Balance of Payments – An Analysis of Development in Nigeria

Balance of Payments – An Analysis of Development in Nigeria

Balance of payments is a systematic statistical record of the economic transactions between the residents of one country ad those of the rest of the world during a given period, usually one year.  In other words, the balance of payment statement is a device for recording all the economical transactions within a given period between all residents of one country ad the rest of the world, that is, the residents of the other countries.

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It is important to note that the term resident refers not only to individuals but also to corporate bodies and governments.

Various types of monetary transactions takes place amongst the countries of the world.

Broadly speaking, it can be classified as follows:The exports and imports of a country give rise to monetary transactions with other countries.

The exports gives rise to receipts from foreign countries while imports results in payments which are to be made to foreign countries for imported goods.

The international lending and borrowing also give rise to monetary transactions amongst the countries of the world.The servicing of foreign debts and their final repayments also results in internationals payments and receipts. This, the balance of payment is an annual record of the international receipts and payments of a country during the year.  It is a summarized statement of all international receipts and payments and indicates the real monetary position of the country concerned. G. O. Nwankwo (1990)2 describes it as a statement of performance of the country’s trading transactions with the rest of the world during a given period, usually one year.

O. Teriba (1976)3 defines it as a statement showing a countries financial position with the rest of the world, for a particular period, usually one year.

R. G. Lipsey (1984) 4 while describing the statement said that in order to know what is happening to the course of international payments, government should keep track of the actual transactions is called the balance of payments.

Balance of payments accounting of any country uses a double entry system of recording accounts with the rest of the world. Thus, balance of payments account is divided into transactions giving rise to payments (or debit) and receipts (or credit).

All international transactions that results in payments to Nigeria (receipts to Nigeria) for instance, increase Nigerian stock of, or claims on foreign  currencies, and may be recorded as credit (or plus +) entries in Nigerian balance (receipts to foreigners) deplete Nigerian stock of or claims on foreign currencies, and may be recorded as debit (or minus) entries in the balance of payments account.

However, the balance of payments accounts should not be confused with the conventional accounting balance sheet shows assets and liabilities at a particular time, where as a balance of payments account groups transactions during a year.

A country real economic gain or loss from international trade or transactions cannot be expressed mathematically like income statement.

The real gain to a country from international transactions is social or utility gain. Form the social view point, a country real gain from foreign trade is largely the next utility represented by the imported commodities (i.e. their power to satisfy human wants) as compared to the utility of exports given in payment.

The balance of payment thus forms part of the national or social accounts of a country, because in social accounting, the economy is classified into: –

  1. Firms (production sector)
  2. Household (consumption sector)
  3. Government sector
  4. Capital sector and
  5. Rest of the world sector

The transactions in the rest of the world sector are known from the balance of payment of the country.  It shows what is sent to the foreign countries by the nations and what is received from them in return.

A balance of payments basically is complied to measure gross deficits or surpluses with the rest of the world.  However, the balance of payment statement has become increasing important in recent years, as it has been devised to describe in a concise fashion the state of international economic relationship of the country, as a guide to its monetary, fiscal exchange control and other policies.

Thus, the fundamental aim of balance of payments statement is to inform governmental authorities about the international economic position of the country, to assist them in reaching decision on various economic policies that help to guide the nation.


Before a detailed discussion is embarked upon, a working         definition is a “sine quanon”.

According to G. O. Nkwonkwo; The balance of payment (BOP) of a country is a statement performance of the country’s trading transactions with the rest of world during a given period , usually one year.

Commenting further on the definition, he stated that it records the total expenditure on imports and shoes the balance of income over expenditure or vice versa.  The income includes foreign loans and foreign private investigates. Similarly expenditures includes payments for imports and services and capital overflows through Foreign aids, loan and foreign investment.


Having defined the balance of payment statement, the next question before us is this;

Of what importance is the balance of payment statement?

According to M.C seth:

…     It is an important index which reflects the true economic position of a country and whether it’s currency is rising or falling in  its external value contributing to this question, D. M Mithani said that

….    The fundamental aim of the balance of payments statement is to inform the governmental authorities about the international economic position of decisions on monetary and fiscal policies, foreign exchange phenomena.

But some authors hold a contrary view on this subject.

R. G. Lipsey for instance stated that;the balances of payment has been important in the recent past….

Under the Brelton wood system, any country whose balance of payments was in deficit led to make the achievement of a satisfactory payments position, a major goal for policy sometimes the over richening goal

Most industrial countries have        allowed their exchange rate to fluctuate on the free market

As  a result, obtaining a satisfactory balance of payment; in order to defend the existing exchange rate has ceased to be the dominant policy consideration.

