METHODS OF CORRECTING DISEQUILIBRIUM IN B.O.P.

When such a situation of disequilibrium arises, the following measures are usually adopted.

i) Use of past reserves 

ii) Borrowings from IMF 

iii) Monetary and fiscal policy measures 

iv) Exchange rate adjustments. 

Let us learn them in detail. 

Use of Past reserves: A country may make use of past reserves to finance the BOP deficit provided such reserves are available. Such reserves consist of gold, foreign currencies and fund related assets i.e., reserve position with the IMF and holdings of special drawing rights. In recent years, increase in quotas and additional allocations of SDRs and expanded private capital flows have contributed to an overall increase in national reserves of several countries. 

Borrowing from IMF: Countries with disequilibrium in B.O.P. Can make use of IMF facilities. These are: 

1. Stand by loans 

2. Extended Fund Facilities (EFF) 

3. Structure Adjustment Facilities (SAF) 

4. Enlarged Structural Adjustment Facilities (ESAF) 

5. Compensatory and Contingency Financing Facilities (CCFF) 

6. Systemic Transformation Facilities (STF).

Monetary and fiscal policy measures: Monetary and fiscal policies are also important tools for influencing B.O.P. Conditions. A change in money supply brought about either through fiscal or monetary policies can bring about the required change in the level of total demand, which includes demand for imported goods and services. 

Exchange rate adjustments; Adjustments in exchange rate is an effective tool. A down- ward adjustment in exchange rate will make exports cheaper and imports dearer. In other words, as a result of such a policy, exports will be encouraged and imports will be discouraged and equilibrium will be restored. 

All these methods, however, suffer from certain limitations. Hence, managing a state of disequilibrium in B.O.P. continues to be a major problem which every country faces. The major problem is that a policy initiative taken for the sake of achieving equilibrium in B.O.P. comes into conflict with other, rather more endearing objectives, such as, economic growth, employment and price stability. Reconciling such conflicts continues to worry policy makers.