BALANCE OF PAYMENT (BOP)
It refers to a statement which records all the transactions made between residents of a
country and the rest of the world during a particular period.
This statement includes all the transactions made by/to individuals, corporates and the
government and helps in monitoring the flow of funds to develop the economy.
When all the elements are correctly included in the BOP, it should sum up to zero in a
perfect scenario. This means the inflows and outflows of funds should balance out.
Exports= Imports- BOP is in equilibrium
Exports> Imports- BOP surplus
Imports> Exports- BOP deficit
Importance of BOP to a country
Helps identify trends that may be harmful or beneficial to an economy so that
appropriate measures are taken.
It reveals a country’s financial and economic status.
Used as an indicator to determine whether a country’s currency is appreciating or
depreciating.
Helps the government to decide on fiscal and trade policies.
Provides important information to analyze and understand the economic dealings
of a country with other countries.
Components of BOP
1. Current Account
It refers to an account which records all transactions relating to export and import of
goods and services and unilateral transfers (donations and gifts from/to abroad) during
a given period of time. Which effect the income, output and employment of a country.
It records all the actual transactions of goods and services
Current account contains:
a) Export and Import of goods ( visible items/trade)
Payments for import are shown on the negative side (debit item) while receipts from
exports are shown on the positive side (credit item).
Balance of this account is called balance of trade.
b) Export and Import of services (invisible items/trade)
Examples are banking, insurance and shipping.
Payments shown on the negative side (dr) and receipts on positive side (cr).
, c) Unilateral transfers
Payments which take place without any service in return eg .donations
Receipts of unilateral transfers from the rest of the world are shown on the credit side
while transfers tp the rest of the world are shown on the debit side.
d) Income receipts and payments to and from abroad
Refer to investment income that may be in form of rent, profit and dividends.
Balance on current account
Refers to the net value of credit and debit items
Credit items> debit items- surplus (net inflow of foreign exchange)
Debit items> credit items- deficit (net outflow of foreign exchange).
2. Capital account
It records all those transactions between the residents of a country and the rest of the
world which cause a change in the assets or liabilities of the residents of the country or
its government. (assets with a term greater than 1 year.
Uses of capital account
- Finance deficit in current account
- Absorb surplus of current account
Capital account does not have direct effect on income, output and employment of the
country.
Components of capital account
- Sale or purchase of fixed assets such as land, building and motor vehicles.
- Transfer of long term assets by migrants.
- Payment of grants by governments for long term overseas projects.
- Receipts of funds from international organizations eg. African union for long term
capital projects.
Change in foreign exchange reserves
These are financial assets of the government held in the central bank.
A change in this reserves a serves as a financing item in the BOP.
Withdrawal from reserves is recorded on the positive (credit side) and addition to the
reserves is recorded on the negative (debit side).
, 3. Financial account
Records investment transactions with the rest of the world for instance purchase of
overseas securities, property and deposits.
Contents;
- Foreign direct investment and investment in portfolio
- Short term bank deposits and loans
The net value of credit and debit balances is the balance on the capital account.
4. Net Errors and Omissions
The BOP does not normally balance due to errors and omissions therefore net errors
and omissions item is included to make the BOP balance.
Capital account in the BOP contains both entries of Capital account and the financial
account.
BALANCE OF PAYMENT ACCOUNT OF A COUNTRY FOR A PARTICULAR YEAR
CREDIT ITEM (RECEIPTS) DEBIT ITEM (PAYMENTS)
CURRENT ACCOUNT (KSH.)
Merchandise exports 200 Merchandise imports 300
Services exported 100 Services imported 200
Investment income 100 Investment income (foreigners investing
(residents investing abroad) in the country) 200
Unilateral receipts (donations) 200 Unilateral payments (donations) 100
Sub-total 600 Sub-total 800
CAPITAL ACCOUNT (KSH.)
Long term borrowings 200 Long term lending’s 80
Short term borrowings 100 Short term lending’s 60
Gold shipment (sale) 100 Gold shipment (purchase) 50
Sub-total 400 Sub-total 190
Errors and omissions 10
Total receipts 1000 Total payments 1000
NOTE
A deficit in the current account must be settled by a surplus on the capital account
A surplus in the current account must be matched by a deficit on the capital account.
