Question.
Why is it detrimental for a nation to have a negative balance of payments?
(Class 12 geography, Fundamentals of Human Geography, Chapter-9. International Trade )
Answer.
About balance of payments and balance of trade.
The difference between the inflow and outflow of foreign exchange in any country is called the balance of payments. Balance of payments includes all foreign transactions involving the movement of goods, services, and money transactions.
The balance of payments is different from the balance of trade. The balance of trade records the number of goods imported and exported by countries while the balance of payments covers the movement of goods, services, and money transactions.
A negative balance of payments has several negative effects on a country's economy:
The negative balance of payments means that more foreign exchange is going out of the country than foreign exchange is coming in.
A negative balance of payments depletes the country's foreign exchange reserves (dollars, euros, gold, and other foreign currency). Due to this, the country is not able to import even its basic things from abroad. Which weakens the overall economy of the country. For example, Sri Lanka's foreign exchange was completely exhausted in the year 2022 because Sri Lanka had a negative balance of payments for some years. Due to this Sri Lanka was not able to import even its essential items like petrol, grains, and fertilizers.
A negative balance of payments depresses the value of a country's domestic currency, increases inflation, and worsens the livelihoods of poor citizens as a whole.
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