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Correction of Balance of Payment Deficit

Trade Restrictions

A country suffering from balance of payment deficit could correct it through the use of import duties and quotas. High duties and import quota will discourage the importation of goods into the country.

Export Promotion

Increased export of goods and services will enable the country to earn more. This will neutralise her deficiency in the balance of payment.

Borrowing from IMF

A country can borrow from IMF to correct deficit balance of payments. Such loan should be project-tied and capable of accelerating economic development and thus, provide a means of paying back the loan.

Grants and Aids

The government of a country can also appeal for grants and aids from friendly countries to correct her balance of payment deficit.

Devaluation

Devaluation provides a more fundamental and drastic way for correcting disequilibrium in a country’s balance of payment. Devaluation is a decrease in the exchange value of domestic currency vis-a-vis other foreign currencies. It makes imports more costly and lowers the value of exports since foreign currencies will be more expensive to buy and domestic currency cheaper for foreigners. Thus, cheaper exports will attract wider markets, which will in turn lead to greater revenue to offset the balance of payment deficit. The effectiveness of devaluation depends on the relative elasticity of demand and supply.

Exchange Control

This is a restrictive device used to reduce the supply of foreign exchange. Through this method, government can control the quantity of foreign exchange bought and sold. This will reduce the quantity of foreign currencies available in the foreign exchange market which will in turn limit the amount of foreign currency that can be spent on imports.

Other corrective measures include

a. Running down external reserves/special drawing rights.
b. Short-term credit from various sources.
c. Purchase of goods on credit.
d. Sales of foreign investments.

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