This view does not seem to hold time for under developed countries including Nigeria, considering the debt crises they are facing.  Infact, the management of the balance of international payments appears to be the pre-occupation of policy markers in these countries and no stone is left unturned in an effort to identify possible causes of problems and to initiate programmes and polices to address them adequately.


As an accounting statement designed to depict at a glance, the state of a nations economy in relation to other countries with whom it has trading links.  A balance of payments systems is sub-divided into three sections; the current account, the capital account and the official financing.


The current account section records the movement of goods, services and unrequited transfers.

Movement in this account have a significant impact on domestic income prices and employment.  D. M Mithani noted that to see how a country’s foreign trade affects income ad employment, one has to look at the current account only.  This account will show total foreign spending on current domestic output, for it will list the country’s exports of domestic goods and services. It will also record the country’s spending on foreign goods and services and therefore its contribution to foreign income and employment.


This capital account records transactions related to movements of long and short term capital.

Capital movements may be divided in different ways, one way it occurs through direct foreign investment by the residents of a country.  This happens when fund is transferred to create new capital in foreign countries.

Another way is through port-folio investments, thus happens when equities or bond are purchased by residents from foreign countries.


The official financing items involves transactions by the Central Bank of the country whose balances of payment is being recorded.  Three different ways in which credit occur in the official financing account includes; the central bank borrowing, I M F (International Monetary Fund), or through running down official reserves of gold and foreign exchange.


One sticking feature of balance of payment statement is the relation among the three divisions of accounts. The sum of the three divisions must be equal to zero – that is

C + K + F = 0

Where C, K and F are representatively the balance on current, capital and official statement accounts.

According to R. G. Lipsey

A deficit on current account must be matched by a net  surplus on capital plus official settlements accounts which means borrowing abroad or running down exchange reserves. A surplus on current account implies a deficit on the sum of the two accounts given this type of relationship in the balance of payment statement, what then do we mean when we talk about payments imbalance?

R. G. Lipsey further stated that; when we speak of balance of payments deficit or surplus, we refer to the balance on some part of the accounts usually we are referring to the balance on current account plus capital account.

A balance of payment deficit thus means that the reserves of the central bank are being run down of its foreign indebtedness or rising while a surplus means the opposite.


A deficit or surplus may be describe as a disequilibrum.  Neither is too good, but a deficit is worse than a surplus through all require certain form of economic adjustment to correct. But before any correction is effected, a mere detailed analysis of the cause of disequilibrum is necessary in order to highlight the impact each on the economy.


According to D. M. Mithani;

…..   Any disequilibrum in the balance of payment arises owing to the large number of causes and many complex factors interacting on another.

Further, the character of disequilibrum may differ from country to country    while the different kinds of disequilibrum and their causes in the same country will differ at different times.

In particular he stated that;

There are certain items, which contribute to the structure of the balance of payment the item inter alia consists of visible and invisible exports and imports, unilateral payments and receipts etc.

Any factor which persistently causes one sided movement in these items        is sufficient to cause disequilibrum in the balance of payment.

He went on to state significantly that huge development and investment programmes in the developing economics are the root cause of the  disequilibrum in the balance of payment.  This is true in the case of Nigeria.  The propensity to import goes on increasing for want of capital for rapid industrialization while export may not be boosted up to that extent as the export products are mainly primary products namely – agricultural products and petroleum products.

Not only that, (D. M. Mithani) due to rapid economic development, the resulting income and price effects will adversely affect the balance of payments position of a developing country.  This researcher does not differ with the foregoing. In fact with an being high in these countries, their demand for imported articles will rise.

Moreover, a huge investment in heavy industries in the developing countries may have an inflationary impact as output of these industries will not be forth coming immediately whereas money income will have been already expanded.

This has been the case in Nigeria in the last few yeas.  With the huge government expenditure in the iron and steel industry, petro-chemical, fertilizer projects etc. money supply has been greatly expended. The consequences of this situation was an exceeding monetary demand for goods and services and general rise in price levels.

Another causes of disequilibrum in the balance of payment of LDCS is that some advance countries have taken steps to restructure their domestic economy.

According to D. M. Mithani;

A vast increase in the domestic production of food stuffs, raw materials substitute goods etc in advance countries has decreased their need for import from agrarian under developed countries. Thus export demand has considerably charged,     resulting in structural disequlibrum in these countries.

