Does the misuse of net errors and omissions arise from a corruption culture?

Abstract

The balance of payments, particularly the current account deficit, has long been of interest to researchers. However, there is a paucity of research on the net errors and omissions in this context. Nevertheless, some countries have been resorting to the net errors and omissions account as a means of offsetting persistent current account balance deficits, a practice which can cause many macroeconomic problems such as increasing exchange rates, inflation, unemployment, and economic contraction. This paper investigates the relationship between net errors and omissions (NEO) by setting them as the dependent variable and finance, capital, current account balance, reserves, and corruption as independent variables. The data availability constraints allow for the analysis of 25 countries with the highest volumes of net errors and omissions over the period 2012-2021. Preliminary tests indicated that ridge regression would be the optimal research method. The results suggest that corruption has a statistically significant positive effect on net errors and omissions. In other words, countries with higher levels of corruption tend to misuse the NEO account for the balance of payments. However, since NEO cannot serve as a reliable instrument for addressing current account deficits, governments should implement structural solutions rather than employing short-term fixes.