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What is an Official Settlement Account?
An official settlement account is a special type of account used in international balance of payments (BoP) accounting to track the transactions of reserve assets of central banks among themselves. The official settlement account tracks transactions involving gold, foreign exchange reserves, bank deposits and special drawing rights (SDRs).
Essentially, this type of account keeps track of transactions related to international reserves and central bank assets that are transferred between nations to settle a balance of payments deficit or surplus.
Key points to remember
- An official settlement account is used to track and record the international balance of payments between central banks.
- It is used to settle transfers of assets and global monetary reserves that circulate between the central banks of nations.
- Countries look to these accounts to monitor capital outflows and inflows to and from other countries.
Understanding official settlement accounts
Official settlement accounts are used in international balance of payments accounting and represent the current account and capital account of central banks. The current account records 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 domestic investment, public borrowing and private sector borrowing. When there is a deficit or a surplus in the balance of payments, inflows or outflows of reserve assets bring the general ledger back to equilibrium. This is recorded in the official settlement account.
The Bank for International Settlements (BIS) is an international financial institution that aims to promote global monetary and financial stability and maintains oversight of official settlement accounts. The BIS is sometimes referred to as the “central bank of central banks” because it provides banking services to institutions such as the European Central Bank and the Federal Reserve.
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 continual outflows of reserve assets for a country, this means that its competitiveness in producing exported goods is relatively low, or that its business environment is not as attractive as that offered by others. country for foreign direct investment.
A nation with chronic current account deficits can then formulate policy prescriptions to improve the quality of its products for export or seek 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 manpower training programs could be encouraged by a country to deal with unwanted outflows recorded in its official settlement account.
