Remittances' Role in Current Account Balance

Steps:

• Define balance of payments (BOP) as record of economic transactions with rest of world, worsening means larger deficit/smaller surplus.
• Break BOP into current account (trade, income, transfers) and capital/financial accounts.
• Identify remittances as unilateral transfers in current account, representing inflows like export credits.
• Assess each option's impact: reduction in inflows directly cuts current account surplus/deficit worsens BOP.

Why A is correct:

• Remittances are credits in current account unilateral transfers; their reduction decreases foreign currency inflows, directly worsening BOP per IMF BOP manual definitions.

Why the others are wrong:

• B: Higher taxes reduce domestic spending and imports, improving current account balance.
• C: Partner economy expansion boosts demand for exports, increasing current account inflows.
• D: Higher interest rates attract foreign capital, improving capital account via inflows.

Final answer: A