Disequilibrium in Balance of Payments

A disequilibrium in the BOP of a country may be either a deficit or a surplus. A deficit or surplus in BOP of a
country appears when its autonomous receipts (credits) do
not match its autonomous payments (debits). If autonomous credit receipts exceed autonomous debit payments, there is a surplus in the BOP and the disequilibrium is said to be favourable. On the other hand, if autonomous debit payments exceed autonomous credit receipts, there is a deficit in the BOP and the disequilibrium is said to be unfavourable or adverse.

Causes of Disequilibrium

There are many factors that may lead to a BOP deficit or surplus:

1. Temporary Changes (or Disequilibrium)- There may be a temporary disequilibrium caused by random variations in trade, seasonal fluctuations, the effects of weather on agricultural production, etc. Deficits or surpluses arising from such temporary causes are expected to correct them selves within a short time.

2. Fundamental Disequilibrium- Fundamentalndisequilibrium refers to a persistent and long-run BOP disequilibrium of a country. It is a chronic BOP deficit, according to IMF. It is caused by such dynamic factors as :

Changes in consumer tastes within the country or abroad which reduce the country’s exports and increase its imports.

1Continuous fall in the country’s foreign exchange reserves due to supply inelasticities of exports and excessive demand or foreign goods and services.

2.Excessive capital of tflows due to massive imports of capital goods, raw materials, essential consumer goods, technology and external indebedness.

4.Low competitive strength in world markets which adversely affects exports.

5.Inflationary pressures within the economy which make exports dearer.

3. Structural Changes (or Disequilibrium)- Structural changes bring about disequilibrium in BOP over theblong run. They may result from the following factors:

(1) Technological changes in methods of production of products in domestic industries or in the industries of other countries. They lead to changes in costs, prices and quality of products.

2.Import restrictions of all kinds by other countries.

3.Deficiency of resources which it is required to import from other countries.

4.Changes in the supply or direction of long-term capital flows.

4. Changes in Exchange Rates- Overvaluation of the domestic currency makes foreign goods cheaper and exports dearer in foreign countries. As a result, the country imports more and exports less of goods. There is also outflow of capital. This leads to unfavourable BOP. On the contrary, undervaluation of the currency makes BOP favourablebfor the country by encouraging exports and inflow of capitalband reducing imports.

5. Cyclical Fluctuations (or Disequilibrium)- Cycli-cal fluctuations in business activity also lead to BOP disequilibrium. When there is depression in a country, volumes of both exports and imports fall drastically in relation to other countries. But the fall in exports may be more than that of imports due to decline in domestic production. Therefore, there is an adverse BOP situation.

6. Changes in National Income- Another cause is the change in the country’s national income. If the national income of a country increases, it will lead to an increase in imports thereby creating a deficit in its balance of payments, other things remaining the same. If the country is already at full employment level, an increase in income will lead to inflationary rise in prices which may increase its imports andbthus bring disequilibrium in the balance of payments.

7. Inflation- Inflation is another cause of disequilibrium in the balance of payments. If there is inflation in the country, prices of exports increase. As a result, exports fall. At the same time, the demand for imports increase. Thus increase in export prices leading to decline in exports and rise in imports results in adverse balance of payments.

8. Stage of Economic Development- A country’s balance of payments also depends on its stage of economic development: If a country is developing, it will have a deficit in its balance of payments because it imports raw materials, machinery, capital equipment, and services associated with the development process and exports primary products. The country has to pay more for costly imports and gets less for its cheap exports. This leads to disequilibrium in its balance of payments.

9. Capital Movements- Borrowings and lendings or movements of capital by countries also result in disequilibrium in BOP. A country which gives loans and grants on a large scale to other countries has a deficit in its BOP on capital account. If it is also importing more, as is the case with the USA, it will have chronic deficit. On the other hand, a developing country brorrowing large funds from other countries and international institutions may have a favourable BOP. But such a possibility is remote because these countries usually import huge quanties of food, raw materials, capital goods, etc. and export primary products. Such borrowings simply help in reducing BOP deficit.

10. Political Conditions- Political condition of a country is another cause of disequilibrium in BOP. Political instability in a country creates uncertainty among foreign investors which leads to the outflow of capital and retards its inflow. This causes disequilibrium in BOP of the country. Disequilibrium in BOP also occurs in the event of war or fear of war with some other country.

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