COVID-19 pandemic forces widening gap in global current account balances

The COVID-19 pandemic has led to a widening gap between the rich and poor. The world added 607 billionaires in the previous year, almost one every two days. But the widening wealth gap was not limited to individuals. The pandemic has also caused an increasing gap in the current account balances globally. Current account balances are a record of a nation’s transactions with other countries.

According to the latest External Sector Report by the International Monetary Fund (IMF), the current account balances increased from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020. The report predicts that the gap will to continue to widen as the secondary and tertiary waves of COVID-19 continue to surge and cause economic disruptions.

The global current account balances have been steadily declining for a few years, and would have continued to do so in 2020 as well -- had the pandemic not broken out. Global current account balances are not necessarily a problem on their own, but excessive gaps can lead to trade tensions and disruptions in asset price adjustments.

The shift in the trend was caused by the decline in travel and its effect on tourism-focused countries, the collapse of oil prices due to low demand, increase in trade of medical goods and finally the shift in consumption patterns of households. These factors were also exacerbated by supportive monetary and fiscal measures taken by many governments across the world to ease economic pressure, along with government lending to several key industries.

India had reported a net current account deficit of 0.9 percent of GDP in FY2020, but recent data showed that the CAD had swung into surplus territory -- with the central bank reporting a current account surplus of 0.9 percent of GDP for FY2021, due to a contraction in the trade deficit.

While the gap is expected to widen further in 2021, the declining trend is expected resume later. The global rebalancing of economies is key for several countries to build strong foundational economies.

"In the years to come, countries will need to simultaneously rebalance, while ensuring that the recovery is built on a solid and durable foundation," said the IMF on its blog.