Q25 of 31 Page 1

What is meant by ‘official reserve transactions'? Discuss their importance in the Balance of Payments.


Official reserve transactions are the transactions made by the Central Bank which cause changes in its official reserves of foreign exchange. It takes effect in the foreign reserve of the country. This transaction happens only when an economy withdraws from its stock of foreign exchange reserves to finance the deficit in its overall Balance of Payments.


The following are the importance of the official reserve transaction:


• Official transaction reserve helps to bring balance in the country’s balance of payment.


• Purchase of a country's own currency is a credit item in the balance of payments; whereas, the sale of the currency is a debit item.


• It helps to adjust the deficit and surplus in the balance of payments.


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