Prolonged crisis in Iraq may push current account deficit to 2.3 per cent: SBI report- WHAT IS CURRENT ACCOUNT DEFICIT?

If the ongoing crisis in Iraq continues for some more time, the country's current account deficit for this year may widen to 2.3 per cent of GDP due to rise in oil prices, says a report by SBI Research.

WHAT IS A CURRENT ACCOUNT DEFICIT?

A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components tend to make up a smaller percentage of the current account than exports and imports.

A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution industrialization or policies that improve domestic companies' global competitiveness. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, since this makes a country’s exports less expensive.

Having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, it may become insolvent.

MEANINGS:

Devaluation:

Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. ‘Devaluation’ means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

In contrast, depreciation is used to describe a decrease in a currency's value (relative to other major currency benchmarks) due to market forces, not government or central bank policy actions.

Solvent and Insolvent:

Solvent means capable of meeting financial obligations.

Insolvent means unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature

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