Highlight the causes of Balance of payments deficits in your country.

Answer Details

A balance of payments deficit occurs when a country's total payments to the rest of the world exceed its total receipts, mainly because imports and other outflows exceed exports and other inflows. The main causes in a developing country such as Nigeria include:

• High import bills: heavy importation of manufactured goods, machinery, food and luxuries.
• Narrow, over-dependent export base: reliance on one or few primary products (for example crude oil) whose prices are unstable in the world market.
• Fall in world prices of exports or a decline in demand for them, reducing export earnings.
• Unfavourable terms of trade: export prices falling relative to import prices.
• Inflation at home: high domestic prices make exports uncompetitive and imports more attractive.
• Debt-service payments: large interest and principal repayments on foreign loans.
• Profit and dividend repatriation by foreign firms operating in the country.
• Capital flight and heavy invisible payments such as freight, insurance and foreign travel or medical treatment.
• Over-valued exchange rate that cheapens imports and dearens exports.
• Fall in domestic production forcing greater reliance on imports.

The central reasoning is that the country spends more foreign exchange on imports and other outflows than it earns from exports and inflows, and this gap is widened by over-dependence on unstable primary exports.