The sustainability of current account in the BRICS countries depends on economic policies’ support to structural adaptation

Abstract

This study undertakes a descriptively comprehensive and statistically robust assessment of the sustainability of current account (CA) and solvency of intertemporal budget constraint (IBC) in the BRICS countries. The long-run model estimated in one-regime setting with no structural break and in sample-split setting with multiple structural breaks provides dominant support to the sustainability of CA and solvency of IBC. The policy makers in the countries with surpluses in CA, such as China and Russia, need to manage upward pressure on domestic currency, encourage domestic investment, and seek opportunities for outward FDI. The central bank interventions in FOREX market, accompanied by both short-term portfolio and long-term direct investments overseas, would help relieve upward pressure on domestic currency and make productive use of foreign exchange reserves. The policy focus in the countries with deficits in CA, such as Brazil, India and South Africa, should be to accelerate productivity, boost exports, bolster saving, and implement fiscal consolidation to ensure the sustainability of CA and solvency of IBC.