Economic Growth

What is a country's current account balance, and is a deficit good or bad for its economy?

A country’s current account balance tracks the amount of money it has coming in and going out.

A country’s current account balance tracks the amount of money it has coming in and going out. Image: Unsplash/adamnir

Ian Shine
Senior Writer, Forum Agenda
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  • A country’s current account balance tracks the amount of money it has coming in and going out.
  • It is largely made up of trade, but also depends on flows of foreign direct investment and the amount of money sent home by people living overseas.
  • In US dollar terms, the country with the biggest current account surplus in 2021 was China, and the country with the biggest current account deficit was the United States.
  • While a current account deficit may sound like a bad thing, this is not necessarily the case … and current account surpluses can suggest negative trends.

There are many measures of the health of a country’s economy. Gross domestic product (GDP) is probably the most well-known, but another measure is a country’s current account balance.

Much like a current account that a person may have with a bank to manage their day-to-day finances, a country’s current account balance tracks the amount of money it has coming in and going out. The OECD defines it as “a record of a country's international transactions with the rest of the world”.

Trade in goods and services is the biggest contributor to these flows of money, but there is more to the current account than trade. The other elements include:

  • Foreign aid sent or received.
  • Foreign direct investment, which is when an entity from one country makes a lasting investment in another country.
  • Salaries or pensions that residents receive.
  • Remittances, which is money that people living abroad send back home.
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How is a current account balance calculated?

A country’s current account balance is measured in US dollars and as a percentage of GDP. If a country is sending more money out than is coming in, it will have a current account deficit. If it is receiving more money than it is spending, it will have a current account surplus.

Most of the world’s least-developed countries have a current account deficit.
Most of the world’s least-developed countries have a current account deficit. Image: UNCTAD

Highly developed and highly underdeveloped countries tend to have current account deficits, while emerging economies will often have a current account surplus. Current account deficits were common in the Americas, Africa, Southeastern Europe, and Central and Western Asia in 2021, while surpluses were more often the case in Central and Northern Europe, Eastern Asia, and Oceania, according to UNCTAD.

In dollar terms, the country with the biggest surplus in 2021 was China, and the country with the biggest deficit was the United States, as shown in the table below.

Table showing the current account balance in largest surplus and deficit economies.
Current account balance in largest surplus and deficit economies. Image: UNCTAD

China has a large current account surplus because of booming exports and the fact that inflows of foreign direct investment exceed outflows, according to the Bank of Finland Institute for Emerging Economies. The surplus has also been boosted by rapid rises in the value of China’s foreign currency and gold reserves.

The US has had a current account deficit for over 20 years. This is partly down to an increasingly large trade deficit, but also a result of foreign investors in the US owning assets in the country that are worth more than the value of US entities’ foreign assets, according to independent nonprofit research organization the Peterson Institute for International Economics.

In percentage terms, Guinea and Papua New Guinea had the highest current account surpluses relative to GDP in 2021, at more than 20%. Larger deficits were mostly found among heavily indebted poor countries, at 3.7%, and landlocked developing countries at 2.9%, UNCTAD says.

Is it bad to have a current account deficit?

While a current account deficit may sound like a bad thing, this is not necessarily the case.

“If the deficit reflects an excess of imports over exports, it may be indicative of competitiveness problems, but because the current account deficit also implies an excess of investment over savings, it could equally be pointing to a highly productive, growing economy,” the International Monetary Fund (IMF) says.

A country may also have a deficit because it has large levels of debt to finance overseas investments that may eventually prove highly profitable, or it could be paying to import a lot of raw materials that it will process into more valuable finished goods for use domestically.

And big drops in the deficit do not necessarily indicate good news. Countries with high current account deficits are at risk of currency depreciation.

Pakistan’s current account deficit fell by 90% in January 2023, but this was because its currency lost more than a quarter of its value against the dollar, meaning imports mostly became prohibitively expensive.

Is a current account surplus good?

Running a current account surplus can allow countries to spend those excess funds on investments or foreign currency reserves. However, having a surplus may suggest a lack of government investment – an accusation the IMF has levelled at Germany in the past.

Current account surpluses can also suggest an economy may be imbalanced. “Japan's current account surplus … is as much due to low domestic demand as it is to its competitiveness in exports. The low domestic demand has translated to stagflation in its economy and low wage growth,” Investopedia says.

Figure displaying the global recession outlook in 2023. current account balance deficit
Recessions can lead to current account surpluses because of drops in consumer demand for imported goods. Image: World Economic Forum

Current account surpluses can stem from recessions, which cause drops in consumer spending and reduced demand for imports. Almost two-thirds of respondents to the World Economic Forum’s Chief Economists Outlook 2023 say that a global recession is likely in 2023, with the acute cost-of-living crisis in many countries causing consumer spending to decline.

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Economic GrowthFinancial and Monetary Systems
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