Balance of Payments

Aybey Boran

Balance Of Payments

In the realm of international finance, one of the most heavily

used data sources is an accounting statement known as the

balance of payment, which records the economic transactions

between the residents and government of a particular country

and the residents and the governments of the rest of the world

during a given period of time, usually a year.

For firms and individual, it provides dues about expectations for such matters as the volume of trade and capital flows, the movement of exchange rate and the profitable course of economic policy.

The balance of payments is important because it helps to determine the exchange rate, and measures the extent to which country economy is a net importer/exporter of goods, services and capital. A weak balance of payments tends to lead to a weakening of the exchange rate because market confidence in the economy is reduced. This can actually be good for business because the lower exchange rate can help to improve price competitiveness in foreign markets, and improve cash flow for exporters. The opposite is clearly also the case, that a strong balance of payments can help to keep the exchange rate high, thus potentially reducing cash flows from exports. Due to the way in which the balance of payments influences the exchange rate, government economic policy seeks to maintain a position in which there is neither an inordinately large deficit or surplus, but a stable balance.

In particular, a country’s own balance of payments is important

to investors, multinational companies, business managers, consumers and government officials because it affects the value of its currency, its policy towards foreign investments and also influences important macroeconomic variables like gross national product, interest rates, price levels, employment scenario and exchange rate. International managers may be interested in a foreign country’s balance of payments for predicting the country’s overall ability regarding exports, imports, the payment of foreign debts and dividend remittances. A country experiencing a severe balance of payments deficit is not likely to import as much as it would in a surplus position. Persistent and continuing deficits in a country’s BOP may signal future problems over payments of

dividends and interest fees or other cash disbursements to foreign firms or investors. Also, the balance of payments is an important indicator of the likely pressure on a country’s foreign exchange rate and the resultant foreign exchange gains or losses which firms trading with that country are likely to face.