Balance Of Payments

A country's balance of payments (BOP) accounts is a systematic statement of all economic transactions between that country and the rest of the world It involves transactions of goods and services and movements of assets.
These transactions are either a debit or a credit entry in the accounts of the country.

• Transactions that the earns a country foreign currency is entered as a credit(loans Inclusive)
• Transactions that involve spending foreign currency are entered as debits

Such Transactions associated with BOP includes those on

• Goods
• Services
• Assets

The Balance of Payment Account is normally divided into two parts;

1. The Current Account
2. The Financial Account(Also known as the Capital Account)

The Current Account

The Current Account of records all visible (merchandise) trade/goods, invisible trade (services) as well as unilateral transfer payments. Thus BOP on current account refers to Merchandise balance, Services balance, and Unilateral Transfer balance. Is is "one-way" meaning: the country giving such transfers do not receive anything back from the other party. It involves gifts to governments and foreign aid.

The current account records transactions for goods and services, interest and transfers.
From this, we know that the current account can be subdivided into the;
Visible and Invisible account;
The Visible Account records transactions in physical goods such as;
Cocoa, Gold, Oil, and Timber

The Invisible Part of the Account will comprise of;

• Transactions from the imports and exports of services
• Payments of Investment Income(NB: Not investment itself but the income from investment)
• Unilateral Transfers

The balance of Trade and Balance on the Current Account

The balance of trade is the difference between exports of goods and services and imports of goods and services. 

The Balance of trade is the largest component of a country's balance of payments.

The Balance on Current Account consists of net exports of goods, plus net exports of services, plus net investment income, plus net transfer payments. 

It shows the difference between how much a nation has spent and how much it has earned.

The Capital/Financial 

The Capital Account records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country. The Capital Account takes care of transactions that either increase or decrease a country's assets or liabilities.

The Capital Account involves transactions such as;

• Unilateral transfer of Assets 
• Debt Forgiveness 
• Remittances from international migrants

Whiles the Financial Account includes the following;

* Sale of county's asset; E.g. GT Bank sold to Vodafone

* Direct Portfolio Investments(NB: the return on this investment will be under CA)

* Purchases of Sovereign Bonds

Official Settlement Balance

This balance refers to the net change in a country's reserve asset held by a country.

Official reserves assets include gold, foreign currencies, Special Drawing Rights(SDRs) and reserve positions in the IMF.

Includes activities in relation to financial transactions involving 

• The Central Bank of a country and the IMF
• The Reserve Assets

When a country runs a BOP surplus, its net holdings of reserve assets will increase.

The balance of Payment Disequilibrium

Balance of Payments disequilibrium occurs when payments on a country’s imports exceed the receipts from its exports or when the receipts from a country’s exports exceed the payments from its exports.

That means a disequilibrium can only occur in the current accounts. When such disequilibrium occurs, it is financed from the Capital Account to ensure equilibrium. For this reason, we say The BOP always Balances!!!

Deficit versus Surplus Balance of Payment

A deficit balance of payments occurs when payments on a country’s imports exceed the receipts from its exports

Balance of Payments is said to be a surplus when the receipts from a country’s exports exceed the payments from its exports.

Balance of Payment Transactions

Transactions are either debit or credit transactions

All transactions that bring receipts from foreigners are credit transactions

• Merchandise exports 
• Transportation and travel receipts
• Income received from investments abroad
• Gifts received from foreign residents
• Aid received from foreign governments

Transactions that involve payments to foreigners are debit transactions 

• Merchandise imports
• Transportation and travel expenditures
• Income paid on investments of foreigners
• Gifts to foreign residents
• Aid given by home government
• Overseas investments by home country residents

Every credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance.

A statistical discrepancy is computed where the bop is not in balance to make up for any shortfalls.

Discrepancies proceed from:

• Under-reporting investment incomes
• Under-reporting merchandise imports
• Under-reporting capital exports

People hide these transactions from governments for the purposes of tax avoidance or some other reason.

Financing The Balance of Payment Deficit

There are short-term measures to  correct balance of payments deficit:

Borrowing from Domestic sources:

1. Government borrowing domestically from the central bank
2. Government borrowing domestically from the public e.g. sale of bonds

Borrowing from External Sources:

1. Borrowing from trading partners.
2. Borrowing from international organizations such as the IMF and the World Bank.
3. Borrowing from international capital markets e.g. Euro Bonds