Balance of payment records all economic transactions between a county and the rest of the countries around the world annually. The balance of payment is made up of two distinguished components respectively the current account, capital and financial accounts. Transactions such as exports and imports of goods and services, income and transfers are recorded in the current account. On the other hand transactions relating to portfolio and foreign direct investments are recorded on the capital and financial accounts. Balance of payment is an important indicator of the health of any country’s business as it reflects its international trade and investment performance. Hence, in the Balance of Payment, sources of funds are recorded as positive and uses of funds are recorded as negative. All things being equal Balance of Payment sums to zero with no overall surplus or deficit but if a country is importing more than its exports, then its trade balance will be in deficit, but if a country is exporting more than its imports, then its trade balance will be in surplus.
Balance of payments data of home country and host country are have significance to government officials, international business managers, investors, and consumers, because such data influence and are influenced by other key macroeconomic variables such as gross domestic product (GDP), employment, price levels, exchange rate, and interest rates. Therefore balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BoP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency.
The Balance of payment of Manual published by the International Monetary Fund (IMF), i.e., IMF is the primary source of BoP and similar statistics data worldwide. It prepares balance of payments manual and publishes the same in a Balance of Payments Year Book.
Monetary and fiscal policy must take the Balance of payment into account at the national level. Multinational businesses use various BOP measures to gauge the growth and health of specific types of trade or financial transactions by country and regions of the world against the home country
Businesses need Balance of payments data to anticipate changes in host country’s economic policies driven by Balance of payment events. Balance of payments data may be important for the following reasons:
- BoP indicates a country’s financial position vis-Ã -vis foreign countries, thereby a country’s ability to buy foreign goods or services.
- BoP is important indicator of pressure on a country’s exchange rate, and thus on the potential of a firm trading with or investing in that country to experience foreign exchange gains or losses. Changes in BoP may presage the impositions of foreign exchange controls.
- BoP data helps in knowing the changes in a country’s BoP may also signal imposition (or removal) of controls over payments, dividends, and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors.
- BoP data helps to forecast a country’s market potential, especially in the short- run. A country experiencing a serious BoP deficit is not likely to import as much as it would if it were running a surplus.
- BoP data can also signal increased riskiness of lending to particular country and it also helps to in the formulation of trade and fiscal policies.