The Role of Remittance Inflows in Reducing Inflation by Impacting the Current Account Deficit

Inflation and the current account deficit are the two essential concerns that most people don’t know much about. Both directly impact every human’s life. Understanding the two is critical, especially if you are an expatriate and frequently transfer funds cross-borders. When an expatriate makes a money transfer online from a foreign country, it helps to improve the situation in a developing country.

Let’s briefly examine how expatriates can help control inflation by positively impacting the current account deficit through international money transfers.

Inflation, its definition and background: easy to understand and valuable to know!

You can understand inflation as the drop in a currency’s purchasing power over time. It can also be defined as the rise in the general price level. It is expressed in percentage generally. It means that a given currency unit will buy less now than it did before. 

The history of inflation is fascinating. 

The origins of inflation can be traced back to the barter trade era. Although the phenomenon has worn the term ‘inflation’ in recent history, the idea has existed for a long time. In that era, the abundance of metal, which was one of the primary sources of barter trade, would push both parties in a barter trade back. The buyer would show no interest in getting the metal from the seller (buyer and seller should be seen in the context of that trade). On the other hand, the seller would look for other materials within reach because metal would not get them what they could get in exchange for other materials available in relatively lesser quantities.

Let’s now study the Current Account Deficit and the reasons behind its occurrence.

What is the Current Account Deficit?

A Current Account Deficit occurs when a country’s imports exceed its exports. In imports, a country sells its goods and services to the outside world and earns money; in exports, a country purchases more from the outside world and pays for it.

In simple terms, a current account deficit occurs when a country earns less and spends more.

Reasons why the Current Account Deficit occurs

There are many reasons behind a current account deficit, but you will learn some important ones here.

Low productivity is a significant reason for the current account deficit. 

A current account deficit will definitely occur when a country cannot produce goods and services. In a globalised world, no country can live in isolation. If one country specialises in goods, the other may specialise in services. Therefore, the goods of one country will be exported to the other after fulfilling its needs. And the services of the other will be imported likewise. But, this only happens when there is a massive production.

Weak import-export policies also chiefly contribute to the current account deficit. 

A country with weak import and export policies will result in a deficit. It will lead to the slow exchange of goods, accumulating the current account deficit over time.

Foreign policies play a significant role in avoiding the current account deficit. 

A friendly foreign policy and even friendlier relations with the neighbouring countries and other states in the world can help avoid this deficit. The rules and regulations between countries are lax, so there are fewer chances of a current account deficit.   

Investment in the technical education of the population is essential. 

If a country cannot educate its people, it is less likely to produce bulk goods or services. And if it does not happen, the required goods and services will be imported from other countries. This can lead to a current account deficit.  

You will now briefly study the link between inflation and current account deficit concerning the above.

The link between the current account deficit and inflation is interesting. 

So far, you have clearly understood the current account deficit and inflation. With the current account deficit, there is a shortage of money, services and goods in a country facing it. It leads to the scarcity of the same, which pushes their prices up. Thus, these go out of the purchasing power of the people.

A commodity in short supply is essentially more expensive than in abundance. This is one of the fundamental economic rules.

Overseas workers can help improve the situation significantly by sending money home from abroad. Their remittances will positively impact balancing the money shortage and stimulate people’s power of purchases. 

Let’s now look at the policies that control the current account deficit and inflation.

Essential policies to reduce inflation and current account deficit. 

Increased exports are at the heart of reducing these two. 

Increased exports mean earning immensely because it will also result in reduced imports. It ultimately minimises both inflation and the deficit.

Investment in newer technologies is essential. 

In this tech-driven era, the world is increasingly shifting towards newer and newer technologies. It leads to reduced dependence on human resources, which eventually leads to savings because a task done by a machine does not need to be compensated monetarily!  

Fiscal policies must be aimed at reducing inflation. 

The central monetary authorities regulate a country. These bodies devise fiscal policies for the nations. All other financial institutions then follow them. These policies need to reduce inflation and the deficit in the current account.

Reducing inflation with stricter implementation of the law

Devising suitable policies only is not enough. Instead, strict compliance with those is equally important. And this compliance can only be ensured through the strict implementation of laws by regulatory bodies with the government’s support.

Investments are required on the supply side of the economy. 

The governments must invest in the supply side of the economies to make exports more appealing and attractive. It will fetch more money from abroad and less expense on purchasing.

Remittances play a vital role in the reduction of inflation.

Foreign remittances are the cure to inflation. As the expatriates send in their remittances, this money benefits the individuals and families. Remittances strengthen the purchasing power of individuals. And if many people can afford things they could not previously, it indicates reduced inflation.

Remittances also help reduce the current account deficit as these are the earnings of the human resources of a country. To better understand it, you may read the entire article.

Factors determining the best method to transfer remittances from abroad

International money transfer is not easy as a general rule. Many international money transfer services claim to be the best. But, the determinants, whether they are best or not, are the speed, security of funds, low fee, best exchange rates etc., which are available under one roof at only a few internationally reputable online transfer companies, including ACE Money Transfer.

Related Articles

Back to top button