Question

“Balance of payments must always balance.” Comment.

Answer 1

1. The statement is theoretically correct because the balance of payments (BoP) is a comprehensive record of all economic transactions between a country and the rest of the world over a specific period. By definition, every transaction is recorded twice: once as a credit (inflow) and once as a debit (outflow). Therefore, the sum of the credit and debit sides must always be equal, and the BoP must balance.
2. However, in practical terms, there can be a surplus or deficit in either the current account or the capital account. These imbalances are reflected as changes in foreign exchange reserves and are adjusted to maintain overall balance in the BoP. For example, if there is a deficit in the current account, it must be offset by a surplus in the capital account or a drawdown of reserves.
3. Thus, while the BoP must balance arithmetically, specific sections like the current account or capital account may not balance individually.