Methods of regulating the balance of payments

State regulation of the balance of payments is a combination of economic, including currency, financial, monetary, state measures aimed at the formation of the main items of the balance of payments, as well as covering the existing balance.

In general, the fundamental deviation of the balance of payments from equilibrium for a long time cannot be maintained, since with the favorable state of external settlements it causes the expansion of foreign exchange reserves and contributes to inflation, and with a disadvantage, it depletes reserves and requires the state to carry out activities that are painfully reflected in the domestic economy. This is especially evidentwith a large balance of payments deficit.

There is a diverse arsenal of methods for regulating the balance of payments, aimed either at stimulating or restricting foreign trade operations depending on the country’s monetary and economic situation (see, for example, [3]).

In fact, with a balance of payments deficit, the choice of instruments of state influence comes down to two types of measures: either the so-called deflation policy, i.e. total demand reduction in the country, which means helping to contain or even an absolute reduction in economic growth, or special measures to influence external settlements by directly state regulation of individual balance of payments items.

Deflationary policy. The policy is aimed at reducing domestic demand and includes limiting budget expenditures mainly for civilian purposes, freezing prices and wages. One of its most important tools is financial and monetary measures: reducing the budget deficit, changing the central bank’s discount rate (discount policy), credit restrictions, setting the limits for the growth of the money supply, and devaluation of the national currency. In an economic downturn, with or threatening to have a large army of unemployed and reserves of unused production capacities, a deflation policy leads to a further drop in production and employment. It is associated with the onset of workers’ living standards and threatens to exacerbate social conflicts if compensation measures are not taken. One of the main tools of deflationary policy is devaluation, in addition, currency restrictions and fiscal policy measures are also used.

Devaluation is a depreciation of the national currency, aimed at stimulating exports and containing imports of goods.

The role of devaluation in the regulation of the balance of payments depends on the specific conditions for its implementation and the accompanying general economic and financial policies. Devaluation stimulates the export of goods only if there is an export potential of competitive goods and services and a favorable situation in the world market. As for the restraining effect of devaluation on imports, in the context of the internationalization of the process of reproduction and the development of international specialization, a country often cannot drastically reduce the import of goods. In addition, not all countries have import substitution policies.

By improving imports, devaluation can lead to higher production costs of domestic goods, higher prices in the country and the subsequent loss of competitive advantages obtained with its help in foreign markets. Therefore, although devaluation can give the country temporary advantages, but in many cases it does not eliminate the reasons for the balance of payments deficit.

To obtain the desired effect, devaluation should be sufficient in size. Otherwise, it only enhances speculation in the foreign exchange markets, as it remains possible to revise the exchange rate. At the same time, the excessive size of the devaluation causes a chain reaction of the decline in other currencies, and then the country that devalued the currency loses the competitive advantages that it expected.

Some countries periodically practice the plurality of the exchange rate as a hidden devaluation. The introduction of a floating rate regime also does not contribute to the alignment of balance of payments. The cessation of spasmodic devaluations to some extent lifted the pressure of speculative capital on international settlements. However, in conditions of floating exchange rates, the effect of their market decline on the price ratio of imported and exported goods is easily nullified. Therefore, to ensure effective devaluation, many countries, especially developing ones, introduce differentiated duties and subsidies for export and import.

Currency restrictions. Blocking foreign exchange earnings of exporters, licensing the sale of foreign currency to importers, and the concentration of foreign exchange transactions in authorized banks are aimed at eliminating the balance of payments deficit by limiting capital exports and stimulating its inflow, and containing imports of goods.

It is significant that in the late 70s and early 80s, despite the liberalization of current operations, approximately 90% of countries with convertible currency applied restrictions on the international movement of capital. EU countries canceled them only in the early 90s.

Financial and monetary policy. To reduce the balance of payments deficit, budget subsidies to exporters, protectionist increase in import duties, cancellation of tax on interest paid to foreign securities holders in order to inflow capital into the country, monetary policy, are used, especially accounting policies and money supply targeting (setting targets for its annual growth).

Special measures provide for the direct regulation of individual items of the balance of payments during the formation of its main articles – the trade balance, “invisible” operations, capital flows.

The most important object of regulation is the trade balance. In modern conditions, state regulation covers not only the sphere of circulation, but also the production of export goods.

The stimulation of exports at the stage of sale of goods is carried out by influencing prices (providing exporters with tax, credit benefits, changing the exchange rate, etc.). To create a long-term interest of exporters in the export of goods and the development of new markets, the state provides targeted export loans, insuring them against economic and political risks, introduces a preferential depreciation regime for fixed capital, provides them with other financial and credit benefits in exchange for an obligation to implement a certain export program.

In connection with the intensification of competition in world commodity markets, special attention is paid to the regulation of export production by deepening intra-industry specialization and cooperating with national firms with foreign ones.

In order to deepen international specialization, the state stimulates the export activities of small and medium-sized firms. Measures are being taken to promote the role of agricultural exports, which is seen as “green oil”. The expansion of sales of machinery and equipment is encouraged. The state is intensively orienting enterprises to foreign markets, creating advantages for them and transferring resources to export production from industries that produce products to the domestic market. State regulation of exports extends to all stages of the movement of goods from studying a foreign market to after-sales service abroad.

Export promotion methods are being applied more comprehensively. These include currency, financial, organizational forms of support for exporters, including advertising, information, and training.

With a passive balance of payments, import regulation is carried out by reducing it and developing the national production of goods in order to replace imports. Non-tariff restrictions are practiced.

In order to regulate payments and receipts for “invisible” balance of payments transactions, the following measures are applied:

limitation of the rate of export of currency by tourists of a given country; direct or indirect participation of the state in the creation of tourism infrastructure in order to attract foreign tourists; expansion of government spending on research in order to increase revenues from trade in patents, licenses, scientific and technical knowledge, etc .; regulation of labor migration.

Thus, countries with a deficit balance of payments usually take a set of measures to stimulate exports, curb imports of goods, attract foreign capital, and limit the export of capital.

These measures run into a number of obstacles. Deflation policies are highly undesirable because they slow down economic growth and lag behind competitors. As for direct regulatory measures, in some cases they can only be extraordinary and temporary, since they inevitably cause a response from partners, which threatens to develop such a policy into a currency and trade war.