What is an official settlement account
A formal settlement account is a type of account used in balance of payments accounting to track transactions in central bank reserve assets between them. The official settlement account tracks transactions in gold, foreign exchange reserves, bank deposits and special drawing rights (SDRs). Essentially, this account tracks transactions related to international assets that are transferred between nations to settle a balance of payments deficit or surplus.
BREAKDOWN of the official settlement account
The types of accounts used in balance of payments accounting are the current account and the capital account. The current account keeps a register of a country’s imports and exports of goods, services, income and transfers, and indicates whether the country is a net creditor or a net debtor. The capital account records the change in foreign and national investments, government loans and private sector loans. In the event of a deficit or surplus in the balance of payments, the inflows or outflows of reserve assets are used to rebalance the general ledger. This is recorded in the official settlement account.
Tracking an official settlement account
Nations keep an eye on the official settlement account to assess their economic health in the global economy. If there are continuous outflows of reserve assets for a country, this means that its competitiveness in the production of exported goods is relatively weak, or its trading environment is not as attractive as that offered by other countries. for foreign direct investment. A country with chronic current account deficits can then formulate policy prescriptions to improve the quality of its products for export, or request exchange rate adjustments to make their exports more price competitive. It can also try to create better conditions for international companies looking to build new factories abroad. Tax incentives, infrastructure projects and workforce training programs could be promoted by a country to combat unwanted outflows from its official settlement account.