Balance of Payment Problems

If a country continues to experience deficits in its visible and or invisible balances it will affect its level economic activity. Deficits mean there is not enough money to purchase the goods and services required by citizens.

Methods of Correcting Balance of Payment Problems

1. Tariffs (taxes on imports)

Taxes increase the cost of items imported and therefore will discourage imports. This may encourage the purchase of cheaper local imports.

2. Import licences

Only holders of this licence can import particular goods and services.  Government can restrict the importation of certain goods and services e.g. those that compete with local goods.

3. Quotas

Restrictions on the quantity of a type of commodity to be imported.

4. Total ban of certain commodities.

5. Exchange Control

This is various forms of control by government on the purchase and sale of foreign currencies by citizens and foreigners. Example: limiting the amount of foreign exchange that residents can leave the country with, banning the use of foreign currencies locally and having a fixed exchange rate.

6. Encouraging export

Incentives given to exporters.

7. Devaluation – the price of foreign currency is increased against the local currency thus discouraging its purchase.

8. Special Drawing Rights -Drawing on the resources of the International monetary fund

9. Importing on creditPurchasing on credit delays payments in the short term

10. Accepting gifts from other countriesThis reduces the need to spend foreign exchange.

11. Borrowing from other countriesThis represents inflows into the Balance of payments accounts

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