Current Account Balance

The current account balance is the net result of a country's transactions with the rest of the world in goods, services, investment income and current transfers over a period, usually a quarter or a year. A surplus means the country earned more from abroad than it paid; a deficit means it paid more than it earned. It is the broadest measure of a country's external trade and income position and the main headline figure in the balance of payments.

A deficit is not in itself good or bad, but it must be financed. A country that spends more abroad than it earns has to borrow, attract investment, or run down its foreign exchange reserves.

Under the IMF's balance of payments manual, the current account has four parts:

• Goods — exports minus imports of merchandise. A negative figure is a trade deficit, a positive one a trade surplus.
• Services — tourism, transport, financial services, software, consulting and similar.
• Primary income — wages earned across borders and investment income such as interest, dividends and reinvested profits.
• Secondary income — current transfers without anything given in return, including foreign aid and personal remittances from migrant workers.

For many developing economies, remittance inflows are large enough to turn a sizeable goods deficit into a modest current account deficit or even a surplus.

By accounting identity, the current account is matched by the capital and financial accounts, with a line for errors and omissions. A current account deficit is offset by net inflows: foreign direct investment, portfolio purchases of local stocks and bonds, loans, or a fall in reserves. Each current-account transaction therefore has a counterpart somewhere in the financial account, which is recorded through a capital-account transaction or a reserve movement.

The balance also equals national saving minus domestic investment. A country that invests more than it saves must import the difference from abroad, which shows up as a current account deficit.

Consider an economy with exports of goods of $40 billion and imports of $55 billion (a goods deficit of $15 billion), a services surplus of $3 billion, net primary income of minus $4 billion as interest and dividends flow to foreign investors, and $10 billion of net remittance inflows. Its current account balance is −15 + 3 − 4 + 10 = −$6 billion. If foreign direct investment brings in $2 billion and the government borrows $1 billion abroad, the remaining $3 billion must come from other inflows or from reserves.

A deficit financed by long-term investment in productive capacity is generally less risky than one financed by short-term borrowing. Analysts watch reserve indicators such as import cover and broader reserve adequacy measures, and the deficit's size relative to gross domestic product (GDP). Persistent large deficits can end in a sudden stop, when foreign financing dries up and the currency falls sharply; in such episodes capital flight by residents often adds to the pressure.

Under a floating exchange rate, a weaker currency tends to narrow a deficit over time by making exports cheaper and imports dearer, while countries with fixed rates must adjust through demand, controls or reserves. Large surpluses attract criticism too, from trading partners who see them as a sign of undervaluation or weak domestic demand.

Current account imbalances sit behind many episodes in monetary history. The strain of transferring large sums abroad was analyzed after the First World War as the transfer problem, linked to German war reparations. Persistent US deficits contributed to the breakdown of the Bretton Woods system, and the global imbalances of the 2000s are widely cited as a background factor in the 2008 financial crisis. The International Monetary Fund assesses members' external positions as part of its regular surveillance.