A deficit for a year or two is normal. A persistent deficit, year after year, builds problems.
What a persistent deficit can lead to
A weaker currency
Residents keep selling it for imports: downward pressure.
Higher interest rates
The central bank may raise rates to attract the money that pays for the deficit.
Foreign ownership
Paying for imports by selling firms, land and shares to foreigners.
Debt and credit ratings
Borrowing to pay for it builds debt; ratings may fall, raising borrowing costs.
Slower growth
Cutting AD to shrink imports can cost jobs and output.
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Whether it matters depends on how it is financed and what is imported.
Less of a worry
- Financed by long-term FDI that builds factories.
- Imports of machines that raise capacity.
- The United States has run deficits since the early 1980s, financed by demand for its assets.
A real danger
- Financed by short-term borrowing that can leave fast.
- Imports of consumer goods.
- Sri Lanka ran out of reserves and defaulted on its foreign debt in 2022.
The points to remember
- Write it like this: "A persistent deficit must be financed by borrowing or selling assets, so debt and foreign ownership rise."
- Judge: long-term FDI and capital imports, or short-term debt and consumer goods?
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Paper 1 asked this in May 2025, as part (a) for 10 marks.
Explain two implications of a persistent deficit on the current account of a country's balance of payments.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |