Balance of payments


What is the Balance of Payments?

The balance of payments (BOP) records financial transactions made between consumers, businesses and the government in one country with others

  • The BOP figures tell us about how much is being spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries
  • In JC , you focus on the current account of the balance of payments

Measuring the current account

  • The current account of the balance of payments comprises the balance of trade in goods and services plus net investment incomes from overseas assets and net transfers
  • Net investment income comes from interest payments, profits and dividends from external assets located outside Singapore.
    • For example a Singapore firm may own a business overseas and send back some of the operating profits to Singapore. This would count as a credit item for our current account as it is a stream of profits flowing back into the Singapore.
    • Similarly, an overseas investment in the Singapore might generate a good rate of return and the profits are remitted back to another country – this would be a debit item in the balance of payments accounts.
  • Transfers into and out of a country include foreign aid payments. As a rich nation, Singapore makes sizeable foreign aid payments to many other countries.

Singapore’s balance of payments surplus rose from $7.8 billion in the third quarter of 2012 to $14 billion in the final quarter, mainly due to a narrower deficit in the capital and financial account. For the year as a whole, the balance of payments surplus rose to $33 billion, from $21 billion in 2011, also reflecting a smaller net outflow from the capital and financial account. Singapore’s official foreign reserves rose to $317 billion as at the end of 2012, equivalent to 8.0 months of merchandise imports.
The current account surplus narrowed to $13 billion in the fourth quarter of 2012, from $17 billion in the preceding quarter (Exhibit 7.1). For the whole of 2012, the current account surplus fell to $64 billion (19 per cent of GDP), from $82 billion in 2011 (25 per cent of GDP). This was largely due to the decline in the goods surplus.In the fourth quarter, the surplus in the goods
balance narrowed by $4.4 billion to $16 billion (Exhibit 7.2). Similarly, a smaller surplus of $76 billion was recorded for the whole of 2012, compared to the $91 billion surplus registered in the previous year, as imports rose while exports fell.The services account turned from a slight surplus in the previous quarter to a $0.1 billion deficit in the fourth quarter. For the full year, the services surplus narrowed to $0.5 billion, from $0.9 billion in 2011, mainly as a result of lower net receipts from maintenance and repair services.The deficit in the primary income balance declined to $1.0 billion in the fourth quarter, compared to $1.6 billion in the preceding quarter. However, for the full year in 2012, the deficit widened to $3.9 billion, from $2.7 billion in 2011. While income receipts from residents’ overseas investments increased during the year, income payments to foreign investors rose by a larger magnitude.


Singapore’s figures as of 2013. Source

Items Latest Period Latest Data % Change (Y-o-Y) 1/ Previous Period Data % Change (Y-o-Y) 2/
External Accounts
Balance of Payments S$m Q3/13
    Current Account Balance S$m Q3/13
        Exports of Goods and Services S$m Q3/13
        Imports of Goods and Services S$m Q3/13
        Primary Income Balance S$m Q3/13
        Secondary Income Balance S$m Q3/13
    Capital and Financial Account Balance S$m Q3/13
        International Reserves (increase in assets is indicated by a minus [-] sign)
S$m Q3/13
Official Foreign Reserves US$m Dec-13


Items Latest Period Latest Data % Change (Y-o-Y) 1/ Previous Period Data % Change (Y-o-Y) 2/
External Trade
Total Trade at Current Prices S$m Dec-13
Total Exports at Current Prices S$m Dec-13
    Domestic Exports S$m Dec-13
        Non-oil Domestic Exports S$m Dec-13
    Re-exports S$m Dec-13
Total Imports at Current Prices S$m Dec-13
Total Trade at Current Prices S$m 2012
Total Exports at Current Prices S$m 2012
    Domestic Exports S$m 2012
        Non-oil Domestic Exports S$m 2012
    Re-exports S$m 2012
Total Imports at Current Prices S$m 2012


