Balance of payments deficit - Skyline E-Learning

Balance of payments deficit, Balance of payments deficit may be defined as a situation which occurs when the combined receipts on the current and long term capital accounts of a country are less than the corresponding payments. In other words, balance of payments deficit occurs when a country’s expenditure flows are more than the country’s income flows.

Types of balance of payments deficit

Temporary balance of payment deficit: This type of deficit, also called

short term deficit, is the type which can easily be corrected or adjusted within a short term. They do not pose serious problems. They can be financed or paid for by the use of reserves or international borrowing.

Fundamental or chronic balance of payments deficit: This is also called long term deficit and this cannot be corrected or adjusted within a short term and it usually has adverse effect on the country’s reserves.

Causes of Balance of payments deficit

The causes of balance of payments in Nigeria for example include:

This makes Nigeria dependent on food
imports and imported inputs for her agro-allied industries.

Low level of technological development
makes the country a greater importer of advance technology.
Inadequacies in export promotion strategies: Export promotion strategies to encourage more earnings for the country are grossly inadequate.
Political instability: Political instability discourages export drive but encourages massive importation of goods and services.

This attitude encourages the government
to engage in massive importation of all kinds of goods into the country.
This can go a long way to deplete the external reserves and use all earnings to settle external debts.
Existence of import-dependent industries: These industries reduce the country’s earnings as they demand for the scarce foreign exchange to enable them to procure machines and raw materials from abroad.

Poor social and economic infrastructure: Poor social and economic infrastructure contribute
greatly to low capacity utilisation in the industrial sector e.g. bad roads, irregular supply of electricity, water and poor telecommunications