A current account deficit is also known as a trade deficit
It refers to a statement which records all the transactions made between residents of a
country and the rest of the world during a particular period.
This statement includes all the transactions made by/to individuals, corporates and the
government and helps in monitoring the flow of funds to develop the economy.
When all the elements are correctly included in the BOP, it should sum up to zero in a
perfect scenario. This means the inflows and outflows of funds should balance out.
Exports= Imports- BOP is in equilibrium
Exports> Imports- BOP surplus
Imports> Exports- BOP deficit
Importance of BOP to a country
Helps identify trends that may be harmful or beneficial to an economy so that
appropriate measures are taken.
It reveals a country’s financial and economic status.
Used as an indicator to determine whether a country’s currency is appreciating or
depreciating.
Helps the government to decide on fiscal and trade policies.
Provides important information to analyze and understand the economic dealings
of a country with other countries.
Components of BOP
1. Current Account
It refers to an account which records all transactions relating to export and import of
goods and services and unilateral transfers (donations and gifts from/to abroad) during
a given period of time. Which effect the income, output and employment of a country.
It records all the actual transactions of goods and services
Current account contains:
a) Export and Import of goods ( visible items/trade)
Payments for import are shown on the negative side (debit item) while receipts from
exports are shown on the positive side (credit item).
Balance of this account is called balance of trade.
b) Export and Import of services (invisible items/trade)
Examples are banking, insurance and shipping.
Payments shown on the negative side (dr) and receipts on positive side (cr).
, c) Unilateral transfers
Payments which take place without any service in return eg .donations
Receipts of unilateral transfers from the rest of the world are shown on the credit side
while transfers tp the rest of the world are shown on the debit side.
d) Income receipts and payments to and from abroad
Refer to investment income that may be in form of rent, profit and dividends.
Balance on current account
Refers to the net value of credit and debit items
Credit items> debit items- surplus (net inflow of foreign exchange)
Debit items> credit items- deficit (net outflow of foreign exchange).
2. Capital account
It records all those transactions between the residents of a country and the rest of the
world which cause a change in the assets or liabilities of the residents of the country or
its government. (assets with a term greater than 1 year.
Uses of capital account
- Finance deficit in current account
- Absorb surplus of current account
Capital account does not have direct effect on income, output and employment of the
country.
Components of capital account
- Sale or purchase of fixed assets such as land, building and motor vehicles.
- Transfer of long term assets by migrants.
- Payment of grants by governments for long term overseas projects.
- Receipts of funds from international organizations eg. African union for long term
capital projects.
Change in foreign exchange reserves
These are financial assets of the government held in the central bank.
A change in this reserves a serves as a financing item in the BOP.
Withdrawal from reserves is recorded on the positive (credit side) and addition to the
reserves is recorded on the negative (debit side).
, 3. Financial account
Records investment transactions with the rest of the world for instance purchase of
overseas securities, property and deposits.
Contents;
- Foreign direct investment and investment in portfolio
- Short term bank deposits and loans
The net value of credit and debit balances is the balance on the capital account.
4. Net Errors and Omissions
The BOP does not normally balance due to errors and omissions therefore net errors
and omissions item is included to make the BOP balance.
Capital account in the BOP contains both entries of Capital account and the financial
account.
BALANCE OF PAYMENT ACCOUNT OF A COUNTRY FOR A PARTICULAR YEAR
CREDIT ITEM (RECEIPTS) DEBIT ITEM (PAYMENTS)
CURRENT ACCOUNT (KSH.)
Merchandise exports 200 Merchandise imports 300
Services exported 100 Services imported 200
Investment income 100 Investment income (foreigners investing
(residents investing abroad) in the country) 200
Unilateral receipts (donations) 200 Unilateral payments (donations) 100
Sub-total 600 Sub-total 800
CAPITAL ACCOUNT (KSH.)
Long term borrowings 200 Long term lending’s 80
Short term borrowings 100 Short term lending’s 60
Gold shipment (sale) 100 Gold shipment (purchase) 50
Sub-total 400 Sub-total 190
Errors and omissions 10
Total receipts 1000 Total payments 1000
NOTE
A deficit in the current account must be settled by a surplus on the capital account
A surplus in the current account must be matched by a deficit on the capital account.
A current account deficit is also known as a trade deficit
