Current account sustainability in Middle East and Africa (MEA) countries: Evidence from panel data

Countries in the Middle East and Africa (MEA) have diverse economic structures. Some countries are oil exporters, some are oil importers and some countries are very poor, dependent on agriculture. Since current account is an important indicator of an economy’s health, it is of interest to examine if current account balances in MEA region are sustainable. However, empirical research paid scant attention to this issue. No study has been conducted before to examine this issue. The present paper makes an attempt to fill this research gap by employing panel data model over the period from 1995 to 2014 to examine current account sustainability in MEA countries. We follow intertemporal budget constraint approach and examine long-run relationship between export and import plus interest on net foreign debt. As we work with panel data, we pay special attention to cross-section dependence. We use annual data collected from World Development Indicators. All data (exports, imports and interest on long-term external borrowing) are in current US dollar and expressed as percentage of GDP. Interest payment on long-term external borrowing (also in current US dollar) is used as a proxy for interest on net foreign debt. Panel unit root test to cross-section dependence indicate variables are first-difference stationary. We next use panel cointegration and bootstrap critical values under null hypothesis to accommodate cross-section dependence. Panel cointegration result suggests that current account is sustainable. However, panel cointegrating regression estimation indicates that the value of sustainability coefficient is less than 1 (one), which implies that current account is weakly sustainable. As current account is weakly sustainable, it is desirable to make policy intervention at macro level to ensure strong sustainability. This may be achieved by accelerating ongoing trade reforms in MEA countries to boost export earnings and hence ensure the sustainability of external debt in the long run.