Question

What is meant by ‘official reserve transactions'? discuss their importance in balance of payment?

Answer 1

Financing the deficit by selling assets or by borrowing from abroad by monetary authorities of a domestic country is known as official transactions or balancing the surplus by lending to abroad or purchasing assets from abroad by monetary authorities is called official reserves.
The decrease in official reserves is known as overall Balance of Payments deficit and the increase in official reserves is known as overall Balance of Payments surplus.
Importance of payments deficit or surplus are:
(i) Overall Balance of Payments deficit or surplus can be adjusted through official transactions.
(ii) It fulfills the good of basic promise that the monetary authorities are the ultimate financiers of any deficit in the Balance of Payments or the receipts of any surplus.