What is Current Account Deficit? And Why Does It Happen?

current account deficit

You must have heard your politicians in assembly or on media talking about current account deficit; so here is what you need to know about it.

Let’s consider the following example of Pakistan’s trade in order to have a better idea of the current account deficit. (This is taken from the 2017 fiscal report)

Exports = $22 Billion

Imports = $55Billion

Current Account Deficit (Trade Deficit) = $23 Billion

The current account deficit or trade deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. This causes the balance of payment crisis in a country. When the amount of imports increases over the number of exports, the minus amount is the trade deficit.

So why does it happen in the first place? Or in other words, why trade deficit occurs in a country?

There can be hundreds of reasons for the increase in the trade deficit.

  • Insufficient Local Production

Trade deficit happens when everything isn’t produced in the country and the country is left with no other option than to import it. This increases the number of imports in a country that causes a deficit in the trade.

  • Leverage on imports

If a country’s taxation policy is based on giving leverage to imports and are difficult for exports, the current account deficit will eventually increase. If it is difficult to do business in a country due to indirect or direct taxation, unfriendly environment, crime, or due to the lack of investment or machinery; the country will face a downfall in the local production while an increase in the imports.

  • Bad economic environment for business

Uncertain conditions together with poor economic policies can create a toxic business environment. This causes the industries to shut down permanently which directly affects the GDP. This is one of the major reasons behind the decline of the country’s export.

Note: A decline in exports and an increase in imports is always a worry some indicator for a country’s economy.

  • Less foreign investment

Lack of foreign investment adversely affects the country’s economic growth by limiting the local production of goods.

For Pakistan, there is an additional reason for the huge trade deficit.

  • Mindset Of People On Local & Imported Products

There is a perspective build among many people in Pakistan that the imported products are better in quality while the local ones are below average. This might be true in few areas, but in a whole, this statement is absolutely incorrect. This is one of the biggest reason that imports continued to get benefit from the people while the local industries failed to establish its routes.

Trade deficit has adverse impacts on a country’s economy. The worst thing it do is that it devalues the currency by a lot. And that results in heavy taxation and inflation.

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