BALANCE OF PAYMENTS ADJUSTMENTS
Balance of payments adjustment refers to the various ways by which balance of payments disequilibrium (especially balance of payment deficits) can be reduced or corrected Balance of payments deficit can either be financed or reduced (corrected).
Ways by which balance of payments deficit can be financed
Some of the means by which balance of
payments deficit of a country can be financed are:
- Running down external reserves and SDRs.
- Drawing (or borrowing) from International Monetary Fund (IMF)
- Short term credit from various source (borrowing)
- Purchase of goods and services (export promotion)
- Sale of foreign investments
- Increased export of goods and services (export promotion)
- Grants and aids from friendly countries
Measures to reduce or correct balance of merit deficit
Balance of payments deficit of a country can be corrected or corrected by the following measures:
- Foreign exchange control: Foreign exchange control involves the rationing of foreign exchange in order to reduce balance of payment deficit.
- Expenditure reduction: This is used in order to cut down domestic demand and reduce imports.
- Expenditure switching: This involves the manipulation of exchange rates to induce people to patronise locally made goods.
- Fiscal control: This involves the rising of tariffs (i.e. increase in import duties) in order to reduce balance of payment deficit.
- Raising interest rates: The raising of interest rates is to reduce bank lending
- Devaluation: Devaluation cheapens exports and makes imports expensive, thus improving the balance of payments
- Reduction of imports: The governments can restrict imports by the use of tariffs, quotas and outright embargo on imports.
- Grants and aids: This can be obtained from richer or friendly nation to offsets the deficit that occurs in the balance of payments.
- Borrowing: A country can borrow money from IMF or other richer nations in order to correct her balance of payment
- Promotion of import substitution industries: This is done to replace the commodities that were previously brought from foreign countries
- Selling investments abroad: Selling of the country’s investment abroad using it to pay the creditors can also serves as a solution.
- Drawing on foreign reserves: Drawings on the value of the country’s foreign reserves to pay the
- Increase in experts: The encouragement of experts can be promoted through subsidies and concession.
- Increase in production: With a spectacular rise in production, domestic prices of goods would be brought down and export of goods stimulated. Demand for imported goods will reduce.