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.

1.3 METHODOLOGY This term paper is prepared with the help of publications on Balance of Payment published by the Bangladesh Bank. Data are also collected from internet by surfing different websites. A soft copy of Microsoft Encarta, a famous computer based encyclopedia, is also used to collect data. Information is taken from different articles of that encyclopedia.

1.4 LIMITATIONS The first problem was of course the deadline of submitting the report. 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. So there may be lack of credibility of the data collected. Electricity failure, which is also a major problem of Bangladesh, hampered the collection of data from different internet sources.

BALANCE OF PAYMENT: GENERAL CONCEPT

2.1 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. In other words, it is the record of all international payments and international receipts. The record is done by the central bank of a country. 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, government or agencies with the rest of the world. Alternatively, 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. For a period, if the

receipt less payments is positive, the balance of payments shows a surplus, if the sum of the total payments exceeds that of total receipts, the balance of payments is said to be in deficit and if the difference between these two is zero, the balance of payments depicts equilibrium. All data are recorded by maintaining double entry book keeping system. 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.

2.2 ELEMENTS OF BALANCE OF PAYMENT

The balance of payments is officially known as the Statement of International Transactions and includes two main accounts. The first, the current account, tracks activity in merchandise tradeexporting and importing; income earned from investments abroad; money paid to foreign investors; and transactions on which the government expects no returns. The second, the capital account, tracks both loans given to foreigners and loans received by citizens. Because the balance of payments is one reflection of a nation's financial stability in the world market, the International Monetary Fund (IMF) uses these accounts to make decisions such as qualifying a country for a loan. The IMF also provides the information to its members so that they can make informed decisions about investments and trade. In detail, all international transactions are classified into 4 broad groups. These groups are Current account transactions Capital and financial account transactions Official reserve account Statistical discrepancy account

2.2.1 Current account The current account, which records transactions involving the purchase (imports) and sale (exports) of goods and services, interest payments paid to and received from people and firms in other nations, and net transfers (gifts and aid) paid to other nations. Following are recorded under this category
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Trading goods - includes export and import of goods Trading Services includes travelling costs, transportation costs, medical expenditures, consultancy service etc.

Income out of Foreign investment -

includes foreign direct

investment (FDI), foreign portfolio investment Unilateral transfer - Foreign grants, Labor remittances

2.2.2 Capital and Financial account The capital account, which records investments in the one country made by people and firms from other countries, and investments that particular countrys citizen and firms make in other nations. Following are recorded under this category All types of foreign investment includes both direct and portfolio investments All types of foreign aid - includes foreign loans and its waivers Banking and non banking claims

2.2.3 Official reserve account This account is basically the governments account which is maintained by the central bank authority. In many countries, the official reserve account is a subdivision of the capital account in which the foreign currency and securities held by the government, usually by its central bank, and are used to balance the payments from year to year. Following are recorded under this category
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Gold holding of government IMF reserve i.e. SDR holding Foreign currency holding by the government

2.3 PURPOSES OF BALANCE OF PAYMENT Balance of payment statistics are regularly compiled, published and are continuously monitored by companies, banks and government agencies. A set of BOP accounts is useful in the same way as a motion picture camera. The accounts do not tell us what is good or bad, nor do they tell us what is causing what. But they do let us see what is happening so that we can reach our own conclusions. Below are 3 instances where the information provided by balance of payment accounting is very necessary

1. 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. Judging the stability of a fixed exchange rate system is also easier with the same record of international exchange. These exchanges again show the extent to which a currency is accumulating in foreign hands, raising questions about the ease of defending the fixed exchange rate in a future crisis. 3. To spot whether it is becoming more difficult for debtor counties to repay foreign creditors, one needs a set of accounts that shows the accumulation of debts, the repayment of interest and principal and the countrys ability to
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earn foreign exchange for future repayment. A set of BOP accounts supplies this information.

