A crisis occurs when the balance of payments is unsustainable. This means that foreign exchange reserves are falling rapidly, are being maintained only by a level of foreign borrowing leading to difficulties in obtaining further loans. A balance-of-payments crisis may be ended by improving the balance of payments on current account, via a recession in domestic activity, or by devaluation. It may alternatively be ended by changing policies so as to prevent capital flight and induce inward capital movements. It may also help if a foreign loan can be obtained to allow time for the current account balance to improve.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|