II Current Account Developments

Donal McGettigan

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Author: Mr. Donal McGettigan

Language:: English

Keywords:: OP; deficit; debt; debt stock ratio; GDP ratio; imbalance; debt positions of the Baltic; debt indicator; trade balances of the Baltic; debt situation; transition economy; Foreign direct investment; Current account deficits; Current account surpluses; Current account balance; Baltics

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Abstract

Current account developments in the Baltics, Russia, and other countries of the former Soviet Union since independence are covered comprehensively in Kapur and van der Mensbrugghe (1997).6 This section highlights the main features of such developments as a backdrop to the analysis of current account sustainability indicators in these countries. Many issues raised in this section are covered in more depth in Section III, where individual indicators are examined.

Current account developments in the Baltics, Russia, and other countries of the former Soviet Union since independence are covered comprehensively in Kapur and van der Mensbrugghe (1997).⁶ This section highlights the main features of such developments as a backdrop to the analysis of current account sustainability indicators in these countries. Many issues raised in this section are covered in more depth in Section III, where individual indicators are examined.

Transition economies have experienced very large declines in real output and consumption since independence. Output growth has already resumed, however, in those countries that have successfully embarked upon necessary reforms, and the potential for future output growth over the medium term is high. Furthermore, all of these countries generally have low savings rates relative to GDP (as will be shown later in Table 3.6), while, simultaneously, investment needs during transition are high.⁷ Such conditions suggest that running current account deficits, both for the purposes of smoothing consumption over time and financing much-needed capital projects, may be optimal from a welfare viewpoint in these countries in the early stages of transition. Such deficits could be offset at a later stage in the transition process by running current account surpluses.

Table 2.1 presents details of the current account and trade balances of the Baltics, Russia, and other countries of the former Soviet Union as a percentage of GDP over the period 1993–97. High current account deficits have been registered throughout the period, with a median deficit of 6.6 percent recorded in 1997.⁸ Russia is the main exception to the rule in that it has been running a small current account surplus since 1993, except for a very small deficit in 1997.⁹

Table 2.1.

Current Account and Trade Balances

(In percent of GDP)

Sources: Data provided by national authorities; and IMF staff estimates

Table 2.1.

Current Account and Trade Balances

(In percent of GDP)

		1993	1994	1995	1996	1997
Current Account Balance
	Armenia	…	0.9	−18.1	−15.6	−19.5
	Azerbaijan	−12.2	−9.3	−13.2	−25.5	−23.7
	Belarus	−30.4	−13.2	−2.4	−3.6	−6.0
	Estonia	1.4	−7.4	−5.1	−9.7	−12.9
	Georgia	−30.6	−22.3	−7.6	−6.0	−6.6
	Kazakhstan	−3.0	−7.7	−3.1	−3.6	−4.0
	Kyrgyz Republic	−12.2	−11.2	−16.3	−23.5	−8.2
	Latvia	−14.5	−0.2	−3.4	−4.0	−5.0
	Lithuania	−3.2	−2.2	−10.2	−9.1	−10.3
	Moldova	−13.4	−7.3	−6.8	−10.8	−14.0
	Russia	3.2	3.8	1.3	0.6	−0.1
	Tajikistan	−30.7	−20.6	−8.8	−7.4	−5.5
	Turkmenistan	20.0	2.0	0.9	2.0	−32.0
	Ukraine	−6.1	−5.8	−4.1	−2.7	−3.3
	Uzbekistan	−7.8	2.1	−0.2	−7.2	−4.0
	Mean	…	−6.6	−6.5	−8.4	−10.3
	Median	…	−7.3	−5.1	−7.2	−6.6
Trade Balance
	Armenia	−22.8	−29.0	−31.2	−29.5	−34.4
	Azerbaijan	…	−12.5	−11.4	−17.3	−14.7
	Belarus	−28.7	−14.6	−5.1	−8.3	−10.1
	Estonia	−8.6	−15.5	−19.2	−24.0	−25.1
	Georgia	−45.4	−33.1	−11.7	−7.7	−9.3
	Kazakhstan	2.7	−7.9	−1.3	−1.6	−1.7
	Kyrgyz Republic	−11.7	−10.8	−12.0	−13.9	−0.9
	Latvia	−0.1	−8.2	−12.3	−14.9	−14.6
	Lithuania	−5.3	−4.8	−11.6	−11.4	−12.0
	Moldova	−13.3	−3.7	−3.2	−12.1	−17.5
	Russia	1.7	7.6	5.0	3.8	3.1
	Tajikistan	−34.0	−21.3	−6.5	−3.5	−5.9
	Turkmenistan	28.2	6.7	17.5	8.2	−13.3
	Ukraine	−6.5	−5.5	−3.3	−2.5	−4.1
	Uzbekistan	−6.9	3.8	−2.4	−5.2	−5.0
	Mean	…	−9.9	−7.2	−9.3	−11.0
	Median	…	−8.2	−6.5	−8.3	−10.1

