transactions and reserve accounts (SDRs) held at the IMF

• 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
 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 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
Other 6077.5 5109.1
Income Balance (net) -11354.0 -12399.2
Income receipts 942.1 572.9
Income payments 12296.1 12972.1
of which: Interest Paid 2947.7 2518.7
Transfers 27679.9 30903.4
Private Transfers (net) 27461.8 31180.3
of which: Worker Remittances 27758.0 31425.3
Official Transfers (net) 218.1 -276.9
Current Account Balance -11166.7 -18436.4
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)

• The balance of trade is one of the key components of a

country's gross domestic product (GDP) formula. GDP
increases when there is a trade surplus: that is, the total
value of goods and services that domestic producers sell
abroad exceeds the total value of foreign goods and
services that domestic consumers buy. If domestic
consumers spend more on foreign products than domestic
producers sell to foreign consumers—a trade deficit—
then GDP decreases.
 The impact of Balance Of Payment (BOP) on
Gross domestic product (GDP)

In a static (accounting) sense, a nation’s GDP can be represented by the following equation:

GDP = \text{private consumption spending} + \text{investments} + \text{government spending} + \

left( \text{exports} - \text{imports} \right)

GDP=private consumption spending + investments + government spending+(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 account
M = imports of goods and services balance
 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

• 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

• Under a fixed exchange rate system:- the government bears the responsibility to assure a BOP
near zero

• Under a floating exchange rate system,:- the government of a country has no responsibility to peg
its foreign exchange rate
 The impact of Balance Of Payment (BOP) on The
exchange rate

The relationship between BOP and exchange rates can be illustrated by use of a
simplified equation:

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
Interest Rates

Apart from the use of interest rates to intervene in the foreign exchange market, the overall level
of a country’s interest rates compared to other countries does have an impact on the financial
account of the balance of payments

Relatively low interest rates should normally stimulate an outflow of capital seeking higher
interest rates in other country-currencies

In the U.S. however, the opposite has occurred as a result of attractive growth rate prospects, high
levels of productive innovation, and perceived political stability
 The impact of Balance Of Payment (BOP) on
Inflation Rates

Imports have the potential to lower a country’s inflation rate

In particular, imports of lower priced goods and services places a limit on what domestic
competitors charge for comparable goods and services
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

Countries occasionally devalue their own currencies as a result of persistent and sizable
trade deficits. Many countries in the not-too-distant past have intentionally devalued
their currencies in an effort 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

• U.S. trade balance = (P$xQx) – (S$/fc PfcM QM)

The J-Curve Adjustment Path
Thanks