What is Balance of Payments (BoP)?

IMF’s Special Drawing Rights (SDR) support helped the country maintain a stable balance of payments surplus in the last September quarter, a financial daily recently said, while claiming that the country’s current account is back in deficit. Widening trade deficit was also one of the main reasons for it.

But the country was in a much better position than it was during 2012-13, when the current account deficit had touched a low of 4.8 percent of GDP.

In 1991, the balance of payments crisis had paved the way for much-needed and long-overdue reforms, the scope of which remains unmatched till today.

The balance of payments, or BoP for short, records all the transactions, be they in goods, services or assets, of the concerned country with the rest of the world. All such transactions over a specified time period, usually a year, are kept track of in this way.    

This is also known as the balance of international payments. Think of it another way: It is a statement of all the economic transactions that a nation’s individuals, firms, and government enter into with individuals, firms, and governments outside the nation in question.  

The transactions in question include imports and exports of goods, services and financial assets, along with transfer payments.

Balance of payments or BoP allows one to monitor all international monetary transactions. In short, the aim is to determine how much money is going in and out of the country's economy.

Knowing the strengths and weaknesses of the economy is the basic purpose of BoP accounting. One can determine the overall gains and losses from international trade by analysing the BoP accounts of the previous year.

The current account and the capital account are the two main accounts in the BoP. Imports and exports in goods, the trade in services and transfer payments are recorded in the current account. While, all international purchases and sales of assets such as money, stocks, and bonds, etc. are recorded in the capital account. Foreign investments and loans are also included in the capital account.

The country is said to be in balance of payments equilibrium when the sum of its current account and its non-reserve capital account equals zero so that the current account balance is financed entirely by international lending.

The balance of payments deficit or surplus is obtained after adding the current and capital account balances. The decrease in official reserves is called the overall BoP deficit and the increase in reserves is BoP surplus.

A country with a current account deficit can face difficulties. In the event that the deficit is large and its economy is unable to obtain adequate foreign investment inflows, the country’s currency reserves dwindle.  

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