Theory question 110
Balance of Payments and Exchange RatesSection B
Discuss the measures that can be taken by a country seeking to correct its balance of payment deficit.
Show the model answer
Model answer
Measures:
1. Devaluation – makes exports cheaper and imports dearer.
2. Import restrictions: tariffs, quotas, import bans.
3. Exchange control – rationing of foreign exchange.
4. Export promotion: subsidies, incentives, diversification of exports.
5. Deflationary monetary and fiscal policies to reduce demand for imports.
6. Import substitution industrialisation.
7. Borrowing from the IMF or other sources / using reserves (short-term).
8. Attracting foreign investment and tourism; reducing invisible payments.
9. Debt rescheduling.
Explanation
Explain how each measure reduces the deficit.