SOURCES OF COVERING AND SUSTAINABILITY OF THE CURRENT TRANSACTIONS DEFICIT IN THE TRANSITION COUNTRIES - EXPERIENCE OF SERBIA

Abstract

This paper analyzes current account (CA) deficit in transition countries of the Central Eastern Europe (CEE), Baltic countries, and South-Eastern Europe (SEE). In spite of expectation that changes of production and trade structure would lead to the reduction of trade account deficit this has not realized. The current account deficits in SEE are particularly large in comparison to CEE countries. We argue that foreign direct investment (FDI) is an important source for covering of CA deficit. Besides that, the external deficits are still sizeable across most of the region, so there arises the question how long it is possible to use FDI to cover the CA deficit. Because of that, the frequent question is how much the CA deficits are dangerous? The major finding of the study is that CA deficit in SEE has increased in recent period, and that FDI are an important source for financing of the deficit. The paper concludes that the future of the CA deficit sustainability depends on the FDI inflow and possibility of additional external indebtedness. These findings are also related to CA deficit in Serbia.