Development Economics - What is a Foreign Currency Gap?
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 9 Apr 2023
In development economics, a foreign currency gap refers to a situation where a country's expenditures in foreign currency, such as payments for imports or servicing foreign debt, exceed its foreign currency earnings from exports or other sources, such as foreign investment or remittances. In other words, it is the difference between the amount of foreign currency a country needs to spend and the amount it can earn.
When a country faces a foreign currency gap, it may have to borrow foreign currency to meet its obligations or reduce its imports, which can have a negative impact on economic growth and development. A persistent foreign currency gap can lead to a balance of payments crisis and a currency devaluation, which can further worsen the situation.
To address a foreign currency gap, countries may try to increase their exports, attract foreign investment, or implement policies to reduce their dependence on imports. Some countries may also try to negotiate debt restructuring or rescheduling with their creditors to ease the burden of foreign debt repayments.
There are several developing countries that have suffered from a foreign currency gap in recent years. Here are some examples along with data:
- Argentina: Argentina has faced a persistent foreign currency gap due to a high dependence on imports and a decline in foreign investment. According to the World Bank, Argentina's current account deficit reached 4.1% of GDP in 2019, and its foreign exchange reserves declined from USD 55 billion in 2017 to USD 12 billion in 2020.
- Turkey: Turkey has also faced a significant foreign currency gap due to a high current account deficit, rising debt levels, and a decline in foreign investment. According to the World Bank, Turkey's current account deficit reached 5.5% of GDP in 2019, and its foreign exchange reserves declined from USD 105 billion in 2013 to USD 55 billion in 2020.
- South Africa: South Africa has experienced a foreign currency gap due to a decline in commodity prices, a decrease in exports, and a rise in foreign debt. According to the World Bank, South Africa's current account deficit reached 3.7% of GDP in 2019, and its foreign exchange reserves declined from USD 50 billion in 2014 to USD 43 billion in 2020.
- Nigeria: Nigeria has faced a foreign currency gap due to a decline in oil prices, which is the country's main source of foreign exchange earnings. According to the World Bank, Nigeria's current account deficit reached 2.2% of GDP in 2019, and its foreign exchange reserves declined from USD 47 billion in 2013 to USD 36 billion in 2020.
It's important to note that the COVID-19 pandemic has had a significant impact on many developing countries' economies and their foreign currency gaps. The data presented above reflects the situation before the pandemic, and the current situation may have changed since then.