Current account imbalances occur when a country’s total receipts from exports of goods, services, primary income, and secondary income do not equal its total payments for imports of the same. Several structural, economic, and policy factors can cause these imbalances.

Structural and economic causes:

• Low productivity and lack of competitiveness: if domestic firms cannot produce goods and services at competitive prices, exports fall and imports rise
• Exchange rate misalignment: an overvalued currency makes exports expensive and imports cheap, worsening the current account
• High domestic income and strong consumer demand: during economic booms, consumers spend more on imported goods and services
• Inflation differentials: higher domestic inflation makes domestically produced goods less price-competitive relative to foreign goods
• Commodity dependence: countries that rely heavily on importing fuel or raw materials tend to run persistent goods deficits
• Weakness in the invisibles sector: a country with few competitive service industries may run a deficit in trade in services

Policy-related causes:

• Restrictive trade policies abroad: other countries’ protectionist measures can limit export opportunities
• Government budget deficits: these can stimulate imports through higher domestic spending
• Openness to foreign investment: large profit repatriation by foreign firms contributes to a primary income deficit

Imbalances can be structural (long-term, arising from the economy’s structure) or cyclical (short-term, driven by the business cycle).