Democratic Republic of São Tomé

The COVID-19 pandemic is having a severe impact on São Tomé and Príncipe’s economy, exacerbating fiscal and external imbalances. Tourism activities and external remittances dropped sharply, while lockdown measures further deepened the recession. The authorities’ swift actions and unprecedented international financial support are helping the country weather the emergency. The economy began to reopen in the fall, but the outlook for 2021 remains challenging and subject to significant uncertainty.

Tunisia

The pandemic aggravated Tunisia’s long-standing vulnerabilities stemming from persistent fiscal and external imbalances, rising debt, and contingent liabilities from inefficient state-owned enterprises. The crisis is expected to induce the largest contraction in real GDP since independence. The authorities’ targeted response together with higher outlays on wages widened the fiscal deficit. A second Covid-19 wave is underway. The authorities are securing 500,000 doses to start a first campaign of vaccinations in February and are aiming to secure more doses to vaccinate half of the population starting in April–May. Staff expects GDP growth to rebound modestly in 2021, but it could take years before activity returns to pre-crisis levels, especially if large imbalances were not addressed and key reforms delayed. Downside risks dominate and recent protests highlight the level of social tensions, aggravated by Covid-19 restrictions, and particularly among the youth.

Are the Current Account Imbalances on a Sustainable Path?

This paper examines the current accounts of 16 developed and developing countries over the period 1970 to 2018. We test whether these nations satisfy their intertemporal solvency condition for external imbalances. The solvency condition in the strong form entails: (1) a cointegration, or a long run equilibrium, relationship between exports and imports of goods and services; and (2) an increase in imports leading to a proportional increase in exports. Our findings imply that the external imbalances are a cause of vulnerability for several nations. Bangladesh satisfies the abovementioned solvency condition—in other words, its current account is sustainable in the strong form. Australia, Ecuador, Honduras, Mexico, New Zealand, and Venezuela show weak forms of sustainability. For these six nations, the presence of a cointegration relationship between exports and imports coincides with less than proportional increases in exports with increases in imports. The current accounts of Chile and Paraguay are unsustainable—while their exports and imports are cointegrated, a growth in imports leads to a more than proportional increase in exports. For a few nations that failed the full sample (1970–2018) cointegration test, we developed sub-samples by anchoring the start date at 1970 and increasing the sample by every five years from 1999 to 2014. From the sub-samples, we find evidence of intermittent, but weak, cases of sustainability for Peru and South Africa. We show that Panama’s current account became unsustainable after 2009. China’s current account satisfied the strong form of sustainability between all sub-samples until 2014 and became unsustainable in the most recent four years (2015–2018). France, the Philippines, and the United States unequivocally failed the intertemporal solvency test in the full sample and sub-sample analyses. The cointegration tests allow for structural breaks in exports and imports. We find these breaks have strong economic significance. For instance, we find that for most countries the structural break in exports coincides with their worst economic recession.

Twin Deficits: Evidence From Portugal, Italy, Spain and Greece

Since the mid-2000s, internal and external imbalances have increased in many EU countries. This contributed to the debate over whether government budget deficits affect current account deficits, known as twin deficits hypothesis. It implies that public debt is actually a burden for future taxpayers and thus a dangerous way for budget financing. Therefore, the fiscal measures implemented by policymakers may also affect the current account. This article tests the twin deficits hypothesis for Portugal, Italy, Spain and Greece for the period 1999–2017. The empirical analysis presented in the article finds evidence that strongly supports this hypothesis only for Italy and Greece. For Portugal and Spain, however, the evidence is quite weak.