Current account surplus/deficit - problems and solutions
by
historyee (student)
1. It may still experience balance of payments problems (as in deficits or surpluses) as there could be, for instance, a gradual long term change. For instance, commodity prices have fallen to a great extent in the past 50 years. This will affect commodites-based economies and perhaps limit their export revenues en route to a current account deficit, since agricultural-based economies are usually also developing countries whom continuously have to import goods for infrastructural improvements.
2. Persistent current account deficit:
Some problems which may arise from a persistent current account deficit is that there would be an depreciation of the currency since imports>exports and thus, it implies that there is excess supply of the currency. In the case of a current account surplus, it would lead to an appreciation of the currency since exports>imports and thus, it implies that there is excess demand for the currency. Regardless, the depreciation of the currency could lead to problems for domestic producers and lead to cost-push inflation as the cost of imported materials has risen. Another problem is that usually, a current account deficit is funded by borrowing. This will accumulate debt and lead to high indebtedness and perhaps limit funds which could have been spent on the domestic country. Furthermore, if a country is unable to pay back loans in time, it will negatively influence their international credit ratings and make future loans unlikely, as foreign countries would not be incentivized to lend to countries whom are unable to pay back debts. Furthermore, a current account deficit implies a financial account surplus, which probably means that interest rates have to be set relatively higher than other countries to attract financial investment. High interest rates might serve to weaken the economy as it deters investment upon capital (domestically) and lead to higher marginal propensity to save rather than a higher marginal propensity to consume, which limits domestic consumption.
