International Finance Research: Balance of Payment Data (Research Paper Sample)

International Finance
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Introduction
In 2003, the Gulf Cooperation Council (GCC) countries pegged their currency against the dollar with the aim of helping the emerging nations in the region to gain authority and self-assurance in their respective economies. In 2007, Kuwait unilaterally dropped the dinar, to a basket of currencies (Merza, Alawin, & Bashayreh, 2012). However, the exact weighting of the basket is not disclosed, but financial experts are opined that the dollar still accounted for 70-80% of the value in the basket peg. The move was encouraged by the need to control inflationary pressures originating from a sustained drop of the dollar against major currencies. Currently, the majority of Gulf States are beginning to feel the harm caused by the dollar peg.
The interesting thing is that the shift amounted to only a 1% revaluation, from the time when the move was made; the dinar has strengthened about 5% against the dollar. The reason I chose Kuwait is that by virtue of being an oil exporting country de-pegging its currency from the U.S dollar will have some consequences. On the other hand, there is a lot of speculation on who is next to de-peg their currency from the dollar (Thorpe, 2008). The other reason why I chose Kuwait is that the country has been depending on the oil economies of the GCC countries. To this end, Kuwait serves as a good example to other oil exporting countries that wish to de-peg their currency from the dollar. This paper will examine the effect of this move to Kuwait’s economy by comparing and analyzing the country’s balance of payment data (both current and capital account from 2011-2015).
Balance of Payment Data
Balance of payment also abbreviated as BoP is a mechanism that countries use to monitor all their international financial transactions at a particular period of time which in most cases is quarterly and annually. It accounts for all trades in the country that is by private and public sector. This way it is easy to tell how much money is going in and out of a country. Tentatively the BoP ought to be Zero; however, that is not the case since the assets (credits) and liabilities (debits) rarely balance. When there is a negative difference it is an indication that more money if flowing out of the country. On the hand, a positive balance of payment is an indication that a country is not exporting most of its currency and it also indicate that there is a lot of foreign investment happening in the country. This way a country tends to know if they have a deficit or surplus. The balance of payment is usually divided into three categories, namely current, capital, and the financial account. Since the de-pegging of the currency from the dollar, Kuwait has maintained an unswerving current balance in capital and current account (Merza, Alawin, & Bashayreh, 2012). There was great improvement in 2011 as compared to 2010.
Kuwait: Balance of payments (billion $ US)
Source: Actualitix, 2016
BoP

Year

11.43 billion $ US

2015

53.53 billion $ US

2014

72.46 billion $ US

2013

78.71 billion $ US

2012

65.72 billion $ US

2011

Source: Actualitix, 2016
The Current Account
The main purpose of the current account is to record the entry and discharge of goods and services into a country. It includes incomes on investments, from both public and private sectors. Kuwait’s current account surplus experience a growth in 2011 and 2012 scoring the highest of KD 22.2 billion in 2012 which is the same 45% of 2012 GDP. The surplus outdid the earlier set best ever record of KD 18.5 billion in the year 2011. This rise was caused by the strong oil proceeds thus resulting to a bigger balance of payments with a surplus of KD 20.7 billion. The current account witnesses a narrowing in its surplus from KWD 20.2 billion in 2013 to 15.1 billion in 2014 (Actualitix, 2016). The surplus dropped as a result of a decline in the goods and services balance, This was also caused by the decline of oil export revenues not to mention the rising to new high of the deficit in net services outflows. However, the current account balance of Kuwait will be shaken has been shaken a bit in the year 2015 as a result of high oil prices continue to run current account surpluses thanks to the high current account surpluses.
The Capital Account
The capital account is used to mark the international capital transfers. This such transfers may include the purchase or selling of non-financial properties, for instance, a physical asset such as land). On the other hand, they include non-produced assets, which are necessary for production; however, they have not been produced. For instance an oil well used for the extraction of crude oil. The year 2012, saw a smaller capital account that resulted in a record of inflows edging up to KD 1.2 -13824. The rise was associated with the United Nations compensation to Kuwait. Kuwait’s Net capital account in 2013 was $4,471,179,000, which saw a fluctuation from 2011 (The World Bank, n.d.). Then again, the U.N compensation saw the inflows decline slightly from an unprecedented high of KD 1.3 billion in 2013 to KD 1.1 billion in 2014. On the other hand, the capital and financial account outflows deteriorated in 2014 to KD 15.4 billion from KD 19.2 billion in 2013. This was caused by the declining net direct investment in foreign countries as well as net ‘other investments’ outflows.
The Financial Account
The financial account is used for documenting international monetary flows that are inclined to investment in business, property, bonds, as well as stocks. Similarly, it takes account of government-owned assets for instance, foreign reserves, gold, special drawing rights (SDRs) in the custody of the International Monetary Fund (IMF), private assets which are in the custody of foreign countries in addition to direct foreign investment. It is also used to mark assets belonging to non-nationals, both private as well as official (International Monetary Fund, n.d.; The World Bank, n.d.). Since 2011, the balance of trade in Kuwait has been consistently positive and stable recording a growth rate of 29% in 2010. Higher oil prices in 2011saw the increase of GDP in 2011 by 29%. Which was estimated to be USD105.6 per barrel.
Analysis of the Balance of Payment Accounts and Exchange Rate
The exchange rate affects the price in which countries trade. Every time the BoP records an acquisition of a foreign asset or a sale of a local product in a foreign country, this indirectly point toward a change in the demand in regards to the supply of the foreign exchange. Therefore, for that transaction to be complete there must be one individual or country, which is willing to exchange his/her domestic currency for foreign currency. Consequently, changes in any of the constituents of the BoP shake the supply of and demand for foreign exchange.
Source: (International Monetary Fund, n.d.)
Kuwait’s real exchange rate in 2001 was aligned with the fundamentals. The continuity of excess capacity in real estate is an indication that the basket peg provided sufficient monetary policies that saw the reduction of interest rates in the midst of inflation. However, the is an instability of the local currency, which is as a result of devaluation to promote local exports that’s exclusive of the main export which is oil. However, the country stands strong when it comes to the foreign exchange market because it finances its imports by earnings from export. However, it is worth to note that the exchange depreciation was caused by a decline in the rate of exchange in ...