Sources: Data provided by national authorities; and IMF staff estimates

Table 2.1.

Current Account and Trade Balances

(In percent of GDP)

		1993	1994	1995	1996	1997
Current Account Balance
	Armenia	…	0.9	−18.1	−15.6	−19.5
	Azerbaijan	−12.2	−9.3	−13.2	−25.5	−23.7
	Belarus	−30.4	−13.2	−2.4	−3.6	−6.0
	Estonia	1.4	−7.4	−5.1	−9.7	−12.9
	Georgia	−30.6	−22.3	−7.6	−6.0	−6.6
	Kazakhstan	−3.0	−7.7	−3.1	−3.6	−4.0
	Kyrgyz Republic	−12.2	−11.2	−16.3	−23.5	−8.2
	Latvia	−14.5	−0.2	−3.4	−4.0	−5.0
	Lithuania	−3.2	−2.2	−10.2	−9.1	−10.3
	Moldova	−13.4	−7.3	−6.8	−10.8	−14.0
	Russia	3.2	3.8	1.3	0.6	−0.1
	Tajikistan	−30.7	−20.6	−8.8	−7.4	−5.5
	Turkmenistan	20.0	2.0	0.9	2.0	−32.0
	Ukraine	−6.1	−5.8	−4.1	−2.7	−3.3
	Uzbekistan	−7.8	2.1	−0.2	−7.2	−4.0
	Mean	…	−6.6	−6.5	−8.4	−10.3
	Median	…	−7.3	−5.1	−7.2	−6.6
Trade Balance
	Armenia	−22.8	−29.0	−31.2	−29.5	−34.4
	Azerbaijan	…	−12.5	−11.4	−17.3	−14.7
	Belarus	−28.7	−14.6	−5.1	−8.3	−10.1
	Estonia	−8.6	−15.5	−19.2	−24.0	−25.1
	Georgia	−45.4	−33.1	−11.7	−7.7	−9.3
	Kazakhstan	2.7	−7.9	−1.3	−1.6	−1.7
	Kyrgyz Republic	−11.7	−10.8	−12.0	−13.9	−0.9
	Latvia	−0.1	−8.2	−12.3	−14.9	−14.6
	Lithuania	−5.3	−4.8	−11.6	−11.4	−12.0
	Moldova	−13.3	−3.7	−3.2	−12.1	−17.5
	Russia	1.7	7.6	5.0	3.8	3.1
	Tajikistan	−34.0	−21.3	−6.5	−3.5	−5.9
	Turkmenistan	28.2	6.7	17.5	8.2	−13.3
	Ukraine	−6.5	−5.5	−3.3	−2.5	−4.1
	Uzbekistan	−6.9	3.8	−2.4	−5.2	−5.0
	Mean	…	−9.9	−7.2	−9.3	−11.0
	Median	…	−8.2	−6.5	−8.3	−10.1

