Question

An extraction from the balance of payments for the current year shows that your country has undergone a deterioration in its net international investment position. Suppose you are part of the policy analysts discussing the pros and cons of such a change, what would be your arguments?

Answer 1

Net international investment position (NIIP) is nothing but the nation’s balance sheet with respect to the rest of the world at a given point of time. It essentially gauges the gap between a nation’s stock of foreign assets and foreign nation's stock of that nation's assets. Hence a balance sheet reference is made. NIIP acts as a bital factor in determining the financial condition of a country.

So NIIP of nation 'X' can be given as...

(Net stocks of X's assets owned by foreign nations) - (Net stocks of foreign nations owned by X)

If NIIP is detoriated, we have three possible scenarios:

• Net stocks of X's assets owned by foreign nations decreases
• Net stocks of foreign assets owned by X increases
• Both of the above

Pros of detoriating NIIP:

• Frankly speaking there ain't much advantages for a detoriating NIIP. A positive NIIP means the nation is a creditor and a negative NIIP means it is a debitor. More positive the NIIP is, better is the financial condition of a nation. So, a detoriating NIIP is not a pro
• A detoriating NIIP can ofcourse illustrate that the government needs to reconstruct their investment pattern and apply better techniques to sell their assets to foreign nations

Cons:

• A decreased foreign ownership of assets directly translates to a slumping economy and the foreign investors are no longer having the confidence and have to withdraw their investments from tha nation
• An increased ownership of foreign assets can result in extended expenditure and thus affecting the domestic consumption and domestic investments. The reliance over another country increases and might result in consequences when the exchange rate becomes weak on the long run.
• The overall credit worthiness and financial condition detoriates as the conclusions drawn from the above two points suggest.

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