When an economy is having a balance of payment surplus the best alternative opened to it is to
Answer Details
When an economy is experiencing a balance of payments surplus, it means that the country is exporting more goods, services, and capital than it is importing. Essentially, there is more money flowing into the country than out of it. In such situations, one of the most viable actions to take is to increase its foreign reserves.
Here's why increasing foreign reserves is often the best option:
Stability and Security: Increasing foreign reserves can help the country maintain better economic stability and provide a financial cushion. These reserves can be used in times of economic distress, for example, to stabilize the country's currency or to cover the balance of payments deficit if one arises in the future.
Credibility and Investor Confidence: A healthy level of foreign reserves signals to international investors and creditors that the country is financially stable, which can lead to greater investor confidence and potentially more foreign investment.
Currency Support: With a surplus, increasing reserves can support the country's currency value in global financial markets. This helps maintain favorable exchange rates and can be used strategically by the central bank to control currency appreciation.
Flexibility in Monetary Policy: Higher foreign reserves give the central bank more flexibility in its monetary interventions. They can control inflation and manage interest rates more effectively.
Promoting imports, while it can help reduce the surplus by encouraging money to flow out of the country, may not always be the best course of action and depends on the country's economic goals and import needs. Borrowing from abroad is generally not necessary when the country has a surplus. Devaluing the currency is certainly not favorable in the context of a surplus as it can create inflationary pressures and reduce purchasing power internationally.