International Financial Management

Dr.Purvi Pujari
 International
Balance of
Monetary Fund
Trade and
(IMF)-
Balance of
Objectives and
Payments
functions

Globalisation in
World Bank- Marketing and
Objective and International
Functions Human
Resource
 Trade:
Exchange of goods and services with other nations.
 Export
Goods and services sold to other countries
 Import
Goods and services bought from other countries
 In addition, trading involve exchange of Visible and
invisible goods
 Visible goods: Are the material goods exported and
imported.
 Invisible products: Are the non merchandise(services)
item.
Balance of Trade
 It is the difference between the monetary value of
exports and imports in an economy over a certain
period of time (only visible goods).
Balance Of Payment
 Balance of payment takes into account both the invisible
and visible items.
Balance of Payments
 Balance of Payments (BOP)—is an accounting record of
a country’s trade in goods, services, and financial assets with
the rest of the world during a particular time period (year or
quarter).
Features of the BOP
 BOP follows the accounting procedure of double-entry
bookkeeping (debits & credits).
 A credit entry records an item or transaction that
brings foreign exchange into the country.
 A debit entry represents a loss of
foreign exchange.

.
Features of the BOP (cont.)
 BOP will always balance.
 A BOP deficit (surplus) means that the debit entries
exceed (are less than) the credits. This imbalance applies
only to a particular account or component of
the BOP.
 The measurement of all international economic
transactions between the residents of a country
and foreign residents is called the balance of
payments (BOP)
 The two major sub accounts of the balance of
payments are:
 Current account
 Capital account
BALANCE OF PAYMENT:
 The balance of payments of a country is a systematic
record of all economic transactions between the
residents of a country and the rest of the world. It
presents a classified record of all receipts on account of
goods exported, services rendered and capital received
by residents and payments made by theme on account of
goods imported and services received from the capital
transferred to non-residents or foreigners.
- Reserve Bank of India
 BOP may confirm trend in economy’s international
trade and exchange rate of the currency. This may also
indicate change or reversal in the trend.
 This may indicate policy shift of the monetary
authority (RBI) of the country.
IMPORTANCE OF THE BALANCE OF
PAYMENTS
 BOP records all the transactions that create demand
for and supply of a currency. This indicates demand-
supply equation of the currency. This can drive
changes in exchange rate of the currency with other
currencies.
 BOP may confirm trend in economy’s international
trade and exchange rate of the currency. This may also
indicate change or reversal in the trend.
 This may indicate policy shift of the monetary
authority (RBI) of the country.
The General Rule in BOP Accounting
 a) If a transaction earns foreign currency for the
nation, it is a credit and is recorded as a plus
item.
 b) If a transaction involves spending of foreign
currency it is a debit and is recorded as a negative
item.
The various components of a BOP
statement
 A. Current Account
 B. Capital Account
The Current Account
 This account includes all
international economic transactions
with income or payment flows
occurring within the year, the
current period
 It consists of four subcategories:
 Goods trade
 Services trade
 Income
 Current transfers
 This account is typically dominated
by Goods Trade
Current Account
 BOP on current account refers to the inclusion of
three balances of namely – Merchandise
balance, Services balance and Unilateral
Transfer balance. In other words it reflects the
net flow of goods, services and unilateral
transfers (gifts). The net value of the balances of
visible trade and of invisible trade and of
unilateral transfers defines the balance on current
account.
Capital Account
 The capital account records all international
transactions that involve a resident of the country
concerned changing either his assets with or his
liabilities to a resident of another country.
Transactions in the capital account reflect a
change in a stock – either assets or liabilities.
The Reserve Account
 Three accounts: IMF, SDR, & Reserve and Monetary
Gold are collectively called as The Reserve Account.
 The IMF account contains purchases (credits) and re-
purchase (debits) from International Monetary Fund.
Special Drawing Rights (SDRs) are a reserve asset
created by IMF and allocated from time to time to
member countries. It can be used to settle international
payments between monitary authorities of two different
countries.
TRENDS IN INDIA’S BALANCE OF
PAYMENTS
 A country, like India, which is on the path of
development generally, experiences a deficit
balance of payments situation.
 This is because such a country requires imported
machines, technology and capital equipments in
order to successfully launch and carry out the
programme of industrialization
 Balance of Payments
The Balance of Payments is the statistical record of a country’s
international transactions over a certain period of time presented in
the form of double-entry bookkeeping.

