causes of disequilibrium in the balance of payment of any country? Suggest the remedial measures


When the value of imported visible and invisible items of trade exceeds the exported visible and invisible items of trade, the demand for titles to trade exceeds the supply of it, it creates a gap between the receipts and payments which pares the way for the out flow of gold reserves of the foreign exchange reserves of the past had depleted on it forces the country to borrow from abroad which in debits the country. Such a situation is known as disequilibrium in the balance of payment. Temporary and timely short term disequilibrium may not be the source of worry for any country, but the long term disequilibrium is really alarming.

Following are the main causes of disequilibrium.

1)         Deficit in Export: The decline in exports results the decline in foreign exchange earnings. Fall in the exports may be due to geographical reasons i.e. draught, untimely rainfalls, floods, pests, water logging, salinity and soil erosion, shortage of irrigation facilities etc. political reasons i.e. out break of wars, embargo on imports by the foreign countries or the development of home industries and protection by importing countries, cut throat competition in the foreign markets, high cost of production due to the rise in the prices of factors and low quality exports or the discovery of cheap substitutes in the importing countries. Higher domestic consumption due the zooming growth of population or industrialization may also figure among the factors which reduce the volume of exports.

2)         Rise in Imports: Import may shoot up due to geographical, economic, social and political reasons. Economic development necessitates the imports of capital goods and fuel zooming growth of population which forces the country to import food stuff or emergencies like famine or epidemic require the import of necessary goods.

3)         Inflation: The prides of goods and services rise when prevail inflationary conditions in the country. This situation discourages exports and encourages imports.

4)         Depression: During depression the purchasing power of the people falls and the demand for goods declines. The decline in prices results low receipts from abroad.

5)         Terms of Trade: In case of adverse terms of trade the receipts from exports decline where as payments increase. If the rise in prices of exports does not tally with the prices of imports, it creates gap between payments and receipts.

6)         Trade Restrictions: If the importing countries put embargo on the imports of goods from abroad it results decline in exports and consequently adverse balance of payment.

7)         Devaluation: If a country devaluates its currency, its exports become cheaper while the imports become expensive. If the importing country devaluates its country, it surely affects the trade and economy of the exporting country.

8)         Invisible Items: If the burden of foreign loans increases the debt service charges cause disequilibrium in the balance of payment. Similarly if the country is dependant upon others for its banking. Insurance shipping services, its balance of payment is adversely affected.

Remedial Measures

Following remedial measures are suggested.

1)         Devaluation: To rectify the disequilibrium in the balance of payment, the country devaluates its currency which cheapens the exports and makes the import dearer.

2)         Deflation: Central bank implements the monetary, policy and adopts the monetary measures like bank rate policy, open market operation, and credit rationing change sin the reserve and liquidity ratio to deflate the currency and bring down the prices. When the prices fall, they boost up exports. If the quality of exportable goods also improves it further pushes up the exports.

3)         Exchange Central: Under this policy, the exporters are required to surrender the earned foreign exchange to the central bank which in return gives them the local currency. The importers are required to seek the permission before placing on the foreign firm. The central bank grants permission keeping in view the available reserves of the foreign exchange.

4)         IMF: IMF also lends to rectify the disequilibrium in the balance of payment. It also suggests the changes in the rate of exchange to achieve the results.

5)         Proper Utilization of National Resources: Disequilibrium can also be remedied by proper utilization of the national resources through planning, producing the import substitutes, persuading the people to prefer the consumption of home product, adopting simplicity. Import restrictions like license systems quota system; increase in custom duties may also be enforced. Export promotion measures including the introduction of home product in foreign markets after their thorough surveys, bilateral and multilateral trade agreements will help in boosting up exports and rectify the in-balances of the balance of payment.

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