Theory question 111
Balance of Payments and Exchange RatesSection B: answer four questions only from this section.
Highlight the causes of Balance of Payments deficits in your country.
Show the model answer
Model answer
Dependence on a single export (oil) whose price fluctuates
Heavy importation of consumer goods, food and luxury items
Importation of capital goods and raw materials for industry
Low export earnings from agriculture
Heavy external debt service payments
Large payments for services: shipping, insurance, foreign experts, education and travel abroad
Repatriation of profits and dividends by foreign firms
Overvalued exchange rate making imports cheap and exports dear
Inflation making exports uncompetitive
Capital flight and smuggling
Explanation
Highlight at least five causes.