BALANCE OF PAYMENT
PREPARED BY: PN AZIZAH ISA
UiTM KELANTAN
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Balance of Payment (BOP)



is a bookkeeping that records all international
transactions between our country and other
foreign countries in a specific time period, usually
in a year.
is a summation of all inflow and outflow
expenditures made by all individuals, firms and
government in a country.
is a record of all the monetary transactions
between a country’s residents and the rest of the
world during a period of time.
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A favourable BOP



BOP account should have a balance spending
between the inflow and outflow in the net
balance.
But of course, is impossible to reach a ZERO
BALANCE, but at least a small difference
between the inflow and outflow.
if inflow > outflow
SURPLUS
(favourable BOP)

if inflow < outflow
DEFICIT
(unfavourable BOP)
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Malaysian BOP Structure

BOP structure can be divided into 3 parts:
i) Current Account
ii) Capital and Financial Account
2 main
account
iii) Error and Omission
Official Statement Account / Reserves
- is to show the net monetary movement.
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CREDIT (CR.) components of BOP
inflow (receipts) of money - is represented by
a positive (+ve) sign.
 Some of the items involve are:
i) exports of goods and services
ii) foreign investment in the country
iii) deposits by non-residents in the country
iv) various loans made to the country.
v) paying back loans made by non- residents
to country’s bank
(take this note)

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DEBIT (DR.) components of BOP
outflow (payment) of money - is represented
by a minus (-ve) sign.
Some of the items involve are:
i) imports of goods and services
ii) county’s investment abroad.
iii) deposit of money abroad by the country’s
residents.
iv) various loans to non-residents made by the
country’s bank.
v) paying bank loans made by the country’s
residents to foreign bank .
(take this note)

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1. CURRENT ACCOUNT


It records all payments and receipts for
goods and services and any transfers of
money to and from abroad.
It is normally divided into three parts:
i.
ii.
iii.
iv.
Goods account (Trade Balance)
Service account
Income
Net transfers (Current Transfers/
Unilateral Transfers)
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i) Trade Balance
Also known as: Merchandise Balance or
Goods Balance or Visible Account.
 It comprises imports and exports of physical
goods (tangible commodities):
 Examples of physical exports are:
palm oil, rubber and petroleum.
 and examples of physical imports are:
machineries, computers and construction
materials such as cement.
 2 condition: Deficit of Trade Balance
Surplus of Trade balance.

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ii) Service Balance




Also known as: Invisible Trade Account.
It measures the value of services exported
minus the value of services imported.
Positive value implies that receipts from
abroad for that particular item exceeds its
payment made.
Negative value implies that payment made to
abroad for that particular item exceeds its
receipts
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Service Balance:
There are six (6) items in this account:
 freight and insurance
- It includes all charges for transporting goods
 Other transportation
- It includes services such as those provided to foreign
ships and receipts by national airline
 travel (tourism) and education
- It includes spending expenditure by foreign tourists (a
credit item) and spending expenditure by Malaysian
tourists abroad (a debit item).
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Government transactions
- It includes expenditures incurred by
foreign embassies in Malaysia (a credit
item) and Malaysian embassies abroad (a
debit item). Includes also transactions on
military expenses.
Other services
- It includes consultancy and professional
charges receives from or paid abroad

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
By adding the value of Goods Account
Balance and Service Account will give
us the Balance of Goods and Services
Balance
on Goods and
Services
=
i)
Goods
Balance
+
ii) Service
Balance
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iii) Income
Compensation of employees
Investment income
- includes profits and dividends from:
direct investment,
portfolio investment and
other investment
which is received from or paid abroad.
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iv) Current Transfers


Net transfers are made by both public and
private sectors.
Some of the items considered are :
a. remittances of immigrants to relatives leaving abroad.
b. foreign aid to and from government or charitable
agencies abroad.
c. personal pensions received from and paid abroad.
d. gifts of money to and from overseas residents to
Malaysian residents.
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As a conclusion,
Current Account:

is derived by adding
components discussed;
all
the
four
Goods A/C
+ Service A/C
+ Income
+ Net Transfers
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2. CAPITAL and
FINANCIAL ACCOUNT

2 items;
i) Capital Account:
- capital transfers
- non-produced and non-financial assets.
ii) Financial Account:
- Direct Investment (abroad or in Malaysia;
such as foreign companies (FDI) setup new
factories here.)
- Portfolio Investment (the buying of shares
and bonds.)
- Other Investment (Official Sector or
Private sector)
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iii) ERROR & OMISSION

