An official settlement account is a type of account that a central bank uses to track its reserve asset transactions with other central banks. Types of transactions include those involving gold, foreign exchange reserves, bank deposits, and special drawing rights among other items.
Countries monitor official settlement accounts to quantify a nation’s economic health.
Official settlement accounts allow countries to monitor the inflows and outflows of other countries. These inflows and outflows consist of investments, loans, services, and goods.
Two accounts make up the official settlement accounts. They are the current and capital accounts. The current account keeps track of goods, services, transfers and determines if the country is a net debtor or creditor. The capital account tracks net investments, government borrowing, and private sector borrowing.
There is a global governing body that oversees official settlement accounts. It is called the Bank for International Settlements (BIS). Its mandate is to promote global monetary and financial stability.
Countries monitor each other’s official settlement accounts, which provide a barometer of the country’s financial health. Depending on how financially strong a country is, other countries may view it as an investment opportunity. A country that sees consistent outflows from its reserve assets is not financially strong. These outflows show that the country’s ability to produce exports is competitively weak. It could also be that the business environments of other countries are more attractive.
Countries can implement policies to turn around current account deficits by improving their export competitiveness. Countries that implement these policies try to make themselves more attractive to foreign investment and stem the tide of unwanted outflows recorded in their official settlement accounts. Some of these policies include improving the quality of export products or changing the exchange rate to make export prices more competitive.
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