Balance of Payments Policies [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. There are a series of field trips available looking at different issues connected with economic development. This tour is the trade tour, and this page looks at policies for dealing with balance of payments problems.


Balance of Payments Policies

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In the case of an overall balance of payments deficit i.e. where the current and capital accounts are in deficit, LDCs such as Zambia have a number of policy options open to them.

  1. Improve the current account balance by promoting export expansion or limiting imports or both.
    These objectives can be brought about by a number of measures:
    • Expand the export of copper and other primary commodities
    • Expand the export of secondary goods through adopting policies of import substitution
    • Introduce protectionist measures such as quotas, tariffs and other non-tariff barriers
    • Changing the value of the exchange rate through a devaluation or allow the currency to float and depreciate
    • Follow restrictive deflationary monetary and fiscal policy that reduces domestic demand and hence imports and reduces inflationary pressures in the economy
  2. Improve the capital account balance by encouraging capital inflows.
    Again a number of possible measures are open to the government:
    • private foreign direct or portfolio investment
    • borrowing from foreign commercial banks
    • borrowing from foreign governments
    • borrowing from multilateral agencies such as the IMF

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Related Glossary Items:
Foreign Direct Investment
Current Account
Current Account Deficit
Fixed Exchange Rate
Floating Exchange Rate
Deflationary Policy

Related Issues:
Protectionist Policies of Zambia
Zambia's Exports and Imports
Zambia's Balance of Payments Situation
Zambia's Trade Policy

Related Theories:
The Economic Effects of a Devaluation
The Imposition of Quotas
The Imposition of Tariffs and Welfare Loss