Testing the Sustainability of Current Account Deficits in Developing Economies: Evidence from Egypt, Morocco, and Tunisia

Sustaining balanced current accounts is a tremendous challenge that faces many developing countries. The growing gap between burgeoning imports for domestic consumption and investment needs and exports from uncompetitive export sectors in many of these countries usually generate current account deficits. This paper tests the long-run sustainability of current account deficits in Egypt, Morocco and Tunisia using the bounds testing approach to cointegration. While the bounds test detects cointegration between exports and imports in three countries, the estimated coefficients of imports variables are correctly signed and statistically significant only in cases of Egypt and Tunisia. Additionally, the null hypothesis of unity coefficient of imports variable is strongly rejected in cases of Egypt and Morocco, suggesting that current account deficits are unsustainable in these two countries. The implication is that countries that violate their long-run intertemporal budget constraints may face painful adjustments in their economies that can result either in sudden exchange rate crisis or foreign debt accumulation.