A current account surplus is not necessary for the balance of payments to be sustainable

Dear Editor,

Let me be clear that what prompted me to write my comments (SN July 2) on Mr Rawle Lucas’s balance-of-payments (BOP) analysis was not to dispute his theoretical correctness, but concerns about policy questions which his analysis raised in my mind. His emphasis on the relationship of the BOP current account and savings implies that achieving a surplus is a policy objective of the current account, and the higher the surplus the better. This is patently not the case. It has to be understood that the balance of payments (total of current account and capital account) always balances as an accounting construct (ask the folks at the central bank). The main policy consideration therefore is whether the balance is sustainable, taking into account growth and welfare goals of the country.

If, for example, reserves are falling consistently, that is a sign that the BOP is not sustainable and corrective action is necessary. However, current account surplus is not necessary for the BOP to be sustainable. In fact, current account deficits are commonplace: in Latin America and the Caribbean, Trinidad and Tobago and Venezuela stand out as countries with current account surpluses over the years for one obvious reason – oil exports. Even the US runs current account deficits. What is important is to make sure that the current account deficit is within a manageable range (probably under 5 per cent of GDP) and that regular foreign capital inflows are adequate to cover the deficit without running up high external debt or otherwise presenting obstacles to the achievement of national goals.

The second implication I found a little bothersome was what appeared to me to be the protectionist/isolationist tone of the analysis. The attention paid to domestic saving as a constraint on investment seemed out of place in the contemporary global economy where large international capital flows are a major reality. It is not that one would want the country to be swamped by foreign investment to the detriment of Guyanese citizens’ interests, but at the same time the last thing we would want to do is go back to inward-looking economic policies that failed us in the past.

Yours faithfully,

Desmond Thomas

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