6.3.4—Current account imbalance effects

A persistent current-account deficit must be financed by capital inflows, reserve changes or borrowing; a surplus supplies net funds abroad. The consequence depends on how durable and productive the flows are.

Deficits can support investment and consumption, but may increase external debt or vulnerability if confidence falls. Surpluses can build foreign assets, yet weak domestic demand or dependence on exports may create adjustment risks.

A deficit financed by foreign direct investment in productive factories differs from one financed by short-term borrowing for consumption; both appear as external financing but have different risks.

A current-account deficit is not itself proof of insolvency, and a surplus does not guarantee balanced domestic living standards.