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Determinants of balance of payments:
Broadly speaking, trend behaviour of merchandise exports and imports along with their terms of trade, net invisible earnings and autonomous capital inflows affects a country's BOP. Each one of these variables is a stimulus to growth and determines the long term viability of external sector. First, exports hold the key to achieving a sustainable balance between the requirements of higher growth and of ensuring viability in the external sector. As a determinant, the higher the share of exports in a country's GDP, faster will be the growth of the economy in response to an increase in overseas demand. Second, imports are a positive function of GDP. An intrinsic link between merchandise imports and exports leads to vigorous export growth and high level of GDP. However as expected, import price is negatively related to its volume. Third, among the items of net invisible earnings, a steady and continuous flow of remittances (insensitive to interest rate) does have a positive effect to sustain a high level of trade deficit. Examples of India, Turkey and Philippines are a pointer in this direction. Fourth, services exports hinge on the degree of association and direction of causality between service orientation of the output structure and the share of services in international trade (RBI, Report on Currency and Finance 2002-03, p.133). Fifth, steady foreign investment inflows are promised to support the investment needs of the economy for higher growth and a source of prudent debt management. For, refinancing of costly debts and prepayment of identified high cost debt in external debt management will have a positive impact on BOP capital account.
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