In less developed countries, population expansion and high growth rate also affect the balance of payments position. An increase in population calls for an increase in exports.

Another cause of disequilibrum and perhaps the most disturbing factor in the coast of Nigeria is the demonstrated effect on the consumption pattern of Nigerians who come in contract with the Europeans through one way or the other.       Though Nigeria does not produce any car yet, our roads are         filled with expensive cars from Japan and Europe.

This excessive demand for the good things of life which we cannot produce on Nigeria generally causes a pressure on the balance of payments position.


It is important to distinguish between a short run and long run disequilibrum. A short run diseqilibrum last for a while. It may be due to international borrowing or lending.

Another cause of disequilibrum may be a situation where imports exceed export in a given year.  But when this happens so often then it becomes chronic and may seriously affect the country’s economy.

A long term disequilibrum also known as fundamental disequilibrum as contained in international monetary fund articles of agreement is a disequilibrum so serious of an ending nature.

According to fund, any member facing this type of problem is devised to seek the assistance of the fund for the solution.

A long-term disequilibrum is viewed with great concern because if left for a very long time, the country is question will lose its stand in the world economic arena.


As a result of serious threat posed to the economy by a disequilibrum in the balance of payment, urgent steps are usually taken to try to achieve an even balance.  This is true for a surplus as well as a deficit. According to Mithani (1964) a deficit or adverse balance of payment is more harmful to a country’s economic growth and is therefore to be corrected sooner than later. For obvious reasons, an adverse balance of payments has to be corrected by encouraging exports and discouraging imports. Several economic policy options are available to a country that has an adverse balance of payment and these have been classified into two: –

–           Monetary and non-monetary measures

The monetary measures include Deflation, exchange, depreciation, Deviation and exchange control.

The non – monetary measures includes tariffs –import duties, import quotes and export promotion policies and programmes. On characteristic feature of monetary measures is that they function indirectly.

For instance, if a country decides to deflate the nation’s currency, the natural consequences is that there is a contraction of the home currency, through clear money and credit policy.  What this means is that consumption of home goods is reduced through reductions income; demand for goods at home will be reduced and more surplus may become available for exports so that export will increase.

Another important point is deflation, the extent of successor otherwise of a deflationary policy, in correction, a balance of payment disequilibrum depends on the degree of elasticity of demand for exports and imports.  When elasticity of demand for imports and exports are less than unity, a severe deflation will be necessary which will harm the employment and income levels of the country.  Deflation is best applied when a country is operating a fixed exchange rate.  This appears to be the case with Nigeria during the period covering 1995 – 1999.


An exchange depreciation is a policy option in which the authorities decide to allow a decline in the rate of exchange of the country in terms of others.

This policy will tend to cheapen the domestic goods for the foreigners so that the exports will be bossed. Again much depends on the elasticity of imports and exports in a particular country.  In a country where the demand for imports and exports is fairly elastic, a small exchange depreciation tends to correct a normal deficit in the balance of payment.


Under exchange control method, all exports are directed by the exchange control authority to surrender their foreign exchange earnings to it and the foreign exchange is rationed out among licensed importers. The non – monetary measures used to correct a balance of payment deficit as earlier stated include import duties and Quotas.

Import duties are levies on selected import items.

When such levies are imposed, there is usually a rise in contraction in import demand.

Quotas on the other hand operates through the government fixing a maximum quantity of value of a commodity to be imported during a given period.

By restricting imports through Quota system, deficit is reduced or eliminated and thereby the balance of payments position is improved.

The Nigerian government made an extensive use of this       measure within the period up to 1995 – 1999.

Tariff is another measure used effectively in Nigeria.    Tariff measures are very effective if the demand imports is     inelastic.


Export promotion involves a reduction in exports duties provision of export subsidies and the establishment of export boundaries.  Nigeria did not consider this option until recently. Even as at now not much has been achieved in that direction as the export revenue is still not encouraging. Whether a monetary or non-monetary measure is to be employed to correct the balance of payment, deficit depend on through analysis of the economic condition that gave rise other disequilibrium.

According to Muthani (1994) D. M., disequilibrum is the balance of payment situation of a country corrected by seeking the help of international  monetary fund which advise members on the correct measure to adopt.


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  1. Mark Samuel Mgbaba says:

    Nigeria need to do something to seriously fight and minimize the high level of bop deficit in our nation.

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