Testing the Sustainability of Current Accounts for Major South Asian Economies: A Panel Data Approach

Abstract

The study assesses the sustainability of current accounts for the panel of five major South Asian economies, namely, India, Pakistan, Bangladesh, Sri Lanka and Nepal for the period 1985–2016. Towards this end, the intertemporal solvency model of Hakkio and Rush (1991) and Husted (1992) has been employed. The panel co-integration test by Westerlund (2007) confirms the long-run relationship between exports and imports but the estimates of the slope coefficient based on GM-FMOLS, GM-DOLS and CCEMG turn out to be less than one indicating the weak sustainability. The weak form of sustainability implies that current account inflows are not equally matched by the outflows underscoring the need for policy interventions. An analysis of the other fundamentals, however, reveals that the non-consumption-dominated import structure, increasing export diversification and broadly declining external debt stocks are welcome signs for the external sustainability of the region