Analysis of Trade Balance and Current Account of South Asian Countries

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International flow of funds
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Table of Contents
Introduction......................................................................................................................................3
(i) Analyse trade balance and the current balance of each country and identify the reasons for the
fluctuations in trade and current balance?.......................................................................................4
(ii) Show a comparison analysis of trade balance and current account balance of given countries?
.......................................................................................................................................................11
(iii) Define the impact of balance of payment of the one country to the other country?..............13
(iv) What are the policy decisions which help to correct the problem of balance of payment?....15
(v) Demonstrate the comparison of policy decisions and the problem of balance of payment?...17
Conclusion.....................................................................................................................................18
References......................................................................................................................................19
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Introduction
This report contains detailed analyses of various aspects of international trade and fund flow for
South Asian countries. It defines terms of trade balance and current account balance with regards
to various countries such as Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Sri
Lanka, and Pakistan. Trend analysis is given with the reasons of fluctuation in the trade balances
of various countries. It also defines the effects of balance of payments and provides comparison
basis for above-mentioned countries. The report demonstrates how trade policies of countries can
deal with the problem of balance of payment and provide comparison analysis towards the policy
and issues of trade in countries.
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(i) Analyse trade balance and the current balance of each country and identify the reasons
for the fluctuations in trade and current balance?
Trade balance
A balance of trade or trade balance is the net value of countries export value and import value. It
is the main component of the current account balance and helps to express the correct
international transactions in the balance of payment. It shows a surplus when exports of goods
and services are greater than imports of goods and services. When exports transactions are less
than import transactions then it creates a trade deficit. It’s not always good to have a favourable
trade balance for the emerging economy as it shows that countries are not opting for import of
new technology and services which can help an economy to develop.
 Favourable trade balance
Trade balances are categorized in favourable trade balance and unfavourable trade balance.
Favourable trade balance can be trade surplus and trade deficit as well. Various trade policies are
created by countries to make sound net export and earning a profit for the country. Trade surplus
results in higher foreign exchange and improved standard of living. It will also help to gain a
competitive edge and reduce the problem of unemployment. Apart from the benefits of trade
surplus for some countries trade deficit is also a favourable condition where countries have
developed an economy and also have an expansion business stage.
 Unfavourable trade balance
A trade deficit is mainly considered as unfavourable trade balance. It certainly depends on the
economy of the country whether trade surplus is unfavourable or trade deficit is unfavourable for
the country. Countries having trade deficit depends on foreign countries for satisfying demand of
their consumer products. Higher import leads to dependence of countries economy on global
product prices. Sometimes trade surplus is also considered as unfavourable for the economy. The
higher surplus in trade balance shows higher export and can be concluded that the country's
economy is highly dependent on the export of goods and services. A country is more dependent
on foreign customers for their economic growth.
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Current Account balance
Current account balance records transactions related to a net export of goods and services, net
investment earnings and net transfer payments. It is a component of the balance of payment
which deals with foreign transactions other than the transaction of capital nature. The balance of
the current account is mostly affected by trade balance as it is the big component of the total
current balance. Every transaction recorded in current account has an opposite impact on the
capital account of the balance of payment. A net surplus balance of current account shows that
the country has to take fund from the rest of the world and negative balance indicated that the
country owes funds to the other countries.
Surplus balance shows that country produces goods and services using their resources and earns
money by export the same. It gives an opportunity to increase productivity for those countries
having a deficit balance in the current account. A deficit balance shows country invests more
than its available resources to meet the investment requirement and consumption for domestic
use.
There are various reasons for fluctuation in the balance of trade and current account balance of
the country. The balance of trade is all about export and import hence change in trade policy,
exchange rate, inflation, and foreign demands are important factors which can affect the balance
of trade. Amendment in trade policy is also an important factor of fluctuation in the country’s
export balances which eventually affect the current account balance and overall balance of trade.
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Showing trend of different countries and define their fluctuation reasons.
Afghanistan
Figure: (Trend of Balance of Trade) Figure: (Trend of current account)
Afghanistan is involved in mainly export of primary products. Most of its income arises from the
export of nuts, fruit, cotton, wool etc. Afghanistan import mainly consumer and capital goods
from its trading partners. Trade is highly affected due to frequent changes in demand for fruit
growing labour and other agricultural product. Most of the export proceeds are used for the
consumption of liquor and it will not help in further value addition in the economy. One of the
main reasons for that change in the trade balance is that developing countries are a price taker in
the market of international trade and Afghanistan is one of those countries.
Bangladesh
Figure: (Trend of the balance of Trade) Figure: (Trend of current account)
Bangladesh has a very low level of production of domestic goods and other consumer product.
The economy of Bangladesh is highly dependent on imports for consumer goods, capital goods,
and other agricultural goods. Hence international prices affect the trade balance of the country
very severely. From the past decades, there is a trend of the trade deficit in the country due to the
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increase in imports and relativity less increment in the export of goods and services. Oil is petrol
is mainly imported by country and also some food items and textile.
Bhutan
Figure: (Trend of Balance of trade) Figure: (Balance of Current account)
Overall international trade transaction of Bhutan is with India. Foreign trade policy of India will
affect trade transaction of Bhutan. It shows the highest trade deficit throughout the year 2010 to
2012 as mentioned above in the graph. It imports goods and services far more than its export due
to non-availability of efficient resources for production and providing services to the nation. In
recent years, a trade deficit is reducing due to the introduction of a hydroelectric project in
Bhutan. Its trade balance mainly affected due to higher fluctuation nature of their export goods
such as wood, rubber, metals etc.
