The stability of the current account is an economic goal where a country aims to keep its balance of payments in a sustainable state. This means avoiding very large, long-term trade deficits or surpluses.
Why stability is important:
- A persistent deficit occurs when a country spends more on imports than it earns from exports. This forces the country to borrow from abroad, which increases foreign debt and risks a currency crisis.
- A persistent surplus can suggest weak local demand and may lead to economic problems like deflation. It can also cause trade conflicts with other countries.
- Governments prefer manageable balances that support productive investments.
How governments manage the current account:
- Encouraging exports to reduce a deficit.
- Adjusting policies to prevent excessive trade dependency.
- Ensuring the current account remains healthy enough to support long-term economic growth.
Balancing other economic goals:
Governments must balance this goal with other needs:
- Economic growth: Trying to grow through exports can sometimes affect the trade balance.
- Low inflation: Certain policies to reduce imports might unintentionally slow down economic growth.
- Employment: Promoting local industries can sometimes create tension with international free trade agreements.
Governments typically use a mix of fiscal, monetary, and supply-side policies to keep the current account stable.