Discuss the measures that can be taken by a country seeking to correct its balance of payments deficit. – NABTEB QUESTION

A country can correct deficit on its balance of payments using any or a combination of the following measures:

(i) Tariffs: Increase in import duties and decrease in export duties may reduce
importation and increase exportation respectively thus reducing the imbalance on balance of payments.

(ii) Reduction in money supply through tight credit policies of the Central Bank and the adoption of budget surplus may reduce importation and correct adverse balance of payments.

(iii) Increase in income tax so as to reduce the disposable income of the people and thus reduce the consumption of imported products.

(iv) The use of import quotas: the maximum quantity of goods to be imported by importers can be fixed by the government to reduce importation.

(vi) prohibition of goods: The government may place embargo on the importation of certain goods.

(vii) Foreign exchange control: the quantity of foreign exchange that can be approved for importation may be regulated to curtail importation.

(viii) Establishment of import-substituting industries: Indigenous investors may be encouraged to establish industries that will produce goods that were hitherto imported.

(ix) Export promotion measured such as tax holidays, provisions of subsidies and liberal credit policy for export – based industries.

(x) Devaluation of currency: A deliberate reduction in the value of the currency of a country in relation to that of another country may correct adverse balance of payment.