Balance of Payments (BoP)
The balance of payments is the statistical record of all economic transactions between a country's residents and the rest of the world over a period. It is split into the current account, the capital account and the financial account.
Also called: balance of international payments · BOP statistics · external accounts
The IMF sets the international standard in its Balance of Payments and International Investment Position Manual. The current account records trade in goods and services, investment income and transfers such as remittances. The capital account is small and covers items such as debt forgiveness and some asset transfers. The financial account records changes in foreign assets and liabilities: direct investment, portfolio flows, loans, deposits and the central bank's reserves.
Because every transaction is recorded twice, once as a credit and once as a debit, the accounts sum to zero in principle. A current-account deficit is matched by a net financial inflow, whether foreign investment, borrowing or a drawdown of reserves. In practice the data never balance exactly, and a line called net errors and omissions closes the gap.
When people speak of a balance of payments crisis, they mean the financing side has failed: foreign lenders stop rolling over debt, investors leave, reserves run low, and the country can no longer pay for imports and debt service at the prevailing exchange rate. The usual responses are devaluation, capital controls or an IMF programme.
For payments businesses, the balance of payments is also a reporting system. Banks in many countries attach purpose codes to cross-border transfers so that the central bank can classify each flow, which is why a payment purpose code can be mandatory.
In practice
The headline phrase "balance of payments" often refers loosely to the current account alone. Read which account a figure describes before drawing conclusions.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Balance of Payments, with more detail and background.
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Commonly confused with
| Term | How it differs |
|---|---|
| Current account balance | The current account is one component of the balance of payments. The balance of payments is the whole record, including the financial flows that pay for a current-account deficit. |
See also
- Current Account BalanceThe current account balance is the net of what a country earns from and pays to the rest of the world for goods, services, investment income and transfers such as remittances. A deficit must be financed by borrowing, investment inflows or reserves.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- Transfer ProblemThe transfer problem is the difficulty a country faces in converting a large payment owed abroad from its own currency into foreign exchange. Raising the money at home is one task; earning the foreign currency to deliver it is another.
- Capital FlightCapital flight is the rapid movement of money out of a country by residents and investors who fear devaluation, inflation, confiscation, default or political instability. It drains foreign exchange reserves and often triggers the controls it was trying to escape.
- Payment-Purpose CodeA payment-purpose code identifies the commercial or regulatory reason for a transfer, such as payment for goods or services. Using an inaccurate code can cause delays, rejection, reporting problems or inconsistencies with the supporting documents.