ON THE ROAD TO CAPITAL ACCOUNT CONVERTIBILITY

The capital account records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country. Transaction in the capital account reflect a change in a stock either assets or liabilities. With regard to the capital account transactions it is useful to make a distinction between various forms of transaction. The basic distinction is between private and official transaction, between direct and portfolio investment and by the term of investment. The bulk of official transactions is in the form of loans and confessional assistance from external official agencies such as IMF, foreign governments and also includes commercial borrowing. On the other hand, the bulk of foreign investments are private. Foreign Direct Investment (FDI) refers to such investment involving the act of purchasing an asset and at the same time acquiring control over it. The acquisition of a firm by a resident in another country is an example of the transfer of funds from the parent company in order that the subsidiary company can acquire assets in its own country. FDI mainly occurs through multinational corporations. Portfolio investment by contra is the acquisition of an asset that does not give the purchase control over the asset. The purchase of shares in a foreign company or of bond issued by a foreign government is an obvious example of such a transaction. Such portfolio investment is often distinguished by the period of the investment, between short-tern and long-term investment. However, this distinction relates to the specification of the asset rather than to the length of time for which it is held. For instance, a firm or individual that hold a bank account in other country, will be engaging in short-term investmenf even if the intention is to keep that money for many years and buying a long-term government bond in another country will be making a long-term investment, even if that bond has only one month mature. The purchase of an asset in another country, whether it is direct or portfolio investment, will appear as a negative item in the capital account for the purchasing country and as a positive item on a country's balance of payments and capital inflows as positive items. The net value of the balance of direct and portfolio investment defined the country's balance on capital account.