Developing countries depend on developed nations for supply of machines, technology and other equipment. This leads to increased levels of imports, thereby, resulting in a deficit in the BOP account. (ii) High rate of inflation: It increases imports which causes a deficit in the BOP.
What affects a country’s balance of payments?
First, the balance of payments is a factor in the demand and supply of a country’s currency. For example, if outflows exceed inflows, then the demand for the currency in the domestic market is likely to exceed the supply in the foreign exchanging market, ceteris paribus.
How can we finance the balance of payments deficit in developing countries?
Financing balance-of-payments deficits. Members with balance-of-payments deficits may borrow money in foreign currencies, which they must repay with interest, by purchasing with their own currencies the foreign currencies held by the IMF. Each member may immediately borrow up to 25 percent of its quota in this way.
What are the causes of an adverse balance of payments?
Natural factors Natural calamities, such as droughts, floods, etc., adversely affect the production in the country. As a result, the exports fall, the imports increase and the country experiences deficit in its balance of payments.
What does it mean when a country has a balance of payments deficit?
The BOP is reported for a quarter or a year. A balance of payments deficit means the country imports more goods, services and capital than it exports. It must borrow from other countries to pay for its imports. It’s like taking out a school loan to pay for education. Your expected higher future salary is worth the investment.
What happens when there is a deficit in the current account?
When there is a deficit in the current account there must be a surplus in the capital account to balance it out and vice versa. A balance of payments deficit is when the payments made by a country are greater than the payments received by the country.
Why was there a balance of payments crisis in Nigeria?
In the mid-1980, when Nigeria started recording huge balance of payments deficits and depletion of the foreign reserve, policy makers were in favour of devaluation of naira. This was expected to reduce pressure on external reserve as well as BOP. However, after the devaluation of naira, the economy was far from recovery.
Why does a country have a balance of payments surplus?
It will have to go into debt to pay for consumption instead of investing in future growth. If the deficit continues long enough, the country may have to sell off its assets to pay its creditors. These assets include natural resources, land, and commodities. A balance of payments surplus means the country exports more than it imports.
