There is an inverse relationship between a country’s current account and its foreign debt, all things remaining equal. This can be observed from the current account and foreign debt statistics of Australia, in the current year. In the year 2009 there is a deficit in Australia’s current account. This is because of a continued rise in its net foreign debt which results in a negative impact on a country’s current account. As shown in the figure below – the total current account deficit for the year 2009 amounts to $6346 million.
Revenue gains received by a country help in increasing the balance in its current account while excessive expenditure leads to a deficit. Thus, if a country imports more goods and services than the goods and services it exports, it leads to a deficit in its current account and vice versa (Daly, 2004).
The above figure shows an increase in Australia’s net foreign debt, over the years from $506,355 million in 2006- 07 to $616,650 million in 2008 – 09 (Australian Bureau of Statistics, 2009), thus indicating that its exports far exceeds its imports, and the savings are relatively lower as well. Thus, it can be said that there is an inverse relationship between current account deficit and foreign debt of a country, as the foreign debt increases, with savings remaining constant, there is a deficit in the current account while, a reduction in foreign debt, increase in exports, increase in savings, etc would lead to a surplus in the country’s current account. Another significant relationship between CAD (current account deficit) and foreign debt of a country is the fact that as the country experiences a CAD it leads to an increase in foreign borrowings, which is required to pay off the deficit, which ultimately leads to a further increase in foreign debt. As the foreign debt rises, the interest on it rises simultaneously,