Sources: Data provided by national authorities; and IMF staff estimates

Although the external debt burden of most of these countries is generally not very high relative to GDP, ¹⁰ it has increased significantly since independence for most of them, reflecting the above current account imbalances (Table 2.2).¹¹ For example, although the mean external debt/GDP ratio was only 24.9 percent in 1993,¹² it stood at 30.2 percent in 1997. This rise masks, however, a more subtle underlying picture of the evolving debt situation. Although debt/GDP ratios jumped very sharply over the period 1993–94 (increasing to a mean value of 31.6 percent from 24.9 percent), they have not risen since then.¹³ Section III shows that real exchange rates in most of these countries have appreciated sharply since 1994. It explains how this real appreciation, together with any economic growth that has occurred, has served to keep the debt-to-GDP ratios stable since 1994. despite very large current account deficits throughout the period. Debt forgiveness has also played a role in keeping the debt-to-GDP ratios lower than otherwise would be the case in certain instances.

Table 2.2.

External Debt

(In percent of GDP)

Sources: Data provided by national authorities; and IMF staff estimates.

Table 2.2.

External Debt

(In percent of GDP)

	1993	1994	1995	1996	1997
Armenia	14.5	30.8	29.1	36.2	45.1
Azerbaijan	…	…	15.1	15.4	10.4
Belarus	27.7	25.7	14.6	6.8	6.9
Estonia	4.8	4.9	5.2	4.4	4.0
Georgia	47.1	76.9	38.6	25.8	24.3
Kazakhstan	9.2	16.6	14.3	14.4	16.2
Kyrgyz Republic	30.0	37.4	39.3	41.7	57.9
Latvia	…	6.4	8.5	7.7	6.4
Lithuania	11.6	11.9	14.6	16.6	15.4
Moldova	18.9	43.8	43.1	48.0	54.7
Russia	61.3	43.0	28.2	22.2	27.5
Tajikistan	63.5	74.2	153.6	69.9	68.4
Turkmenistan	3.3	26.1	20.8	31.5	73.8
Ukraine	12.9	27.7	23.6	21.2	23.8
Uzbekistan	18.9	17.0	17.5	17.1	18.0
Mean	24.9	31.6	31.1	25.2	30.2
Median	18.9	26.9	20.8	21.2	23.8

Sources: Data provided by national authorities; and IMF staff estimates.

Table 2.2.

External Debt

(In percent of GDP)

	1993	1994	1995	1996	1997
Armenia	14.5	30.8	29.1	36.2	45.1
Azerbaijan	…	…	15.1	15.4	10.4
Belarus	27.7	25.7	14.6	6.8	6.9
Estonia	4.8	4.9	5.2	4.4	4.0
Georgia	47.1	76.9	38.6	25.8	24.3
Kazakhstan	9.2	16.6	14.3	14.4	16.2
Kyrgyz Republic	30.0	37.4	39.3	41.7	57.9
Latvia	…	6.4	8.5	7.7	6.4
Lithuania	11.6	11.9	14.6	16.6	15.4
Moldova	18.9	43.8	43.1	48.0	54.7
Russia	61.3	43.0	28.2	22.2	27.5
Tajikistan	63.5	74.2	153.6	69.9	68.4
Turkmenistan	3.3	26.1	20.8	31.5	73.8
Ukraine	12.9	27.7	23.6	21.2	23.8
Uzbekistan	18.9	17.0	17.5	17.1	18.0
Mean	24.9	31.6	31.1	25.2	30.2
Median	18.9	26.9	20.8	21.2	23.8

Sources: Data provided by national authorities; and IMF staff estimates.

While much of the external financing for the Baltics, Russia, and other countries of the former Soviet Union has been made up of official disbursements, grants, and rescheduling of debt, both private capital flows and foreign direct investment have been increasing rapidly in relative importance in recent years. For instance, although for 1993 only 8 percent of total external financing in these countries was in the form of private capital flows, this figure stood at 36 percent in 1997. In comparison, foreign direct investment has increased its share of financing to 24 percent of the total from 1 percent over the same time period (Table 2.3).¹⁴ For countries more advanced in the transition process, such as the Baltics, the move toward private financing has been more pronounced,¹⁵ although the recent Asian crisis has muted such developments since late 1997. Countries less advanced in the transition process are likely to continue to rely overwhelmingly on official disbursements and grants in the medium term.¹⁶ For further details of the composition of capital flows to the Baltics. Russia, and other countries of the former Soviet Union, see EBRD (1997).

