THE Balance of Payments (BOP) is a method countries use to measure the flow of money into and out of their economies over a specific period of time, usually quarterly and yearly. As with any company or individual this is important information to know and has implications for the financial health of the nation. Let’s take a look at what makes up the balance of payments, why it is important, and how Jamaica measures up.

The BOP summarises the total international trade activities of the private and public sectors by monitoring the payments and liabilities to foreigners (debits) and receipts and obligations from foreigners (credits). If a country’s debits are greater than its credits over the given period, then it can be said to be running a deficit, that is, money is tending to flow out of the economy. Conversely, if the country’s credits are greater than its debits, then the country can be said to be running a surplus, where inflows exceed outflows. Unsurprisingly, surpluses are generally preferred to deficits and indicate that a country is saving more than it is spending.

However, there are instances when deficits are acceptable. For example, if there is a lot of foreign direct investment in a country, there may be a lot of profit repatriation, which involves sizable outflows of money from the country. However, the country still benefits from the employment and the other spin-off activity that the foreign owned businesses generate.

In the simplest of senses the balance of payments is divided into two accounts: the current account and the capital account. The current account measures mainly the net flow of goods and services into the country. The current account balance, as this flow is commonly known, is the sum of total exports less total imports in tangible goods such as bauxite, motor vehicles or food, and the sum of total exports less total imports in services such as tourism, transport, insurance, education, and so forth. The current account balance is an important indicator of economic health. Export- driven economies are desirable as the production fuels growth and further economic development. Although the trade balance is typically its largest component, the current account also includes

net international interest payments and net unilateral transfers such as remittances and foreign aid. A current account surplus is almost always a trait of growing economies.

As its name suggests, the capital account keeps track of capital flows into and out of the country. Basically it measures the relative change in foreign ownership of domestic assets as opposed to domestic ownership of foreign assets. A capital account can be said to be in surplus where foreign ownership of domestic assets is greater than domestic ownership of foreign assets, and in deficit in the opposite situation. The capital account takes into consideration investment, in real estate, bonds, stocks, foreign direct investment and government- owned assets such as foreign reserves, gold and IMF Special Drawing Rights.

Jamaica had a current account deficit of US$296.5 million for the period April-June 2014 an increase of US$7.5 million over the deficit recorded in 2013. In the merchandise trade category, imports amounted to US$1,306.6 million versus exports of US$348.3 million, representing an increase in the deficit of US$75.5 million. As you can see, Jamaica is importing more than it is exporting by a ratio of nearly four to one. The decline of US$54.5 million in the deficit on the income sub-account and an increase of US$21.7 million in the surplus on the current transfers sub-account tempered the deterioration in the current account for first quarter of the fiscal year. Net private and official capital inflows for the period under review were able to finance the deficits on the current and capital accounts. The Net International Reserves (NIR) of the Bank of Jamaica increased by US$72.5 million for the quarter. The Bank’s gross reserves at end of June 2014 amounted to US$2,016.5 million representing 14.5 weeks of projected goods and services imports. The internationally accepted minimum NIR level is 12 weeks of imports of goods and services.

Pamela Lewis is the vice president of investment and client services at Sterling Asset Management. Feedback: Visit www.sterling.com.jm or e-mail info@sterlingasset.net.