If the balance of payments always balances, how can there be a deficit? The answer is that
the media and politicians are referring to the current balance or the balance of trade
rather than the overall balance of payments position. A balance of payments surplus on
the current account is where the value of exports exceeds the value of imports. A deficit
is where the value of imports exceeds the value of exports. As explained above, if there is
a surplus on the current account, this will be matched by an outflow in the capital
account, for example a reduction in the size of sterling bank balances, or an increase in
official reserves. The opposite is true for a deficit. This implies that there cannot be a balance
of payments problem. However, persistent surpluses or deficits on the current
account are considered to be problematic. A persistent deficit has to be financed in some
way, either through borrowing, to increase the external liabilities, or by selling more
assets. A deficit will also lead to pressure on the exchange rate, as will be shown later. A
continued surplus is also a problem, since one country’s surplus must mean that other
countries are experiencing a deficit, and they will be faced with the problem of financing
the deficit. Political pressure will be brought to bear, and there is the possibility of the
introduction of tariffs or other import controls in order to reduce a deficit.