Balance of payments (Part II)
Yvonne Harvey, Contributor

A girl leaves a classroom with male counterparts at St. George's College on September 19. The all-boy institution admitted females to its sixth form in a historic move this school year. - Ricardo Makyn Photo

HELLO EVERYONE. I know you all remembered to do your assignment and you are eager to see if you got parts (b) (11) and (d) correct. For part (b) (11) you were asked to calculate the BALANCE OF TRADE from the information given. The answer you should have arrived at is US $M -3,000. The balance of trade remember involves the exports and imports of visibles and since the imports exceed the exports, the balance is negative (unfavourable). The answer to the part which asked you to calculate the CURRENT ACCOUNT BALANCE is US $M -8,000. To arrive at this figure, you must first calculate the invisible balance which is US $M -5,000. The current account balance takes in the visible and the invisible balance and since they were both unfavourable, the overall current account balance is also unfavourable. I hope you got those answers. Now let us move on to the meat of this lesson. First, we are going to look at the final part of the balance of payments account ­ THE OFFICIAL FINANCING ACCOUNT.

THE OFFICIAL FINANCING ACCOUNT

This account shows how the balance of payments is financed i.e. it shows what is done with the surplus or the deficit on the balance of payments. Let us look at some ways of financing a balance of payments deficit.

FINANCING A BALANCE OF PAYMENTS DEFICIT

- Borrowing from international financial institutions e.g. The International Monetary Fund and The World Bank

- Borrowing locally

- Drawing down on the official reserves of foreign exchange

- Selling an asset locally or overseas

- Borrowing from other countries

- Receiving gifts and grants

- Rescheduling of the debt.

What if the balance of payments showed a surplus? This surplus could be financed in the following ways.

FINANCING A BALANCE OF PAYMENTS SURPLUS

The surplus may be used in the following ways:

- Lend money, for e.g. to other countries

- Purchase an asset locally or overseas

- Increase the official reserves of foreign exchange

- Pay outstanding debts

- Invest the surplus

- Give gifts and grants to other countries

Below is an example of the official financing account. Assume that the balance of payments figure is US $M -1500.

THE OFFICIAL FINANCING ACCOUNT

Now we have balanced the balance of payments by eliminating the deficit of
US $M 1500.

What though if a country continues to have an adverse balance of payments, year after year? Well, that country must find ways of correcting that adverse balance of payments. The country has a balance of payments problem and must therefore
earn more by:

(a) Increasing exports through

- Offering incentives and subsidies to local manufacturers

- Encouraging foreign investment

- Extending credit facilities

- Reducing spending

- Improving marketing skills and sponsoring exhibitions

- Devaluing the local currency, which makes exports cheaper.

(b) Reducing imports by:

- Increasing tariffs (duties) on imported goods and services

- Setting quotas to limit the physical amount imported

- Requiring special licenses to import

- Devaluation, which makes imports dearer

- Foreign exchange controls, which limit the amount of foreign currency available to individuals.

The question below will test how much you have grasped of this lesson.

(a) What is the Official Financing Account? (2 marks).

(b) (1) List TWO ways of financing a balance of payments surplus (2 marks).

(11) List TWO ways of financing a balance of payments deficit (2 marks).

(c) A country has a balance of payments of US $M + 300, draw up the Official Financing Account to show how this may be financed (2 marks).

(d) Explain TWO ways of CORRECTING an adverse balance of payments.

Total: 10 marks.

Next week, I will give you a possible answer to part (c) of the question. The answers to the other parts of the question can be found in the lesson.

My intention for the next few weeks is to consider some aspects of unit X111 - Regional and International Business Environment. This unit is often omitted in covering the Principles of Business syllabus, or treated very lightly because of time. We are going to be one step ahead by doing it early - smile. Next week, therefore I will list some of the major economic institutions in the Caribbean and outline their functions. See you next week.

* Yvonne Harvey teaches at Glenmuir High School.