3.2. Balance of Payments Disequilibrium

♤ For a BoP Equilibrium, the current and capital accounts must sum to zero. This means that the balance of payments of a country is said to be in equilibrium when the demand for foreign exchange is equal to its supply.

♤ In order to understand BoP disequilibrium, one must take into account the current account balance which is the difference between current income and current expenditures;

of foreign

exceeds the

exchange

demand;

There will be a deficit in the

balance of payments when the demand for foreign exchange exceeds its supply, and there is a surplus when the supply

♤ BoP disequilibrium is financed by internal or external financing. External financing could be through FDI inflows, portfolio inflows, increased loans from foreigners / reduced holdings of foreign currency / increased foreign holdings of domestic currency; by acquiring foreign currency from the government (lower reserves) or lastly by hoping that the foreign government forgives the debt, if it is so, it would be a unilateral flow in capital account.

A number of factors affect the balance of payments as discussed below: