Balance of payments is a record of accounting involving all financial transactions taking place between one nation and the rest of the world economies. The foregoing transactions involve all country’s imports and exports for commodities and services, monetary capital and monetary transfers either into or out of the country. Balance of payments presents a summary of a country’s international business transactions for a given period, normally a year. These transactions are presented in the accounting records in a single currency, which is always the domestic currency for the country. A negative balance of payments is otherwise known as balance of payments deficit.
The Implication of Negative Balance of Payments
Normally, the balance of payments should balance on both sides. However, this has never been the case. A balance of payments can either be in surplus or deficit. When the central bank uses the domestic currency in exchange for a foreign currency then it is said to be running a negative balance of payment. There are also other causes of negative balance of payment.
Negative balance of payments is good for a country depending on the source of the deficit. A deficit indicates that a country is debtor to other economies of the world. It is always accompanied by reduction in the foreign exchange assets. This is because the foreign reserves would be utilized for investing in other economies abroad. Even though this is debited in the current account, the domestic economy gets back returns on investments, which are actually credited in the current account. In fact, long term returns on investments abroad may exceed the capital outflow. This is definitely beneficial to the country. The deficit may also indicate that foreign direct investments in the country’s local market are on the increase. The reason is that the country to which there is an increased foreign direct investment is under the obligation to pay investment returns to foreign economies or investors.
It is important to note that by paying investment returns to foreign economies, the financial outflow is recorded as debit on the country’s current account. This implies that the more the foreign direct investments within the domestic market are the more the financial outflow in terms of payments on investment returns. This contributes to the negative balance of payments. This has a positive impact on the local economy. The negative balance leads to the increased market value and the future production and growth of the country. This can ultimately lead the domestic economy to experience a rise in its net export thereby overturning its deficit.
Therefore, in light of the foregoing facts, negative balance of payments is not really bad for the economy of a country, especially economies that are still developing. It is economically sound for a country to spend some money to generate more. When a country runs an intentional negative balance of payments, it should finance the deficit through mechanisms that do not increase foreign liabilities. It should increase net credit from foreign economies.
However, negative balance of payments may be detrimental to a country if the country does not have a sound economic policy. Besides, this may also be the case if the country uses the debts for its local consumption as opposed to future growth plans.
Economists concur that when an economy is experiencing negative balance of payment it implies that it is engaging in more investments abroad than its local savings. The sense behind an economy’s investment resolves is that it spends money to earn more money. The investments are done in order to heighten the Gross Domestic Product of the economy. In this case, a country commits into liabilities to other countries of the world. This makes a country become what is known as a net debtor.