What are the majors of correcting an adverse balance of payment?

Answer 1

Answered by Shaaban B. Omar (Dar es Salaam, Tanzania) Balance of payment refers to the difference between the receipts (earnings) of a country from abroad and the payments of a country to abroad. It is the systematic record of a country's transactions with the rest of the world. Balance of payments can be favourable unfavourable, or balanced. Balance of payment is favourable if the country's receipts from abroad are greater than the country's payments to abroad. It is unfavourable if the country's payments abroad are greater than the country's receipts from abroad. It is balanced fi the country's receipts from abroad are equal to the country's payments abroad. Transaction records are recorded in various accounts, such as (a) Goods and services account: which deals with a systematic record of payments to foreigners in a specific period of time. (b) Unilateral transfer: which records such things as grants and gifts. (c) Long-term capital account: which records inward and outward flow of capital. (d) Short-term capital account: which deals with financial flows to finance trade, exchange rate and interest rate. (e) Unrecorded transactions: which deals with recording of omitted transactions, i.e. transactions which have never been captured in other accounts. (f) Official reserve transaction balance account: which deals with the final balance. This may be positive or negative. The balance of payment may be in disequilibrium. This is when the recordings indicate that there is a deficit. This shows that there has been unfavourable balance of payment because the total payments abroad have exceeded the total receipts from abroad. Deficit in the balance of payment may have been caused by a number of factors, such as: · Low export: due to low demand elasticity for exports and decline of the supply of goods for export. · Increase in demands for imports: due to low production of essential goods in the domestic economy. · Unfavourable terms of trade: due to the fall in price of exports and the rise of price of exports, which leads to low amount of receipts from abroad and the high amount of payments abroad. · Shortage of capital goods: the capital goods then have to be imported at whatever price. · Devaluation policy: which happens when the country's export have low price elasticity and when the imports have inelastic demand or when other countries which export similar products also devalue their currencies. · Unfavourable climatic condition: which leads to fall in the country's production, which leads to low export. Correction of a deficit in the balance of payments. When there is a deficit, a country has to adopt various methods to correct it. The methods that can be applied include: (a) Export promotion: One of the best way to promote export is to provide subsidies to exporters and applying tax exemption and trade fairs. These can encourage and empower the exporters, and with more production and export the disequilibrium can be reduced or corrected altogether. (b) Reducing expenditure on imports: This can be done by imposing high import tarrifs, thus importation of goods will be reduced thus domestic goods will have to be more production of domestic goods, the outflow of the government funds will be reduced. (c) Devaluation policy: The reduction of currency is made in order to promote exports and discourage imports, as when a currency is devalued exports become cheaper while imports become more expensive. (d) Increasing production: In this, the production of export goods is increased hand in hand with the increase of the production of goods which would otherwise be imported. (e) International cooperation: International organizations such as IMF, the World Bank and the World Trade Organization, can help to correct the balance of payment through aids, grants and loans. Financial assistance from donor countries: Friendly nations can assist fiancially a country with deficit in balance if payment.