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Question
What are official reserve transactions? Explain their importance in the balance of payments.
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Solution
The transactions carried by monetary authority of a country, which cause changes in official reserves, are termed as official reserve transactions (ORT). These transactions are carried through purchase or sale of currency in the exchange market for foreign currencies or other assets. The reserves are drawn by selling foreign currencies in exchange market during deficits and foreign currencies are purchased during surplus. When the official reserves increases or decreases, it is called overall balance of payments surplus or deficit respectively.
Importance of ORT in balance of payments:
1. Purchase of a country’s own currency is a credit item in the balance of payments; whereas, sale of the currency is a debit item.
2. It helps to adjust the deficit and surplus in balance of payments.
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