a) Distinction between Current Account and Capital Account (5 marks)

The balance of payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world over a specific period. It is divided into the current account and the capital account (now often referred to as the financial account in modern terminology, but I’ll use the terms as per the question).

• Current Account: This records transactions involving the export and import of goods and services, income flows (e.g., wages, dividends, interest), and unilateral transfers (e.g., remittances, aid). It reflects the country’s net income from trade and transfers. A surplus indicates the country is a net lender to the world, while a deficit means it is a net borrower. For example, in Ghana, the current account often shows deficits due to high imports of consumer goods and machinery outweighing exports like cocoa, gold, and oil.
• Capital Account: This captures capital transfers and the acquisition/disposal of non-produced, non-financial assets (e.g., debt forgiveness, migrant transfers). However, in broader BoP contexts, it is often combined with the financial account, which includes direct investments (e.g., FDI in mining), portfolio investments (e.g., bonds), and other investments (e.g., loans). It shows changes in ownership of assets and liabilities. In Ghana, capital inflows from FDI and remittances help offset current account deficits.

Key distinctions:

• Current account deals with recurring, income-related flows (trade in goods/services), while capital account focuses on asset transfers and investments.
• Current account affects national income directly, whereas capital account impacts the stock of foreign assets/liabilities.
• Deficits in current account may signal competitiveness issues, while capital account deficits indicate net capital outflows.

b) How a Government Can Rectify Deficits

i. Rectifying a Deficit on the Current Account (7.5 marks)

A current account deficit occurs when imports and outflows exceed exports and inflows, often leading to currency depreciation and external debt buildup. Governments can address this through expenditure-switching and expenditure-reducing policies, aligned with BoG’s macroeconomic stability goals under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930).

• Expenditure-Switching Policies: Encourage shifting spending from imports to domestic goods. This includes devaluing the currency (e.g., allowing the cedi to depreciate) to make exports cheaper and imports expensive. In Ghana, the BoG has used managed floats since the 1980s to boost exports like gold. Promoting export diversification via incentives (e.g., tax breaks for non-traditional exports under the Ghana Export Promotion Authority) or trade agreements (e.g., AfCFTA implementation post-2021) can increase earnings.
• Expenditure-Reducing Policies: Reduce overall spending to lower imports. This involves fiscal austerity, such as cutting government subsidies (e.g., on fuel, as in Ghana’s 2015-2020 adjustments) or raising taxes to curb consumption. Monetary tightening by the BoG, like increasing the policy rate (e.g., from 13.5% in 2021 to 30% in 2023 amid inflation), reduces credit and import demand.
• Structural Reforms: Improve competitiveness through investments in infrastructure (e.g., Ghana’s Agenda 111 hospitals or road projects) and human capital. Post-2022 DDEP, Ghana sought IMF support (2023 bailout) to stabilize the current account via export-led growth.

These measures must comply with BoG directives on foreign exchange management to avoid capital flight.

ii. Rectifying a Deficit on the Capital Account (7.5 marks)

A capital account deficit implies net outflows of capital, often due to investor flight or repayment of debts, exacerbating BoP pressures. Rectification focuses on attracting inflows while managing outflows, per BoG’s Capital Requirements Directive.

• Attracting Foreign Investments: Offer incentives like tax holidays in free zones (e.g., under the Ghana Investment Promotion Centre Act) to boost FDI. Ghana has attracted investments in oil (e.g., Jubilee Field) and mining post-2019 reforms. Issuing Eurobonds (e.g., Ghana’s 2024 issuance post-DDEP restructuring) or seeking multilateral loans (e.g., World Bank support) can bridge gaps.
• Improving Investor Confidence: Strengthen regulatory frameworks, such as enforcing the Corporate Governance Directive 2018 for banks to reduce risks. Anti-corruption measures and political stability (e.g., post-2024 elections) encourage portfolio inflows. The BoG’s Cyber and Information Security Directive 2020 enhances trust in digital finance, attracting fintech investments.
• Managing Outflows: Impose capital controls judiciously (e.g., limits on repatriation, though Ghana avoids strict controls per IMF agreements) or hedge external debts. Post-2017 banking cleanup, recapitalization (e.g., BG/GOV/SEC/2023/05 notice) stabilized banks, reducing outflow risks.

In practice, Ghana’s 2023-2025 IMF program emphasizes capital account surplus through debt sustainability to support reserves.