Indigenization & Balance of Payment (BOP): Correlation Analysis

Indigenization & Balance of Payment (BOP): Correlation Analysis

Countries do track monies coming in and going out of the country through the Balance of Payments (BOP). BOP is an accounting of a country's international transaction for a particular time usually a year. Generally, BOP can be defined as an accounting record of all monetary transactions between a country and the rest of the world. The monetary transactions include the payment of a country's exports and imports of goods, services and financial capital as well as financial transfers. The BOP is usually prepared in single currency, typically the domestic currency, however for international comparisons the United States Dollar is used in line with the prevailing exchange rate. The BOP should balance when all components are included, however imbalances usually occur particularly in developing nations. For example, when exports are greater than imports, a deficit arises, and it should be balanced by funds earned from foreign investments, the running down of reserves or receiving loans from other countries. Institutions like the IMF, WB and AFDB usually finance the BOP deficits.

In simple terms BOP is made up of the Current account and Capital account. Current account comprises of balance of trade (exports less imports), factor income and cash transfers. In short, the current account includes transactions that don't give rise to future claims. Capital account includes the net change in ownership of foreign assets. BOP imbalances is mainly caused by current account factors, which includes the exchange rate, government fiscal deficit, business competitiveness and private behavior of economic agents (willingness to be in debt to finance consumption). The BOP crisis is also known as the Currency crisis, and occurs when a nation is unable to pay for essential imports and service its debt payments. The crisis is accompanied by rapid decline of country's currency.

Indigenisation of the economy is the deliberate economic empowerment of indigenouspeople mainly through economic expansion.The effect of indigenization on the BOP can be analysed by looking at the components of the BOP against the objectives of the indigenization Act. Indigenization is aimed at increasing the productivity of the country, and this will mean decline in the country's imports and automatically improves the BOP of the nation. Generally developing nations are net importers, which means that they import more than they exports, and hence, reducing imports will mean reducing the BOP deficit.

Improving the country's productivity, will also imply that exports volumes will increase and this will reduce the BOP deficit. However, increase in productivity may not automatically lead to increase in exports, it should be accompanied by opening new markets. The production process or formula should be cost effectiveness. And to maximize benefits of exports value addition to country's products is needed because developing nations are commonly known to export primary products.

Indigenization aims at defining property rights correctly. This will enhanced security and attracts foreign direct investment which in turn improves the reserves of the nation and hence the BOP. Investment is appropriate in a stable and conducive environment. Hence by defining property rights promote investment. Productivity is also improved through well defined property rights and hence the balance of trade is improved implying the BOP as well.

Since many companies and economic agents are financially constrained, the issue of property rights will bring in collateral security, as a piece of land can be used as collateral to borrow loans to facilitate business. Indigenization aims at opening up lines of credit, and this will go a long way in promoting growth and shape the standards of living of the nationals.

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