Theory question 106
Balance of Payments and Exchange Rates(a) What is balance of payment disequilibrium?
(b) Explain the two types of balance of payment disequilibrium.
(c) Highlight any four reasons most West African countries are experiencing balance of payment problem.
Show the model answer
(a) Balance of payments disequilibrium is a situation in which a country's total receipts from abroad are not equal to its total payments abroad, i.e. a deficit or surplus.
(b) Deficit: total payments for imports of goods, services and capital exceed total receipts from exports. Surplus: total receipts exceed total payments.
(Other classifications accepted: cyclical, structural, short-run/temporary and fundamental disequilibrium.)
(c) Any four: dependence on a few primary exports with falling or unstable prices; high demand for imported manufactured goods; worsening terms of trade; heavy debt servicing; capital flight and profit repatriation by foreign firms; low productivity and weak industry; overvalued currencies; smuggling; political instability.
A deficit means outflows exceed inflows.