Statistical discrepancy that occurs due to
late payment, wrong calculation, return
payment and other information gathered
which is mistaken in estimating figures
and data.
(take this note)
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OVERALL BALANCE
(Total currency flows of money.)
= CURRENT ACCOUNT
+ CAPITAL & FINANCIAL A/C
+ ERRORS & OMISSIONS.
which give rise to a surplus or deficit of
the Balance of Payment.
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BANK NEGARA RESERVE
(international reserve)
(official financing)


If BOP is surplus (positive); is an increased
in value. So an addition is stated as
negative in the reserve account, showing
that there is an inflow of foreign reserve.
If BOP is deficit (negative); is a reduction in
value. So a decrease or drawings is stated
as positive in the reserve account, showing
that there is an outflow of foreign reserve.
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NET CHANGE IN
BANK NEGARA
INTERNATIONAL RESERVE

This year’s reserve is added to the last
year’s total net reserve.
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PERSISTENT DEFICIT IN
THE BALANCE OF PAYMENT


Deficit means a greater payment than
receipt - due to a large outflow of
money paid to other countries.
Persistent Deficit - for a country which
experience a pro-longed deficit from
year to years is discouraged and need
to be solved.
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Some of the Effects of
BOP deficit are:
1.
Reduces economic growth – once the
economy cannot maintain a high
exports compared to imports - reduces
aggregate demand and will result to
a less multiplier effect on the real
output and GDP will falls.
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Some of the Effects of
BOP deficit are:
2. Reduces the competitiveness of
domestic prices – once export is less
compared to import, demand for RM is
less compared to foreign currency
forced RM to depreciated.
Malaysian goods will look like more
expensive compared to others in the
global market.
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Some of the Effects of
BOP deficit are:
3.
Increases debtedness – larger volume
of loans might have been taken to
develop the economy. This will lead to
deficit in the capital and financial
market. Repayment of loans with the
larger interest for longer period of
repayment.
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Some of the Effects of
BOP deficit are:
4.Reduces reserves – larger exports
increases demand for foreign reserve,
thus Bank Negara Reserve account has
to be debited.
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Some of the Effects of
BOP deficit are:
5.
Depreciating the exchange rate –
import is larger than export, thus less
demand for RM will depreciate its
value.
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POLICIES TO REDUCE
BOP DEFICIT:
1.
Reducing the volume of imports
and increase exports – by
introducing the protectionist
policy or encouraging the public to
buy local goods.
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POLICIES TO REDUCE
BOP DEFICIT:
2. Expenditure switching policy – substituting
imported goods to exported goods.
Any policy to encourage consumers in
buying domestic products such as a policy
which can reduce the price of domestic
goods and become more competitive, so
that it could attract more buyers to it.
- Also to promote investors to produce more
goods for export and at the same time to
reduce import. Subsidies and grant were
given to help them, instead more tax
exemption to support this exporting firms.
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POLICIES TO REDUCE
BOP DEFICIT:
3. Deflationary Policy – this is a policy
to reduce aggregate demand. To
make a fall in aggregate demand is
aim at reducing consumers demand
on imported goods and at the same
time to make domestic prices lower
and becomes more competitive in
the global market, thus larger
demand for Malaysian export.
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POLICIES TO REDUCE
BOP DEFICIT:
4.Devaluation/Depreciation of Ringgit – a
government’s policy to depreciate the
country’s currency lower than the par value
(for countries with Pegged exchange rate
regime.) While for those country’s using the
Flexible exchange rate regime can forced the
value to depreciate by the controls at the
FOREX market, whereby reserves were used
to change the market forces of demand and
supply at the FOREX market. Thus, exports
becomes cheaper in the eyes of foreigners
(with the assumption that there’s no
retaliation)
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POLICIES TO REDUCE
BOP DEFICIT:
5. A policy of budget surplus – reduces the
government spending thus lowering the
competition for loans. This will reduce
interest rate and depreciating the value of
Ringgit and thus affected the import
volume.
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POLICIES TO REDUCE
BOP DEFICIT:
6.
Contractionary monetary policy – to
reduce money supply (liquidity in the
hands of the public) and increases
interest rate on loans to reduce
investment facilities. Usually public will
buy more imported goods when they are
rich therefore by making a fall in their
income there will be less imports.
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