Why is a persistent deficit in the balance of payments undesirable? Wh

Question

Why is a persistent deficit in the balance of payments undesirable? What policy measures are available to achieve an improvement in a country’s BoP?

03 May 2024

Answer :

Word Count : 732

A persistent deficit in the balance of payments (BoP) refers to a situation where a country's payments for imports, outflows of capital, and other foreign obligations exceed its receipts from exports, inflows of capital, and other foreign sources of income over an extended period. Such a deficit can have several undesirable consequences for an economy. Let's explore why a persistent deficit in the balance of payments is considered undesirable and discuss policy measures that can be implemented to achieve an improvement.

1. Economic Vulnerability: A persistent deficit in the balance of payments makes an economy vulnerable to external shocks. It implies that the country is relying heavily on external borrowing or depleting its foreign exchange reserves to meet its obligations. This reliance ___ ________ ____ _____ ___ _________ ___ _________ ___ _____.
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