Understanding Spain’s Balance of Payments
The balance of payments (BoP) measures transactions between residents and non-residents. These measurements are made on an annual basis. The institution in charge of making the measure is the Bank of Spain, following the directions of the Sixth Edition of the Balance of Payments and International Investment Position Manual (BPM6) of the International Monetary Fund.
Components of the Balance of Payments
- Credits: Exports of goods and services, income receivable, reduction in assets, or increase in liabilities. Revenue and income for the country.
- Debits: Imports of goods and services, income payable, increase in assets, or reduction in liabilities. Obligations to pay for the country.
- Balance: Credits minus debits. The sign can be positive (surplus) or negative (deficit).
Principle: Dual accountability. Each transaction is accounted for twice, following the criteria of double-entry bookkeeping.
Accounts within the Balance of Payments
Current Account
The current account includes the Goods and Services (G&S) account, showing transactions in items that are outcomes of production activities. It reflects transactions of goods and services between residents and non-residents.
Capital Account
The capital account shows capital transfers receivable and payable between residents and non-residents, and the acquisition and disposal of non-produced, non-financial assets between residents and non-residents.
Financial Account
The financial account records transactions that involve financial assets and liabilities, e.g., direct investment, reserve assets. Capital inflows from abroad are registered as a credit: a positive sign in the column of net changes in liabilities equals an increase of liabilities with non-residents. It also includes net errors and omissions.
Balance of Payments Equilibrium
When there is a surplus or a deficit, it refers to the balance of any of the different accounts within the BoP.
Current Account Details
The current account balance is the difference between imports and exports of goods, sometimes called the balance of merchandise trade. However, this is not a good summary because services are an important component of trade.
- Current Account Surplus: Exports of G&S, investment income, and transfers exceed imports and outflows.
- Current Account Deficit: Imports are greater than exports and inflows; this must be financed by borrowing.
Solutions for a current account deficit:
- Sell national assets to foreign investors.
- Borrow money from foreign banks.
- Sell foreign assets owned by residents.
Capital Account Details
The capital account balance shows total credits less debits for capital transfers plus non-produced, non-financial assets. It can be shown as a balancing item. The sum is conceptually equal to net lending (+) / net borrowing (-) from the financial account.
The current and capital accounts show non-financial transactions, with the balance requiring net lending or net borrowing, while the financial account shows how net lending or borrowing is allocated or financed.
For a surplus of credits over debits in the current and capital accounts, there is a balancing net acquisition of financial assets or a reduction of liabilities, which is shown in the financial account.
Financial Account
The overall balance equals net lending/net borrowing. Net lending means the economy supplies funds to the rest of the world (net borrowing means the opposite).