Current Account Balance
The current account balance is the net of what a country earns from and pays to the rest of the world for goods, services, investment income and transfers such as remittances. A deficit must be financed by borrowing, investment inflows or reserves.
Also called: current account · current account deficit · current account surplus · external balance
The current account has four parts: trade in goods, trade in services, primary income such as interest and dividends, and secondary income such as worker remittances and aid. Add them and the result shows whether the country is earning more foreign currency than it spends or the other way round.
A deficit is not a problem in itself. Fast-growing economies often import more than they export and fund the gap with foreign investment. The risk lies in how the gap is funded. A deficit covered by short-term borrowing or volatile portfolio money can reverse abruptly, and the country then has to draw on its reserves, let the currency fall, or restrict payments.
This is why exporters, tourism and remittance inflows get so much policy attention in reserve-short countries: they are the channels through which external money arrives.
Commonly confused with
| Term | How it differs |
|---|---|
| Current-account transaction | A current-account transaction is a single payment for trade or services, as classified by exchange-control rules. The current account balance is the national total of all such flows. |
See also
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- Import CoverImport cover is the number of months a country could keep paying for its imports out of its foreign exchange reserves if no new foreign currency came in. It is the simplest measure of how long a country can withstand an external shock.
- RemittanceA remittance is a cross-border transfer sent by one individual to another — typically a migrant worker sending money home to family. It is distinct from a commercial payment between businesses, and regulators define it more narrowly than everyday speech does.
- Capital FlightCapital flight is the rapid movement of money out of a country by residents and investors who fear devaluation, inflation, confiscation, default or political instability. It drains foreign exchange reserves and often triggers the controls it was trying to escape.
- DevaluationDevaluation is a deliberate official reduction in the value of a currency that is fixed or managed against another. It makes exports cheaper and imports dearer overnight, and is usually forced by reserves running too low to defend the old rate.