Items Latest Period Latest Data % Change (Y-o-Y) 1/ Previous Period Data % Change (Y-o-Y) 2/
Industrial Production Index (2011=100) Dec-13
Total Output 3/ 4/ S$m 2012
Investment Commitments in Manufacturing & Services (Fixed Assets Investments) S$m 2012
    Foreign Investments S$m 2012

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Trade in goods includes items such as:

  • Manufactured goods
  • Semi-finished goods and components
  • Energy products
  • Raw Materials
  • Consumer goods
  • (i) Durable goods
  • (ii) Non-durable goods e.g. foods
  • Capital goods (e.g. equipment)
Trade in services includes:

  • Banking, insurance and consultancy
  • Other financial services including foreign exchange and derivatives trading
  • Tourism industry
  • Transport and shipping
  • Education and health services
  • Research and development
  • Cultural arts

Trade in services

Trade in services includes the exporting and importing of intangible products – for example, Banking and Finance, Insurance, Shipping, Air Travel, Tourism and Consultancy.


What does a current account deficit mean?

  • Running a deficit on the current account means that the UK is not paying its way in the global economy. There is a net outflow of demand and income from the circular flow of income and spending.
  • The current account does not have to balance because the balance of payments also includes the capital account. The capital account tracks capital flows in and out of the UK. This includes portfolio capital flows (e.g. share transactions and the buying and selling of Government debt) and direct capital flows arising from foreign investment.

The capital account is not covered at AS level; you only need to understand the current account of the balance of payments.

What are the main causes of a current account deficit?

  • High income elasticity of demand for imports – when consumer spending is strong, the volume of imports grows quickly
  • Long-term decline in the capacity of manufacturing industry because of de-industrialization. There has been a shift of manufacturing to lower-cost emerging market countries who then export products back into the Singapore. Many Singapore businesses have out-sourced assembly of goods to other countries whilst retaining other aspects of the supply chain such as marketing and research within.
  • Singapore is a net importer of foodstuffs and beverages and has also seen a sharp rise in spending on imports of oil and gas.
  • The trade balance is vulnerable to shifts in world commodity prices and exchange rates. Singapore imports a large volume of raw materials, component parts and pieces of capital equipment.

Exports and Aggregate Demand

For example in the UK economy the value of exported goods and services in a normal year accounts for between 25-30% of total GDP. In some industries, the percentage of output exported is much higher than this. It is clear that developing and growing successful export businesses and industries is key to the present and future health of the UK economy. A fall in exports will have a direct negative effect on aggregate demand and the final impact on national income, employment and investment can be amplified by multiplier and accelerator effects.

Exports and Aggregate Demand

Many industries rely heavily on our key export industries remaining competitive – these include:

  • Transportation / freight businesses
  • Trade finance businesses
  • Insurance businesses

Many other service businesses that operate in ports and airports

The Exchange rate and the Balance of Payments

Changes in the exchange rate can have a big effect on the balance of payments although these effects have uncertain time lags.

  • When sing dollar is strong, the price of Singapore goods and services in foreign markets rises and Singapore exporters find it harder to sell their products overseas. It is also cheaper for Singapore consumers to buy imported goods and services because the Sing$ buys more foreign currency than it did before
  • So a strong pound may lead to a worsening of the balance of trade – much depends on the value of price elasticity of demand for exports and imports.

The balance of payments and the standard of living

  • A common misconception is that balance of payments deficits are always bad for the economy. This is not necessarily true.
  • In principle, there is nothing wrong with a trade deficit. It simply means that a country must rely on foreign direct investment or borrow money to make up the difference
  • In the short term, if a country is importing a high volume of goods and services this is a boost to living standards because it allows consumers to buy more consumer durables.

