Consequences of Disequilibrium in BoP

A disequilibrium (surplus or deficit) in the balance of payments is considered undesirable for a country. However, the consequences or implication of disequilibrium depends on location or source and duration. In this context the following generalizations are possible –

a) With respect to location it could be said that a surplus in the combined current and capital accounts should be considered desirable for a country. On the other hand, a deficit in the combined current and capital account should be considered undesirable for the country. 

b) With respect to the duration it could be said that if the disequilibrium (surplus/deficit) is temporary or short-term, then it is not much a serious concern for the country. But, if the disequilibrium (surplus/deficit) is persistent or long-term, it is a matter of serious concern for the country and needs corrective policy action. 

c) A fundamental disequilibrium (in the form of deficit) is undesirable because – 

(i) Under a system of fixed exchange rates it forces the country to go for devaluation, while under flexible exchange rates it causes depreciation in the external value of the currency. 

(ii) It would lead to an increase in the external debt of the country and may lead to an external debt trap.

(iii) It leads to depletion in foreign exchange reserves and again makes the position of the country extremely vulnerable. 

(iv) It makes the country totally dependent on the loans supplied by international organizations and foreign governments and raises serious doubt about the maintenance of its external sovereignty. 

d) It is observed that disequilibrium in the form of surpluses is very rare while disequilibrium in the form of deficits is a common phenomenon. Hence, in practice, the term disequilibrium is normally associated with deficits in the BOP.