Measuring Deficit or Surplus in Balance of Payments

In this article we will discuss about the ways for measuring deficit or surplus in balance of payments.

It is only when all items in the balance of payments are included that there is no possibility of a deficit or surplus. But if some items are excluded from a country’s balance of payments and then a balance is struck, it may show a deficit or surplus.

There are three ways of measuring deficit or surplus in the balance of payments.

First, there is the basic balance which includes the current account balance and the long-term capital account balance.

Second, there is the net liquidity balance which includes the basic balance and the short-term private non-liquid capital balance, allocation of SDRs, and errors and omissions.

Third, there is the official settlements balance which includes the total net liquid balance and short-term private liquid capital balance.

If the total debits are more than total credits in the current and capital accounts, including errors and omissions, the net debit balance measures the deficit in the balance of payments of a country. This deficit can be settled with an equal amount of net credit balance in the official settlements account.

On the contrary, if total credits are more than total debits in the current and capital accounts, including errors and omissions, the net debit balance measures the surplus in the balance of payments of a country. This surplus can be settled with an equal amount of net debit balance in the official settlements account.

The relationship between these balances is summarised in Table 2 below.

Autonomous and Accommodating Items:

Each balance would give different figure of the deficit. The items that are included in a particular balance are placed ‘above the line’ and those excluded are put ‘below the line’. Items that are put above the line are called autonomous items.

Items that are placed below the line are called settlement or accommodating or compensatory or induced items. All transactions in the current and capital accounts are autonomous items because they are undertaken for business or profit motives and are independent of balance of payments considerations.

According to Sodersten and Reed, “Transactions are said to be autonomous if their value is determined independently of the balance of payments”. Whether there is BOP deficit or surplus depends on the balance of autonomous items. If autonomous receipts are less than autonomous payments, BOP is in deficit and vice versa.

“Accommodating items on the other hand are determined by the net consequences of the autonomous items”, according to Sodersten and Reed. They are in the official reserve account. They are compensating (induced or accommodating) short-term capital transactions which are meant to correct a disequilibrium in the autonomous items of balance of payments. But it is difficult to determine which item is compensatory and which is autonomous. For instance, in the table given above, the main difference in the three balances is their treatment of short-term capital movements which are responsible for deficit in the balance of payments.

The basic balance places short-term private non- liquid capital movements below the line while the net liquid balance puts them above the line. Similarly, the net liquid balance places short-term private liquid capital movements below the line and the official settlements balance puts them above the line. Thus, as pointed out by Sodersten and Reed, “Essentially the distinction between autonomous and accommodating items lies in the motives underlying a transaction, which are almost impossible to determine”.

Conclusion:

The above analysis is based on the assumption of fixed exchange rates. Thus a deficit (or surplus in the balance of payments is possible under a system of fixed exchange rates. But under freely floating exchange rates, there can in principle be no deficit (or surplus) in the balance of payments.

The country can prevent a deficit or (surplus) by depreciating (or appreciating) its currency. Further, balance of payments always balances in an ex-post accounting sense, according to the basic principle of accounting. Lastly, such a balance of payments can be in equilibrium only if there are no compensating transactions.