# Reconciling BDL’s Definition of the Balance of Payments with the Standard Definition: An Empirical Example

The Central Bank of Lebanon’s (Banque du Liban BDL) definition and calculation of the balance of payments (BOP) as the change in net foreign assets of the financial system departs from the standard definition which identifies the BOP as equal to the change in the Central Bank’s foreign reserves. In this economic digest, we will provide a reconciliation of these views with an example from actual Lebanese data.

In economic theory, it is generally understood that the current account (CA) is equal to the change in net foreign assets (NFA = foreign assets FA minus foreign liabilities FL):

CA = change NFA

Suppose that CA = -11

Then this deficit has to be financed by capital inflows through the capital account; and if these are not enough, then by BDL foreign reserves or assets.

Suppose that capital inflows are non-resident deposits of 8. Therefore the FL of banks will increase by 8, and if we assume constant FA for simplicity, then the change NFA of banks = -8.

The rest of the CA deficit has to be financed by BDL’s foreign reserves; so BDL’s FA will fall by 3, and given constant FL for simplicity, then change NFA of BDL = -3.

Hence: CA = change NFA of banks + change NFA of BDL = – 8 – 3 = -11

Suppose that non-resident deposit inflows were 13; then change in NFA of banks will be -13. But in this case, only 11 was needed to finance the CA deficit, so the remaining 2 will be absorbed by BDL in higher foreign assets, so the change NFA of BDL will be +2.

As such:  CA = change NFA of banks + change NFA of BDL = – 13 + 2 = -11

So what we have established is that no matter how the numbers pan out, CA will always be equal to change NFA

Also, we can establish the following:

• In Lebanon, change in NFA of banks reflects largely (but not totally) the private changes in the capital account as banks dominate the financial sector in Lebanon.
• The balance of payments BOP as is commonly understood is the balancing item after the current and capital accounts are accounted for, so in actual fact it would be change in NFA of BDL.
• So Lebanon departs from international standards by defining BOP as the change NFA (of banks and BDL), whereas for accuracy and comparison reasons it should be change in NFA of BDL.

The table below highlights the observations mentioned above*:

 Billion USD 2018 2019 2020 2021 2022 BOP BDL -4.8 -5.9 -10.5 -2 -3.2 ∆NFA BDL -2.3 -3.9 -14.3 -4.6 -3.0 ∆FA BDL -3.3 -3 -10.9 -5 -3.2 BOP STD -2.3 -2.4 -13.2 -6.5 N/A

*BDL’s foreign assets are exclusive of its Lebanese Eurobond holdings.

And it is clear from the table that BDL’s changes in NFA comes closest to the standard BOP (BOP STD), with the relatively minor differences being mostly due to changes in the valuation of non-USD foreign assets and liabilities of BDL (second comes closest the change in the FA of BDL). As such, this would reconcile BDL’s definition of BOP with the standard definition. Notice that BDL’s definition has overvalued the actual BOP in 2018 and 2019 because the change in banks’ NFA was negative; whereas it has undervalued actual BOP from 2020 onward because banks’ NFA has turned positive.