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Causes of Balance of Payment Disequilibrium

(i) Changes in Demand Conditions

When there is change in demand conditions, there is going to be disequilibrium in the balance of payments. When the change is, favourable in terms of export commodities, then a surplus arises, whereas a deficit results if the change is in favour of imports.

(ii) International Competition

When domestic economy is sold to foreign competitors because its cost of production is higher than that of its rivals in international market, there will be disequilibrium in the balance of payments situation of the domestic country.

(iii) Exchange Rate Valuation

An over-valuation of the exchange rate will lead to a deficit while an under-valuation of exchange rate may lead to a surplus in the balance of payments. Therefore, a disequilibrium exist, in the balance of payments since either a deficit or surplus is a deviation from equilibrium.

(iv) Tax Regulations

An unfavourable export tax regulation leads to a deficit in the balance of payments, while an unfavourable import tax regulation could lead to a surplus in the balance of payments and hence to a disequilibrium situation.

(v) Price-wage Inflation

Inflation in the domestic economy causes exports to be relatively more costly in the world market and this leads to a loss of export and its attendant deficit in the balance of payments. This could also cause a disequilibrium.

(vi) Transfer

When out-transfer payments exceed transfer receipts from other countries, there will be disequilibrium in the balance of payment.

(vii) Over importation of Goods and Service

This leads to excess of visible imports over exports and hence a disequilibrium in the balance of payment.

(viii) National income

A country’s export will depend on the national incomes of its trading partners. An increase in income abroad will have a favourable effect on the country’s exports. Similarly, if income increases in the domestic economy, imports would likely increase. All these cause disequilibrium in the balance of payment.

(ix) Other factors that can cause disequilibrium in the balance of payment include

(a) Policy instability/political instability;
(b) Excessive government expenditure;
(c) Servicing of huge external debts;
(d) Low level of technological development;
(e) Low level of agricultural productions;
(f) Inadequacies in export-promotion strategies.

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