Current Account Sustainability in Transition Economies

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This paper presents an analysis of the sustainability of current account deficits in transition economies in Central and Eastern Europe. These countries have experienced large current account imbalances in the transition to a market economy. We consider a wide range of macroeconomic factors that may indicate whether such imbalances are sustainable. We find that capital inflows and the choice of regimes of fixed exchange rates have led to a real exchange rate appreciation in many countries; this in turn has led to a significant loss of competitiveness and a worsening of the current account. In several countries there are a number of other indicators that point to a fragility of the external balance: weak banking and financial systems, large fiscal imbalances, low foreign reserves, increasing foreign debt and foreign debt-burden ratios. However, short-term portfolio investments (so-called hot money' inflows) are still relatively small in the transition economies examined, thus limiting the possibility of sudden speculative capital outflows.

Published: Skreb, M. and M. Blejer (eds.) Balance of Payments, Exchange Rates and Competitiveness in Transition Economies. 1999.

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