Correcting Disequilibrium in the Balance of Payments

Once a persistent deficit is identified, a country has several categories of policy tools to correct it.

(A) Monetary measures

• Devaluation — the government/central bank officially reduces the external value of its own currency relative to other currencies, making exports cheaper (and more competitive) and imports costlier, which should raise exports and reduce imports.
• Deflation — a deliberate contraction of money supply and credit to reduce domestic prices and demand, which lowers import demand and can make exports more price-competitive.
• Exchange control — the government/central bank rations the available foreign exchange, permitting it only for essential imports and restricting it for non-essential ones.

(B) Trade (non-monetary) measures

• Export promotion — incentives such as export subsidies, tax concessions, and simplified export procedures to encourage exporters.
• Import substitution — encouraging domestic production of goods that were earlier imported, reducing import dependence.
• Tariffs — customs duties raised on imports to make them costlier and less attractive relative to domestic goods.
• Import quotas — a direct physical limit on the quantity of a good that may be imported in a given period.

(C) Other measures

• Attracting foreign capital — creating a favourable climate for FDI/FPI inflows and NRI deposits to strengthen the Capital Account and offset a Current Account deficit. …