Countries with current account surpluses

Surplus countries (balance of payments on current account for 2011)

% of GDP













Saudi Arabia




Many countries operate with a trade and current account surplus – good examples are China, Germany, Norway and emerging market countries with strong export sectors. There are several causes and each country will have a unique set of circumstances:

Export-oriented growth: Some countries have set out to increase the capacity of their export industries as a growth strategy. Investment in new capital provides the means by which economies of scale can be exploited, unit costs driven down and comparative advantage can be developed.

Foreign direct investment: Strong export growth can be the result of a high level of foreign direct investment where foreign affiliates establish production plants and or exporting.

Undervalued exchange rate: A trade surplus might result from a country attempting to depreciate its exchange rate to boost competitiveness. Keeping the exchange rate down might be achieved by currency intervention by a nation’s central bank, i.e. selling their own currency and accumulating reserves of foreign currency. One of the persistent disputes between the USA and China has revolved around allegations that the Chinese have manipulated the Yuan so that export industries can continue to sell huge volumes into North American markets.

High domestic savings rates: Some economists attribute current account surpluses to high levels of domestic savings and low domestic consumption of goods and services. China has a high household saving ratio and a huge trade surplus; in contrast the savings ratio in the United States has collapsed and their trade deficit has got bigger. Critics of countries with persistent trade surpluses argue they should do more to expand domestic demand to boost world trade.

Closed economy – some countries have a low share of national income taken up by imports – perhaps because of a range of tariff and non-tariff barriers.

Strong investment income from overseas investments:  A part of the current account that is often overlooked is the return that investors get from purchasing assets overseas – it might be the profits coming home from the foreign subsidiaries of multinational businesses, or the interest from money held on overseas bank accounts, or the dividends from taking equity stakes in foreign companies.

Economic Policies to Improve the Balance of Payments

Economic Policies to Improve the Balance of Payments

  • There are a number of policies that can be introduced to achieve an improvement in a country’s trade balance – some of them focus on changing the growth of demand, others look to improve the supply-side competitiveness of an economy
  • As with any macroeconomic ‘problem’ effective policies are those that target the underlying causes.

Policy options

Demand management:

  1. Reductions in government spending, higher interest rates and higher taxes could all have the effect of dampening consumer demand reducing the demand for imports
  2. When domestic demand is low, this creates an incentive and the spare capacity for businesses to export overseas to replace low spending in the home economy

Natural effects of the economic cycle: One would expect to see a trade deficit fall during a recession – so some of the deficit is partially self-correcting.

A lower exchange rate:

  1. A lower exchange rate provides a way of improving competitiveness, reducing the overseas price of exports and making imports more expensive
  2. For those countries operating with a managed exchange rate, the government may decide to authorise intervention in the currency markets to manipulate the value of the currency

Supply-side improvements:

  1. Policies to raise productivity, measures to bring about more innovation and incentives to increase investment in industries with export potential are supply-side measures designed to boost exports performance and compete more effectively with imports. The time-lags for supply-side policies to have an impact are long.
  2. Policies to encourage business start-ups – successful small businesses with export potential
  3. Investment in education and health-care to boost human capital and increase competitiveness in fast-growing and high value industries such as bio-technology, engineering, finance, medicine
  4. Investment in modern critical infrastructure to support businesses and industries involved in international markets

Protectionist measures such as import quotas and tariffs

How do events in the USA affect the Singapore economy?

How did the Global Recession Alter Singapore’s Export Profile?

World merchandise exports contracted by 23 per cent in 2009 – the sharpest decline since World War
II. Singapore’s merchandise trade dropped by an even greater magnitude of 27 per cent in the first
half of 2009 compared to the same period in 2008. Singapore’s domestic exports were particularly
hard-hit, falling by 29 per cent. While global trade flows have recovered from the lows of the first half
of 2009, it is useful to consider if the shock brought about by the global recession altered Singapore’s
export profile significantly.

The United States is the largest economy in the world and developments in her economy inevitably have a significant impact on the global economy and prospects for Singapore.