Country X is facing a situation where its total payments to other countries are greater than its total earnings from abroad.
(a) State the term that relates to the above situation.
(b) Explain six measures the country could take to correct the situation
Explanation
(a) The situation is referred to as an unfavourable/adverse/deficit balance of payment.
(b) Measures to correct an unfavourable balance of payment:
i. Restricting imports: if imports are more than exports, the country should restrict imports to reduce its citizens demand imported goods and services. Such restrictions may take the form of a total ban, quotas, and increased import duties.
ii. Increasing exports: A country may resort to measures that would encourage its citizens to produce for export whereby its earnings from exports would be used to offset its import bills
iii. Exchange control: The government of a country may introduce measures that would regulate the amount of foreign exchange available for importers.
iv. Devaluation: A country may reduce the official rate of exchange of its currency with other countries. The effect of this is to make exports cheaper and imports expensive, thus increasing the demand for her exports.
v. Borrowing: A country may borrow to solve its balance of payment problems. Such loans should go to finance home production for export
vi. Sale of gold reserves/foreign investment: A country may sell part of its gold reserves as well as other securities so as to finance its balance of payments.
vii. Gift or aid: A country may seek assistance from friendly countries and donor agencies to correct its adverse balance of payments.
viii. Drawing on foreign reserves: A country can make drawings on its external reserves to solve its balance of payment problems
ix. Import substitution: A country may encourage domestiC producers to produce close substitutes imported products to discourage importation of such goods.