What is a significant concern of maintaining a sustainable current account deficit (CAD)?

A significant concern of maintaining a sustainable current account deficit (CAD) is that it can constrain economic growth. A current account deficit exists when a country spends more on foreign trade than it earns, leading to a net outflow of funds. To finance this deficit, a country may require consistent inflows of foreign capital, which can take the form of investments or loans.

When a nation runs a persistent CAD, it may face challenges in attracting sufficient foreign investments, which can limit the funds available for domestic growth and development. This situation can hinder economic expansion because it may lead to reliance on external sources to fund consumption or investment, creating vulnerabilities to shifts in investor confidence or global economic conditions. Moreover, a large and ongoing CAD can lead to concerns about the country’s ability to service its debt, potentially resulting in higher interest rates or reduced access to international capital markets.

In contrast, maintaining high domestic prices, restricting foreign investments, or increasing currency volatility are not direct concerns associated with a sustainable CAD. These factors are more related to broader economic management issues rather than the specific implications of running a current account deficit.