Is it harmful to a country's economy if it runs a current account deficit?

The current account balance is determined by the sum of
following four components: the exports of goods and services, the imports of goods and
services, the net income abroad and the net current
transfers.

When a country has a current account deficit it
is essential to analyse the reasons behind the deficit. Only when this is done would it
be possible to say if the current account deficit is harmful or
not.

The current account can show a deficit when the
country is building up on its capacity to produce goods and services in the future. To
do this, if it does not have enough resources, it would have to import them from other
nations. The imports can be in the form of external investments, resources for boosting
its production capacity and the import of finished goods as the present capacity is not
being used to manufacture what it requires. This creates a current account deficit but
ensures that in the future the country would have the ability to convert it into a
surplus.

A deficit can also be created if large amounts of
funds are being invested in sources of income abroad and in the future the returns from
these would eliminate the deficit.

If a country has a
deficit but none of what has been mentioned above is being accomplished a current
account deficit is a matter of concern as it continually increases the debt on the
country. This may lead to a situation where the country can no longer afford to pay for
imports or pay the interest on the funds that it has borrowed.