Current account deficits in Africa: Stylized facts and basic determinants

In this study we had two objectives. First, to understand the key determinants of current account deficits in Africa and how they compare with those of the developing world, and, second, to assess whether such current account deficits are "excessive," defined as the difference between the actual and estimated fitted values obtained. On the first front, we show that for several keydeterminants Africa is, indeed, different. Specifically, we find that with respect to the African countries, (a) there is not as much persistence in current account deficits as in the full sample of developing countries, probably because the chances of reversals are greater; (b) unlike in the full sample of developing countries, domestic output growth is positively linked with current account deficits, possibly as a result of differences in income elasticity; (c) the impact of private savings on current account deficits is larger than in other regions, which is consistent with the idea that increases in consumption in Africa may be financed by foreign inflows to a larger extent; (d) fiscal consolidation of IMF-designed programs may be more effective than elsewhere as the impact of public savings on the current account deficit is larger in Africa than in the average developing country; the larger the debt level, the stronger the fiscal impact; (e) macroeconomic uncertainty, openness, and balance of payment controls are not statistically significant; (f) the high level of debt appears to signal the need for adjustment; (g) aid flows help close the external gap; (h) unlike in the average developing country, a depreciation of the currency reduces the current account deficit, at least in the short run; and (i) the impact of the terms of trade is consistent with the Harberger-Laursen-Metzler effect. Based on the findings of the first section, we are able to calculate whether the current account deficit in Africa is "excessive" with respect to the fundamentals, as estimated from the full sample of developing countries. In fact, we conclude that the current account deficit is almost 3% of the gross national disposable income above the equilibrium level. Both internal conditions and global changes in the world economy have helped reduce the external gap, but it appears that much of the current account deficit imbalance with respect to equilibrium is country specific. Our findings above open at least one possible path for future research. Since we have used annual data for the period 1975-95, we have mostly captured the transitory "short-run" effects of changes in policy variables. We cannot say much about permanent, long-run effects that deal with current account sustainability. The obvious question is to ask whether Africa is also different with respect to permanent effects, not justtransitory shocks. If so, a key issue is to investigate whether the long-run current account deficit is "excessive" or not.