Pakistan Institute of Development Economics



The Current Account Deficit Sustainability: An EmpiricalInvestigation for Pakistan

The existence of large and persistent current account deficitis always viewed with great concerns, as it usually leads an economy toa state of insolvency due to building up excessive net foreign debt. Asthe current account deficit is a persistent feature of Pakistan’seconomy, therefore, it becomes essential to empirically investigate,whether this deficit is sustainable or not. To this end, the presentstudy has applied two alternative approaches, namely, the intertemporalapproach to the current account and the intertemporal solvency approach,in order to get more convincing evidence on the sustainability issue inPakistan using the time series data over the period 1960 to 2012. Fromthe perspective of both the approaches, Pakistan’s current accountdeficit is on a sustainable path and the macroeconomic policies of thecountry remained effective in securing it from any external sectorcrisis. JEL Classification: C32, F32, F41 Keywords: Current AccountDeficit, Intertemporal Budget Constraint, VAR Model,Cointegration

Tahir Mukhtar,

Aliya H. Khan