Michel, an entrepreneur of Country Zeta, borrowed $ 5 million from an overseas bank to expand his textile business. During the same financial year, the Government of Country Zeta secured a loan of $ 30 Billion from an International Financial Institution to manage the ongoing Balance of Payments. Samuel, an Economics student categorised both of these transactions as 'autonomous transactions' in the BoP account of the country. Do you agree with his classification ? Justify your answer with valid reasons.

Question

Accepted Answer

This case involves two types of capital transactions:

(a) **Michel's borrowing of $5 million from overseas bank:**
- This is a capital account transaction (borrowing from abroad)
- It is an autonomous transaction as it's done for economic motive (expanding business)
- Recorded on credit side of capital account (inflow of foreign exchange)
- Increases liabilities of Country Zeta to rest of the world

(b) **Government's loan of $300 million:**
- This is also a capital account transaction (government borrowing from abroad)
- It is an autonomous transaction for government
- Recorded on credit side of capital account
- Increases government's external debt

**Impact on BOP:**
- Both transactions create capital inflows
- They help finance current account deficit if any
- They increase Country Zeta's external liabilities