Do you know that international remittances can significantly help achieve Balance of Payment (BOP) Surplus goals? More than 281 million people live outside their home countries, according to 2020 statistics. International diasporas remitted $597 billion to low-to-middle income countries in 2021. Most overseas workers send international remittances back home without knowing their connection with import/export and how it can play an essential role in improving the Balance of Payment (BOP) Surplus. Learning about the role and importance of your money transfer back home from abroad can make an immensely positive difference.
Before jumping into the details, let’s first get into the nook and cranny of how the Balance of Payment works and what roles remittances can play in improving the situation and boosting a country’s economy.
Balance of Payment (BOP)
The balance of payment, commonly known as the balance of international payments, is a proclamation of all transactions established between one country and the rest of the world over a specific period, either a quarter or a year. It sums up all the transactions that a nation’s companies, governmental institutes and individuals accomplish with other countries’ respective government authorities, companies and individuals. In a nutshell, BOP is like an informant that tells you if it saves enough money to pay for the imports while giving the maximum output for the country’s growth. But what is its connection with the trading industry? To know that, you first need to understand what import/export is and how it works.
Import/Export and its impact on the economy
Global trading for a nation holds significant value in developing a country, influencing GDP, exchange rate, level of inflation, and interest rates. The masses may be misinformed about the value of remittances and their crucial part in the import/export category, becoming the most significant determinant of a nation’s economic performance and Gross Domestic Product (GDP). A nation’s GDP is the comprehensive measurement of a country’s overall financial activity. Import/Export is an essential element of the expenditure methods of calculating the GDP. The formula that is used to calculate GDP is:
GDP = C + I + G + (X – M)
Where C stands for consumer spending, I for Investment spending, G for government spending and X/M for Exports/Imports. This indicates that the net export figure positively contributes to the country’s trade surplus when export exceeds import. A trade surplus contributes to economic growth depicting a high output level from the country’s factories and industrial groups.
Similarly, international remittances are essential to the positive contribution of trade surplus that fulfils the Balance of Payment Surplus conditions, which help benefit the country.
What is Balance of Payment (BOP) Surplus?
A balance of payment surplus means the country exports more than it imports while providing enough capital income to pay for all domestic production. When achieved by a nation’s import/export industry, a surplus boosts economic growth for a short period. This increased export then helps boost domestic production in its factories, creating more job opportunities while flourishing the economy.
Millions of overseas workers from low-to-middle income economies live in foreign lands and send money online back home to support their families. Their remittances not only uplift the quality of life in their country but also create investment opportunities that help increase domestic production and support exports to increase.
A country’s overall international investment position and BOP are influenced form its international accounts. Transactions are divided into two accounts; the capital account and the current account. The current account consists of transactions in goods, investment income, services, and remittances, whereas capital accounts are separate accounts with minimal capital accounts. International remittances are components of current transfers, part of the existing accounts. This is where BOP surplus goals are achieved.
What are the possible measures to achieve the balance of payments surplus goals?
Since international remittances are a part of the current transfer accumulated in the current account of BOP transactions, they reciprocate the nation’s growth to boost its GDP to create domestic opportunities. Remittances achieve 50% of the balance of payment surplus goals, especially for third-world countries, which mostly rely upon remittances from migrants who live for a short period in other countries.
Several things can help achieve the balance of payment surplus goals to increase export and boost domestic production. Some of these policies focus more on increasing the number of remittances in/out of the country, not just on an individual basis but also for business and industrial investment.
Improvement in trade through remittance
- Improving macroeconomic stability:
It is a fact that remittances are used by migrants and their families for personal use and are also a part of the high investment groups such as investing in businesses. Improving a country’s macroeconomic stability makes that nation more attractive to outward and inward investment. Investment in the form of remittances can increase a country’s dimension for exporting and eventually raise productivity.
- Improving the long-run policies for BOP
In the long run, the balance of payment surplus becomes too dependent upon export-guided growth. That is when import and business investment take the steering wheel to drive through the hardships. Expenditure switching policies should be applied at such times, designed to change the relative prices of exports and imports, primarily benefiting imports.
- Improving remittance policies to raise productivity
On a large scale, measures to bring about more innovation and incentives to increase investments through exports or international remittances compete more effectively with imports/exports. If remittance policies are made more attractive for the customers by banks and remittance service providers, the country’s economic growth might boost to achieve everlasting development.
Nevertheless, it is a proven fact in many developed countries that international remittances play a crucial role in increasing GDP. But how do people know which is the best method for remittance?
The best method of remittance transfers
The online remittance system has taken over the world with a blast. Many have already accepted an online money transfer as the best method and promoted it positively for easy transfer and faster results. Many banks provide online remittance systems, but most people prefer online remittance service providers like ACE Money Transfer, which help with personal growth and improve economic growth and a nation’s GDP. Remittances from overseas workers and diasporas not only improve living standards in developing countries but also have direct positive impacts on boosting exports to achieve the balance of payment surplus goals.
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