What is a Current Account Deficit?

A current account deficit is the difference between a country’s purchases of goods and services and its sales of goods and services in foreign trade. In more precise terms, a current account deficit is an economic indicator that shows how much a country is indebted to or indebted to the outside world.

A current account deficit usually occurs when export revenues exceed import expenses in a period. In this case, the country is buying more goods and services from abroad (imports) and at the same time selling fewer goods and services abroad (exports).

When Does a Current Account Deficit Occur?

A current account deficit occurs when the value of goods and services exported by a country in a certain period (usually a year) is less than the value of goods and services imported. In other words, a current account deficit occurs when a country buys more than it sells abroad.

Here are some situations that may cause a current account deficit:

High imports: A current account deficit occurs when a country imports goods and services it needs instead of producing them.

Low exports: The country’s inability to export enough goods and services also leads to a current account deficit.

High foreign debt: The interest paid by the country to pay its foreign debt increases the current account deficit.

High exchange rate: A high exchange rate makes imports more expensive and increases the current account deficit.

Economic growth: Rapid economic growth can increase imports and cause a current account deficit.

Low investments: Insufficient investment can reduce production capacity and cause a current account deficit.

Weakening competitiveness: The fact that the goods and services produced by the country are not competitive enough in the international market reduces exports and increases the current account deficit.

Natural disasters and political instability: Natural disasters and political instability can negatively affect the economy and cause a current account deficit.

A current account deficit is not always a bad thing. It is possible to benefit from a current account deficit to finance economic growth. However, it is important that the current account deficit is sustainable and kept under control. Otherwise, the country’s economic stability may be at risk.

What happens if the current account deficit increases?

A rising current account deficit indicates a deterioration in a country’s foreign trade balance and its need for external borrowing. An increase in the current account deficit can have several negative effects:

Increased External Borrowing: When the current account deficit increases, the country needs more external resources (such as borrowing or receiving foreign investment) to finance its imports. In this case, the country may increase the amount of external borrowing, which can put pressure on future payments.

Depreciation of the Currency: An increase in the current account deficit can cause the value of the country’s currency to decrease. This means that the country’s currency loses value against the outside world, which can cause imports to become more expensive and increase inflation.

Increased Interest Rates: An increase in the current account deficit can increase the country’s need for external financing. In this case, the country may increase interest rates to reduce the cost of lending. High interest rates can reduce investment and negatively affect economic growth.

Negative Effects on Investment and Growth: A persistently high current account deficit can lead to economic instability and reduced investment. In this case, businesses and consumers may reduce their spending due to future uncertainty, which can negatively affect economic growth.

As a result, a widening current account deficit can lead to economic imbalances and negatively affect economic growth in the long run. Therefore, many countries implement various policies to keep the current account deficit under control.

How is a current account deficit closed?

A current account deficit occurs when the value of goods and services exported by a country in a certain period (usually a year) is less than the value of goods and services imported. In other words, a current account deficit occurs when a country buys more than it sells abroad.

To close the current account deficit:

Increase exports: Selling the goods and services produced by the country to more countries is important to close the current account deficit. To do this:

Making products and services more competitive in the international market

Providing incentives to open up to new markets

Providing support to exporting companies

Policies such as can be implemented.

Reducing imports: It is important for the country to produce the goods and services it needs or to find alternative sources of imports in order to close the current account deficit. To do this:

Providing incentives for domestic production

Imposing taxes on imports

Encouraging savings

Policies such as can be implemented.

Increasing investments: Increasing investments increases production capacity and encourages exports. This helps close the current account deficit.

Increasing competitiveness: Making the goods and services produced by the country more competitive in the international market is important for closing the current account deficit.

Ensuring economic stability: Economic instability discourages investments and increases the current account deficit. For this reason, ensuring economic stability is important to close the current account deficit.

There is no single solution to close the current account deficit. A combination of the policies listed above should be implemented. In addition, closing the current account deficit will take time.

Some additional measures to close the current account deficit:

Exchange rate policy: Keeping the exchange rate under control makes imports expensive and encourages exports.

Encouraging capital inflow: Foreign investors should be encouraged to invest in the country.

Reducing foreign debt: Reducing foreign debt helps to close the current account deficit.