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. The data are derived from various sources such as foreign exchange transaction records of authorized dealers, documents of the Ministry of Food on import of food grain by the government, documents of Ministry of Finance on imports financed through foreign loans and grants, 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 adjustment policies that Bangladesh pursued under various facilities of the IMF brought about some positive changes in the economy. The aggregate demand management policies initiated by IMF through streamlining fiscal and monetary systems proved largely successful. 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.

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

transportation, communication service, construction service, financial service, computer and information service etc. Balance of income account is also recorded under current account which includes compensation of employees, direct investment and portfolio investment. Under capital account amount of capital transfer, amount of direct investment and
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amount of portfolio investment are recorded. Reserve assets are mentioned under the capital and financial account.

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3.3 ANALYSIS & FINDINGS

Interpretation: It is found that trade balance throughout year 2008, 2009 & 2010 is negative. It indicates that we are always in trade deficit with the rest of the world. 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 48.76%. 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.

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Interpretation: It is found that export throughout the year 2008, 2009 &2010 is in increasing trend. But the rate of increasing is not very high. From 2008 to 2009 the rate of increasing was 2.68% where from 2009 to 2010 the rate of increasing was 41.84%. on the other hand import was also increasing throughout the year 2008-2010. And the rate of increase in import was at a very high rate. From 2008 to 2009 the rate negative ( it was -0.39%) but from 2009 to 2010 it raises with a bang. The increasing arte of import from 2009 to 2010 was 42.82% which caused negative trade balance in 2010-11 fiscal year.

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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. 46.16% increased in service deficit.

Interpretation: We have found that from 2008 to 2009 payment decreases by 2.6% but from 2009 to 2010 payment increases by 36.13% . On the other hand receipt decreases in 2009 from 2008 with 7.56% but it increases from 2009 to 2010 by 31.52% which causes negative balance in service sector in 2010-11 fiscal year.

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Interpretation: Income balance throughout the year 2008-2010 is negative for Bangladesh. This negative balance increases from 2008 to 2009 by 27.56% where from 2009 to 2010 it decreases by 4.96% but still we have negative balance in income sector.

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. But still we have negative balance in income in 2010-11 fiscal year which is $1205 million. This is because the percentage
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raises in income receipt is lower than the percentage increases in payments.

Interpretation:

Current

transfer

balance

for

Bangladesh

is

positive

throughout the year 2008-2010. And this positive trend is in increasing percentage. From 2008 to 2009 percentage increase in current transfer was 24.95% but this increasing percentage fall in 2010 to 4.31%. 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.

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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 foreign remittance increased by 27.54% but from 2009 to 2010 the percentage increase was very low which was 5.11%. as a result we did not get much higher positive balance in current transfer.

Interpretation:

Though

we

have

positive

current

account

balance

throughout the year 2008-2010 but this has a ups and downs in this three year. From 2008 to 2009 current account balance increased by 322.50% but from 2009 to 2010 it falls by 79.46%. This is because of sudden world economic crisis and fall in foreign remittance.

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Interpretation: We have found that we have negative in trade balance, negative in income balance, negative in service balance but we have positive in current account throughout the year 2008-2010. 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. 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.

Interpretation: Throughout the year 2008-2010 we have positive balance in capital transfer but in this element there is not much growth. From 2008 to 2009 capital transfer falls by 90.72% but from 2009 to 2010 it raises by 39.40%. We have positive balance but we should take care in this area so that we will get positive BOP.

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Interpretation: We have negative financial account balance throughout the year 2008 2010 and the percentage of this is higher day by day. From 2008 to 2009 financial account increased by 59.23% but from 2009 to

2010 it falls by 283.97%. This is not a good sign for balance of payment of Bangladesh.

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. Due to world economic crisis and fall in foreign remittance & increase in import causes this negative BOP for Bangladesh.
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Interpretation:

In 2008-2009 fiscal year we have increased our foreign

reserve and from 2008 to 2009 fiscal year this increase was 703.92% higher but in 2010 fiscal year it falls with a higher percentage and causes to reduce in foreign reserve by $747 million. This is not a good indication for our countrys economy. Our government and we also should take necessary steps in this situation.

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