Theory question 112
Balance of Payments and Exchange RatesSection B (answer four questions only from this section)
(a) What is balance of payments deficit?
(b) How is it financed?
Show the model answer
Model answer
(a) A balance of payments deficit occurs when a country's total payments to other countries (for imports, services, transfers and capital outflows) are greater than its total receipts from them in a given period.
(b) Drawing down the country's foreign exchange reserves.
Borrowing from the IMF.
Borrowing from other countries, foreign banks or the World Bank.
Selling foreign assets/investments.
Attracting foreign investment and grants/aid.
Rescheduling or deferring payments of external debts.
Explanation
'Financing' means paying for the deficit, not correcting it.