Balance of payment (B.O.P)

Introduction

The term balance of payment refers to the statistical record of all economic transactions that have taken place during a given period, usually a year between a country’s residents and the rest of the World i.e. it is simply all payments and receipts of country’s international transactions of a given country.

Components of the B.O.P

The balance of payment contains three types of accounts that are used in the recording of all transactions. Each B.O.P component account has a debit and credit side; the debit side records all the payments or outflows out of a country while the credit side records all the receipts or inflows into the country. As a convention, the debit side items are recorded as negative (-) while the credit side items are recorded as positives (+). Inflows into the country include export earnings, money transfer or donations from abroad, inflows of foreign investments into the country etc. Outflows include imports, repatriated earnings of foreign investments, and money transfers by locals abroad. The three accounts are;

Current account

It is a record of all current inflows or receipts and outflows/ payments between a country’s residents and the rest of the world. The items recorded her include; unilateral/ money transfers, payments and receipts from the import and export sector, military transactions, incomes from old investments by both residents and foreigners etc. the sum of debits against credits gives the balance of the current account. If it so happens that the debit side exceeds the credit side thus giving a negative figure, then the balance of the current account is said to be a deficit. However, if the credits exceed the debits giving a positive figure, then the current account is said to be a surplus which is ideally favorable.

Capital account

It records all the lending and borrowing alongside all the purchases and sales of assets by individuals and government agencies. These assets may include treasury bills, government bonds company shares or even physical assets such as houses and land. Purchases of foreign assets by residents are recorded as debits while purchases of local assets by foreigners are recorded as credits. In this case as well the debits and credits are summed against each other giving either a surplus or a deficit balance of the capital account. A surplus is the favorable of the two.

Official settlements account

This records all the official transactions carried by government agencies, central bank and the treasury. The components of this account include, central bank’s gold holdings, county’s reserve holdings, foreign reserves of other foreign central banks held by the local central bank etc. interventions by the central bank in the foreign exchange market will also be recorded in this account. The official settlements account balance gives the net change in country’s stock of foreign reserves and also official government borrowing. The transactions on the official settlements account are used to compensate for any differences between the total payments and the total receipt/ payments of the current and capital accounts. As a consequence, the official settlements account balance is always the negative of the total sum the “items above the line” balance.