Current International Payments Imbalance
International payments imbalance is a major cause of concern for countries all around the world. The imbalance of payments reflects a systemic problem in the global economy, arises in an environment of policies, rules, conventions and institutions. The two main sources of this financial chaos are the misdiagnosed exchange rate, and increase in capital dependance.
Highly misaligned exchange rates lead to mis-targeted economic activity, distorted economic activity, and ultimately, economic imbalances. For example, a country’s central bank, who sets an exchange rate below the market rate, could potentially lead to an overvaluation of the country’s domestic currency, resulting in an external reduction of foreign trade and foreign-denominated assets and liabilities. An increase in serviced debt liability can aggravate the imbalance and lead to financial instability.
When there is an imbalance in the international payments system, certain countries may take measures such as controlling capital flows, or one-sided currency interventions to balance their payments and increase their exports. However, such measures, when taken without proper understanding of the underlying economic conditions and international financial framework, may have an adverse effect on the global payments balance itself.
Therefore, a multi-dimensional approach to address the international payments imbalance is necessary. The approach should address both currency misalignments and capital dependence, while at the same time, taking a broader view of the global and national economic and financial dynamics.
This approach should involve a number of different policy instruments and initiatives, with varying degrees of direct and indirect effect. These could include capital account liberalisation and the closer monitoring of currency market developments, as well as more comprehensive measures such as international exchange rate stability and macroeconomic management.
The challenge for policymakers is how to best harness these policy instruments to achieve a favourable and sustainable global payments balance. Exchange rate stability and capital flows management can play a pivotal role in reducing the threat of international payments imbalances, but much still needs to be done to achieve this. Furthermore, policymakers must bear in mind the potential risks and unintended consequences such measures may have, and ensure their actions are consistent with the overall development of global economic activity.
Therefore, it is important that international economic policy remain at the forefront of efforts to mitigate the risks of payments imbalances. The goal should be for countries to establish more open and transparent economic frameworks, to support sustainable and equitable economic and financial development. Only through a collaborative effort involving all stakeholders can countries succeed in bringing about the necessary balance in global payments.
