Current account stability

1. The aim is to avoid large, persistent imbalances, whether deficits or surpluses.
2. It does not mean achieving an exact zero balance every year.
3. A stable position is one that is sustainable over time.
4. Small or temporary imbalances are normal and can be benign.

Persistent deficit problems

1. A persistent deficit must be financed by borrowing from abroad, by financial inflows, or by running down foreign exchange reserves.
2. Continued borrowing can build up external debt that has to be serviced with interest, diverting future income abroad.
3. Rising external debt can become unsustainable if foreign lenders lose confidence and stop lending.
4. A large deficit can put downward pressure on the exchange rate, as more of the currency is supplied to buy imports.
5. It can also signal weak international competitiveness.

Persistent surplus concerns

1. A large surplus may reflect weak domestic demand and low consumption.
2. It can mean households consume less than the economy could sustainably support.
3. A surplus can create upward pressure on the exchange rate.
4. A stronger currency can make exports less price competitive over time.
5. Large surpluses may provoke trade tensions or retaliation from trading partners.

Conflicts with other objectives

1. The current account objective sits alongside economic growth, low unemployment and low, stable inflation.
2. Strong economic growth raises incomes and draws in more imports, worsening the current account.
3. Using contractionary policy to cut a deficit can lower growth and raise unemployment.
4. So pursuing current account stability can conflict with other objectives, and it depends on how far the government prioritises the external balance.

Should current-account stability be a priority objective?

1. Stability deserves real weight because a large, persistent deficit builds up external debt whose interest drains future income, and a sudden loss of lender confidence can force a sharp fall in the currency and painful spending cuts.
2. But over-prioritising the external balance is costly: using contractionary policy to curb imports sacrifices growth and jobs, and many deficits are financed smoothly by stable long-term inflows and never trigger a crisis.
3. A surplus target is no safer, since a large surplus can reflect weak domestic demand and depressed living standards and can provoke retaliation abroad, so stability is not the same as aiming for a surplus.
4. On balance, current-account stability is worth pursuing as one objective among several, but how far it should be prioritised depends on the size and cause of the imbalance, how it is financed and the exchange-rate regime.