Page 137 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 11 : Balance of Payments and Balance of Trade : Meaning and Components

Autonomous or above the Line transactions are those that “take place regardless of the size of other Notes
items in the balance of payments”. Take, for example, the export of goods to a foreign buyer. It is an
‘initiating’ or an ‘autonomous’ transaction and its value results in payments by foreigners to the
home country, which is entered as a credit item. When the home country borrows $100 million from
the World Bank to construct a highway, the sum of $100 million is credited into the Long Term
Capital Account of the home country. If the foreign multinational corporations repatriate $300 million
of their profits (earned from their investment operations in our country) to their country of origin,
then we enter $300 million into our BOP Service Account as investment income outflow or capital
service debit item. If India receives $50 million from the United States as aid for the famine-stricken
people in India, then the amount of $50 million is entered as credit into India’s Unilateral Transfer
BOP Account. All these transactions which take place either in the goods account, or the services
account, or the unilateral transfer account or the long term and short term capital account of a country
are considered as ‘autonomous’ or ‘above the line’ transactions. They arise out of autonomous economic
activities as credit or debit transactions, and these transactions take place regardless or independent
of balance of payments situation.
The ‘accommodating’ or ‘below the line’ transactions, on the other hand, take place on account of, or
due to, balance of payments situation of a country. They are the result of balance of payments situation,
whereas the ‘autonomous’ transactions are the cause of balance of payments situation. Take for example,
gold exports or foreign borrowings. Suppose South Africa, a gold exporting country, exports $800
million worth of gold as a commodity export, then these $800 million export proceeds are entered as
credit in that country’s merchandise account. Here gold is exported as an autonomous activity or as
a current account transaction. This activity causes foreign exchange earnings and thereby determines
the BOP situation for the country (note that it is not determined by the BOP situation of the country).
On the other hand, if India (which is not a gold exporting country) is forced to export gold worth
$400 million to settle its balance of payments deficits, then we say that this gold export is not an
‘autonomous’ but an ‘accommodating’ transaction undertaken exclusively with a view to solve its
BOP problem. Here, the gold export is the result of BOP situation and not its cause. This
‘accommodating’ gold export transaction is entered into India’s BOP International Liquidity Account
as a credit item. Another example would be, where a country has borrowed from abroad. If Malaysia
has borrowed $700 million with a view to construct its East West Highway from the World Bank, it is
an ‘autonomous’ transaction, and it is entered into Malaysia Long Term Capital Account as a credit
entry. But if Malaysia has borrowed a sum of $700 million from the World agencies to settle its BOP
deficit, then it is treated as an ‘accommodating’ transaction and ‘entered into the country’s International
Liquidity Account as a credit item.
In brief, all credit and debit entries in the BOP current and capital accounts are regarded as
‘autonomous’ or ‘above the line’ transactions; and all the credit and debit entries in the International
Liquidity Account are to be regarded as ‘accommodating’ or ‘below the line transactions’. The
distinction between ‘autonomous’ and ‘accommodating’ transactions lies in the questions whether
the transactions have caused the BOP situation or whether the transaction has been caused by the BOP
situation.
The distinction between the ‘autonomous’ and ‘accommodating’ transactions looks very clear cut
from what has been said above. But the distinction may sometimes be not all that cut and dry. For
instance, if Malaysia exports $500 million worth of rubber, we take it as an ‘autonomous’ export
transaction and treat it as now having been caused by the country’s BOP situation. But it may be
possible that Malaysia exported this $500 million worth of rubber to avoid causing a BOP problem. In
this case, this transaction has been undertaken due to BOP considerations and not regardless of BOP
considerations. The subtlity lies in the question whether this export transaction was undertaken
regardless of BOP considerations or whether it was undertaken with BOP considerations in mind
(i.e., to avoid a possible BOP deficit problem). This raises the question of short term and long term
motives behind all BOP transactions of a country, and the problems of identifying transactions as
‘autonomous’ or ‘accommodating’ become extremely hard to handle. For accounting purposes, it is
reasonable to treat all current and capital account transactions as ‘autonomous’ or ‘above the line’;
and all the entries in the International Liquidity Account as ‘accommodating’ or ‘below the line’

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