India
Figure: (Trend of a balance of trade) Figure: (Balance of Current account)
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India shows recently reduction in the balance of trade due to the reduction in imports of oil and
gold from other countries. Reductions in the import of electronic items are also contributed to
fluctuation in the current account balance. India mainly performs an international transaction
with EU, US, and China. Change in their trade policy also affects the balance of current account
and balance of payment. India is stepping towards the developed economy and improving their
trade situation which helps the country to reduce its deficit balance of trade. The deficit of
balance increases from 2002 due to new rules and regulations for import of petroleum products.
Maldives
Figure :( Trend of a balance of Trade) Figure: (Trends of current balance)
The country relies on the higher import of oil and consumable goods due to lack of raw material
possess by country. Due to its graphical structure, Maldives is totally depended on international
trade exchange. Import duties are the main source of income for the various state of the country.
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Nepal
Figure: (Trend of the balance of Trade) Figure: (Trend of current Balance)
Nepal shows drastically increases in trade deficit due to poor geographical structure and lack of
proper resources to produce goods and services in the country. The trade balance is mainly
affected by various reasons such as the foreign exchange rate, availability of alternative
resources in the international market and compare prices of goods and services.
Sri Lanka
Figure: (Trend of the balance of Trade) Figure: (Trend of Current balance)
An economy of Sri Lanka is very sensitive toward the change of prices in the international
market as majorly export of country is dependent on the import of various goods and services. A
country is earning its export exchange through tourism. Improvement in services of tourism
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helps the country to offset to some extent its deficit trade balance. Reduction in the deficit of the
current account is also due to an increase in tourism.
Pakistan
Figure: (Trend of a balance of trade) Figure: (Trend of current balance)
Pakistan economy is suffering from a vicious cycle of current account deficit. Oil prices and
demand for investment and finished goods are the main reasons for changes in the balance of
trade and current account of the economy. It shows continuous trade deficit due to the higher
import of petrol and other energy products. Trade policy of countries trading partner will affect
the balance of trade.
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(ii) Show a comparison analysis of trade balance and current account balance of given
countries?
Fluctuation in the balance of trade and current account balance of a country is dependent on the
size of the economy, their trade history, and countries geographical locations. All countries have
some favourable and unfavourable conditions due to which their export and imports are affected.
Afghanistan has mainly traded with Pakistan, Russia for their import and export. India is also a
trading partner with the export of oil and other petroleum products. It has a recent trade deficit of
$6960.70 million and its highest trade deficit was $-1660.90 million. It’s on an average current
account deficit is -3054.89USD million. It shows very fluctuation trend in trade balances as
compared to other countries.
Bangladesh imports mainly food items, textile and oil products, and export majorly garments
products. It shows the deficit trend in trade balance and in current account balance as compared
to the other countries due to the growing economy and its requirement of higher imports. The
country has an average trade deficit of -27.40 BDT Billion and average current account balance
of 179.16 UDS million which shows better situation from Pakistan, Nepal, and the Maldives.
Bhutan involves the export of electricity, metals, and rubber. It imports oil, fuel, appliances,
wood, and food from India at its major portion of international trade. Indian economy is very
much dependent on Bhutan trade policy due to a higher level of import from India. The total
average trade deficit of country is -5726.80 BTN million and the total current account balance is
-9613.17 BTN million. Bangladesh is also one of its trading partners.
India has a growing economy and it required better technology and products to gain the growth
objective. The country has increasing import rate due to the increasing demand for oil, waxes,
pearls, stones, and jewellery. Indian has a trade surplus with various countries such as UK, US,
the United Arab Emirates due to the increase in exports of various items. As compared to other
countries India has increasingly reduce its trade deficit due to favourable trade policy and better
export quality. It shows the current trade deficit of USD141.2 billion.
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The Maldives has a very small manufacturing base of its own hence country has to imports a lot
of consumer and capital goods. It mainly exports fish to its trading partner. United Arab emirate,
India, Sri Lanka are its main trading partners. Its economy is highly dependent on imports from
above-mentioned countries. It shows the current trade deficit of 234.90 USD Million and the
current account deficit of 860.10 USD million due to negative net exports and a lower rate of
repatriation.
Nepal has majorly exported iron, textiles, plastics, and vegetables. Its main trading partners are
India and Bangladesh. It shows a deficit due to its geographically challenged location and
infrastructure constraints. Recent trade balance of the country is 113688.70 NPR Million.
Sri Lanka exports of tea, garments, rubber, processed diamond etc. Its economy is highly
dependent on the foreign policy of the US, UK, Germany, and Italy. Its major imports included
petroleum, textiles and transportation equipment from India, China, and Iran. Recently country
shows a deficit in the balance of trade 903.40 USD Million and the current account deficit is 462
USD Million.
Pakistan has majorly imported from China. Its trade balance dependent on the economy of
India, Malaysia, and Saudi Arabia. It has a trade surplus with US, UK, and Germany. The total
recent trade deficit of Pakistan is 327232 PKR Million. And current account balance of 3665
USD Million.
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