What is an ‘Official Settlement Account’
An official Settlement Account is a type of account used in balance of payments accounting to keep track of central banks’ reserve asset transactions with one other. The official settlement account keeps track of transactions involving gold, foreign exchange reserves, bank deposits and special drawing rights (SDRs). Essentially, this account keeps track of transactions related to international assets that are transferred among nations to settle either a balance of payment deficit or surplus.
BREAKING DOWN ‘Official Settlement Account’
The account types used in balance of payments accounting are the current account and the capital account. The current account keeps a record of a country’s imports and exports of goods, services, income and transfers, and whether the country is a net creditor or net debtor. The capital account records the change in foreign and domestic investments, government borrowing and private sector borrowing. When there is either a balance of payments deficit or surplus, inflows of reserve assets or outflows of reserve assets bring the ledger back into balance. This is recorded in the official settlement account.
Monitoring an Official Settlement Account
Nations keep an eye on the official settlement account to gauge their economic health in the global economy. If there are continual outflows of reserve assets for a country, it means that its competitiveness in producing exported goods is relatively weak, or its business environment is not as attractive as that offered by other countries for direct foreign investment. A nation running chronic current account deficits may then formulate policy prescriptions to improve the quality of its goods for export, or seek exchange rate adjustments to make their exports more price competitive. It also may 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 address unwanted outflows recorded in its official settlement account.
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