Why is it useful to examine a country’s BOP?

 The BOP provides detailed information about the supply and demand
of the country’s currency.
 The trade statistics in the Current Account, for example, show the
composition of trade – what a country imports and what it
exports.
 The Capital Account shows inflows and outflows of capital in
various categories.
 Viewed over time, BOP data can shed light on important
developments in a country’s comparative advantage and international
competitiveness.
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 Balance of Payments
Accounts

 They are composed of the following:

 The Current Account
 The Capital Account
 The Official Reserve Account

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 Balance of Payments Accounts
Current Account
 Records flows of exports, imports, investment income, and
international financial transfers.
 Merchandise trade – export and import of tangible goods
 Services – payments and receipts for legal and consulting fees,
royalties, tourist expenditures
 Investment income – payments and receipts of interest, dividends, and
other income on foreign investments
 Unilateral Transfers – “unrequited” payments (e.g. Foreign aid).

 If the debits exceed the credits, then a country is running a trade

deficit.
 If the credits exceed the debits, then a country is running a trade
surplus.
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 What is the IMF?
• The IMF is an international
organization of 185
member countries. It was
established to promote
international monetary
cooperation, exchange
stability, and orderly
exchange arrangements; to
foster economic growth
and high levels of
employment; and to
provide temporary financial
assistance to countries to
help ease balance of
payments adjustments.
 Why was it created?
• The IMF was conceived in July 1944, when
representatives of 45 governments meeting in
the town of Bretton Woods, New Hampshire,
in the northeastern United States, agreed on a
framework for international economic
cooperation.
 What does it do?
• Surveillance
• Lending
• Technical assistance
 Surveillance
It is an assessment of economic and financial developments,
which provides a framework that facilitates the exchange of
goods, services, and capital among countries and sustains
sound economic growth. It consists in:
Focusing on assessing whether countries' policies promote
external stability

It is to be remembered that surveillance is a collaborative,

candid, and evenhanded process between the Fund and its
members
 Lending
- IMF lending enables countries to rebuild their international
reserves; stabilize their currencies; continue paying for imports; and
restore conditions for strong economic growth.
- IMF does not lend for specific projects.
- It eases the adjustment policies and reforms that a country
must make to correct its balance of payments problem and
restore conditions for strong economic growth.
 Technical assistance
• It supports the development of the
productive resources of member countries by
helping them to effectively manage their
economic policy and financial affairs.
• About 90 percent of IMF technical assistance
goes to low and lower-middle income
countries, particularly in sub-Saharan Africa
and Asia.
INTERNATIONAL MONETARY FUND
(IMF)

 The International Monetary Fund (IMF) is an organization of

countries that seeks to promote international monetary co-
operation. It facilitates the expansion of international trade.
Thus, it contributes towards increased employment and
improved economic conditions in all member countries.
OBJECTIVES AND FUNCTIONS OF
INTERNATIONAL MONETARY FUND
(IMF)

 The fundamental objective of the IMF was the avoidance of

competitive devaluation and exchange control. Basically
there are three general objectives of IMF viz.
 i) The elimination or reduction of existing exchange controls.
 ii) The establishment of maintenance of currency
convertibility with stable exchange rates.
 iii) The establishment of multilateral trade and payments.
 Difference Between World Bank and IMF
World Bank
- assists developing countries through
long-term financing
of development projects and programs
- acquires most of its financial resources by
borrowing on the international bond market
- staff of 7,000 drawn from
184 member countries
IMF
- oversees the international monetary system
- evaluation of member countries'
economic performance
- promotes exchange stability and orderly
exchange relations among its
member countries
- assists all members - both industrial and
developing countries by providing
short- to medium-term credits
- draws its financial resources principally
from the quota subscriptions
of its member countries
- staff of 2,300 drawn from
184 member countries