Table 2.3.

Sources of External Financing

Sources: Table 2 from Kapur and van der Mensbrugghe (1997); additional data provided by national authorities; and IMF staff estimates.

Table 2.3.

Sources of External Financing

	1993	1994	1995	1996	1997	1993–97
		(In millions of U.S. dollors)
Total	28,350	38,079	56,399	39,732	45,006	207,547
Official disbursements	4,984	4,822	7,173	8,873	10,230	36,082
Grants	3,140	2,750	2,862	843	2,384	11,979
Private capital	2,176	1,314	7,559	7,354	16,050	34,453
Foreign direct investment	316	1,439	1,830	5,135	11,013	19,733
Debt rescheduling	10,222	13,974	26,561	9,522	1,818	62,097
Accumulation of arrears	1,617	5,905	1,157	494	5	9,178
Drawdown of official reserves	0	4,135	353	1,786	505	6,779
Use of IMF credit net	1,822	2,373	7,503	4,144	2,000	17,842
Errors and omissions	4,073	1,367	1,401	1,562	1,002	9,405
			(As percent of total)
Total	100	100	100	100	100	100
Official disbursements	18	13	13	22	23	17
Grants	11	7	5	2	5	6
Private capital	8	3	13	19	36	17
Foreign direct investment	1	4	3	13	24	10
Debt rescheduling	36	37	47	24	4	30
Accumulation of arrears	6	16	2	1	0	4
Drawdown of official reserves	0	11	1	4	1	3
Use of IMF credit net	6	6	13	10	4	9
Errors and omissions	14	4	2	4	2	5

Sources: Table 2 from Kapur and van der Mensbrugghe (1997); additional data provided by national authorities; and IMF staff estimates.

Table 2.3.

Sources of External Financing

	1993	1994	1995	1996	1997	1993–97
		(In millions of U.S. dollors)
Total	28,350	38,079	56,399	39,732	45,006	207,547
Official disbursements	4,984	4,822	7,173	8,873	10,230	36,082
Grants	3,140	2,750	2,862	843	2,384	11,979
Private capital	2,176	1,314	7,559	7,354	16,050	34,453
Foreign direct investment	316	1,439	1,830	5,135	11,013	19,733
Debt rescheduling	10,222	13,974	26,561	9,522	1,818	62,097
Accumulation of arrears	1,617	5,905	1,157	494	5	9,178
Drawdown of official reserves	0	4,135	353	1,786	505	6,779
Use of IMF credit net	1,822	2,373	7,503	4,144	2,000	17,842
Errors and omissions	4,073	1,367	1,401	1,562	1,002	9,405
			(As percent of total)
Total	100	100	100	100	100	100
Official disbursements	18	13	13	22	23	17
Grants	11	7	5	2	5	6
Private capital	8	3	13	19	36	17
Foreign direct investment	1	4	3	13	24	10
Debt rescheduling	36	37	47	24	4	30
Accumulation of arrears	6	16	2	1	0	4
Drawdown of official reserves	0	11	1	4	1	3
Use of IMF credit net	6	6	13	10	4	9
Errors and omissions	14	4	2	4	2	5

Sources: Table 2 from Kapur and van der Mensbrugghe (1997); additional data provided by national authorities; and IMF staff estimates.

An unusual feature of the debt in this group of countries is that the overwhelming majority of it is owed by governments. Given the many competing expenditure needs in transition economies, together with declining revenue performance in many of them, the budgetary implications of the debt positions of the Baltics, Russia, and other countries of the former Soviet Union are of central importance. Accordingly, there is a need to focus on a variety of fiscal indicators when analyzing this debt.

Finally, much of the debt appears to have been contracted on an ad hoc basis. This factor, combined with the relatively short maturity of much of the debt, leads to the danger that there may be a bunching of large debt-service obligations over the coming years. Accordingly, the composition of debt indicators, together with expected repayment schedules, should form an important part of any analysis of each individual country’s external debt situation.

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