In this article we will discuss about:- 1. Meaning of International Payments 2. Characteristics of International Payments 3. Need 4. Problems.
Meaning of International Payments:
When money is transferred from one party to another due to any economic transaction it is called the process of payment. Payments are of two types. One is local, the other is international. When payment is made in the same country it is called local payment. On the other hand, when the payer and receiver are of two different countries, it is called international payment.
In other words, when payment process happens between two countries it is called international payment. In international payment, payment is made by the govt., or citizen or organisation of one country to the govt., or citizen or organisation of another.
Characteristics of International Payments:
1. Transaction between Two Countries:
International transaction is done between two countries, i.e., the business done between two countries is called international business. When one country buys goods from another it is called the importer and the selling country is called the exporter.
2. Two Parties:
Like local business, in international business too, there must be atleast two parties. One party receives the payment while the other gives the payment. This giving and receiving of payments is included in international payments.
3. Value Transfer:
Money transfer and value transfer are two different things. Money transfer happens in local business while in international business value transfer takes place. Because two countries have different currencies the value transfer is done through an exchange banker.
One characteristic of international payment is its difficult work process. It is a difficult process in comparison to local business. The reasons for this are different currencies, exchange control, variation in exchange rates etc.
5. Economic and Non-Economic Activities:
International payment takes place due to both economic and non-economic activities. Export-import, loan, interest etc. are included in economic activities. Due to these activities one party becomes the payer and the other becomes the receiver. The responsibilities are fulfilled by – payment from one to another. Non-economic activities include help, grant, damages, money transfer by non-residents, expenses incurred on embassies, tourists, sports persons etc.
There are no difficulties in payments in local business. Both parties reside in the same country and face no problem in giving or receiving payment in the local currency. But when payment process takes place between two countries it is called international payment. There is difficulty in international payment because both parties are of different countries. Currencies in both countries are different and the currency of one is not legally acceptable and foreign exchange is controlled by the governments in all the countries.
Need for International Payments:
International payments are necessary for both the exporter and importer countries. There are many practices due to which the need for international payment arises.
These reasons are as follows:
1. Merchandise Transactions:
Merchandise transaction takes place between two countries, i.e., goods are bought and sold between two countries. These goods could be both consumer goods and industrial goods. The selling country is called the exporter while the buying country is called the importer. The exporter receives the payment while the importer makes the payment. There are many reasons for merchandise transactions like lack of goods in one country, lack of new technology of manufacturing, lack of resources etc.
Every country produces only those goods which it can produce cheaply and easily. The goods which it cannot produce are imported and thus arises the need for international payments.
2. Service Transactions:
This is the age of international business. Today service transactions also take place between two countries just like merchandise transaction. Today countries can get those services which are not available in their countries. Getting the services of experts in the fields of education, science, medicine and technology including information technology is very common. The importer country has to pay for these services which makes international payments necessary.
3. External Debt:
Every country fulfills its needs from internal resources. But when they are not fulfilled from internal resources external debts are taken. It is also called international debt.
4. External Aid:
When a country receives aid from another country it receives it in the form of international currency. This is also international payment. This foreign currency has to be converted into local currency.
Compensation also requires international payments. Sometimes government of a country has to give compensation to the govt., citizens or organisation of another country, e.g., the British govt., received compensation from the Germans after the Second World War.
When money is loaned by one country to another, interest on that loan is to be paid. When money is given as loan interest is paid and when money is given as capital, appropriation profit percentage is paid. This is also a reason for international payments.
International payments are also made due to royalty. Big companies get their trademarks registered. When these trademarks are used by foreign companies’ royalty has to be paid.
8. Different Expenses:
International payment is also required for different types of expenses, e.g., embassy expenses, educational expenses, expenses of sports teams etc.
9. Prize Distribution:
International payment is also needed for international prizes, e.g. Nobel Prize, Nehru Peace Prize etc. These could be given to the citizens of any country. When they are given to the citizen of another country the prize money is transferred to his country.
Problems in International Payments:
Many problems are faced in international payments.
1. Different Currencies:
Every country has a currency of its own which is accepted in that country only. The internal value of these currencies may be low. Therefore, problems arise in international payments. The payer wants to pay in its currency while the receiver wants to be paid in his own currency. Therefore, due to the non-parity in the currencies of each country there is a problem in international payment.
2. Exchange Rate:
These payments are affected by the variation in exchange rate. Fixing exchange rates is a difficult process. Moreover, due to changes in exchange rate it is difficult to decide on which day the payment should be made. If an exchange rate is decided then it is possible that it may change on the day of payment. In such a situation the payer would not know how much money he needs.
3. Exchange Control:
Government controls the exchange rate which causes problems in international payment. These controls cause a lot of delay in payment and businessmen suffer losses. Due to these controls exports and imports are limited.
4. Banking System:
International business and payments are possible only through banks. Such payments can be made only through those banks which have branches in foreign countries. The bank’s branches have to be contacted through the bank only which is time consuming process. The bank charges are high as well.
International business is more risky. This risk is related to international business. There is always a chance of the payment reaching the wrong hands or two companies may have similar names.
6. Difficulties in Payment of Scarce Currencies:
If the receiver demands payments in currencies that are scarce then there arises a problem. Even though the International Monetary Fund makes them available, it causes delays.
The aforesaid points explain the difficulties in international payment but now internet banking provides easy banking facilities. Moreover, nowadays the risk in the exchange rates can be insured in all countries. Therefore, the problems in international payments have been minimized.
The terms of credit or payments in international trade are contractual matters of prior arrangement between seller and purchaser, and their determination depends upon a number of factors such as exporter’s knowledge about the buyer, buyer’s financial standing, exchange restrictions in the importing country, competition in the foreign market.