The Bank of Guyana’s Annual Report for the fiscal year ended 2018 revealed that the balance of payment deficit widened from US$69 million in 2017 to US$132 million as at the end of 2018 – reflecting an increase of 91 percent. This article seeks to address this topic by explaining what is ‘balance of payments’, and how it affects the economy. The illustrations below depict the movements in Guyana’s Balance of Payment figures over the last ten years:
Balance of Payment overall balances
As can be observed from the data above, over the last ten years, Guyana’s trade balance recorded a surplus in years 2009, 2010 and 2012, with the highest surplus during that period being US$234.5 million in 2009; and deficits were recorded in the years 2011, 2013, 2014, 2015, 2016, 2017 and 2018, with the highest deficit of US$132 million being recorded in 2018.
The balance of payment (BOP) of a country, sometimes referred to as ‘trade balance’, is defined as a systematic summary statement of a country’s international economic transactions during a given period of time, usually a year. In other words, it is a record of transactions between its residents and foreign residents over a period of time; or the imports and exports’ transactions of a country.
The importance of balance of payments
It serves as an indicator of the changing international economic or financial position of a country.
It helps in formulation of a country’s monetary, fiscal and trade policies. It helps in determining the influence of trade and transactions on the level of national income of a country.
It is useful to individuals and banks, firms and financial institutions which are directly or indirectly involved in international trade and finance.
It is an economic barometer of a nation’s progress vis-à-vis the rest of the world.
Economic growth in developing economies: balance of payment constrained growth? The case of Nigeria
In the case of Nigeria, balance of payments’ instability was found to have complicated macroeconomic problems and financial management. Over the last three decades or so, there has been a growing trend in fluctuations of Nigeria’s balance of payments. A balance of payments’ crisis usually distorts the working of the entire economic system, because it creates disequilibrium between the supply and demand for money (Nwani, 2003). The different economic measures put in place by various governments in the 1980s could not turn around the balance of payments’ problems. For example, the Nigerian exports promotion policy, import substitution industrialisation, exchange rate policy, and the structural adjustment programme. The worst of all was the transitional period of democracy (1999-2010), when balance of payments continued to show red although the Government tried to change the course of the balance of payments (Anoka & Takon, 2014).
Causes of the balance of payments’ problem
In some respects, in an open economy, balance of payments reflect the net result of equilibrium or disequilibrium in the domestic economy. If there is a savings gap, that is, if domestic savings are not sufficient to cover domestic investment, the economy needs a net inflow of capital to cover the shortfall. In the same way, a trade gap with the domestic demand for goods and services exceeding domestic production can be covered only by a trade deficit with the outside world. Such a trade deficit must, however, be financed with foreign exchange. It means that a country with a trade deficit therefore needs a net inflow of capital from the rest of the world; or, alternatively, a sufficiently high level of foreign reserves.
With that in mind, reducing Guyana’s vulnerability to the balance of payments’ problem therefore starts at home. Such that it is domestic savings and investment that, in the long run, must be in equilibrium. Also, domestic production and expenditure should be aligned; the efficiency of the domestic industries must be improved in order to make domestic export products more competitive in world markets.
Efforts to address a balance of payments’ problem more directly — that is, by manipulating imports, exports and capital movements — do not rectify the basic causes of the problem, and, as such, often lead to even more controls. Such direct controls, like borrowing foreign funds to finance a deficit, can alleviate the problem only in the short run (Stals, 1993).