How sustainable are external imbalances in selected transition countries?

The main aim of the article is to examine the issue of 'current account sustainability' in selected transition countries. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, as part of strengthening the growth prospective and external positions a rapid entrance into the European Union (EU) and into the Economic and Monetary Union (EMU), together with the further promotion of FDI and a prudent fiscal policy should become necessary elements of the economic policy created in the region. In the end, the results indicate that current account deficits of transition countries that exceed 5 per cent of GDP generally involve problems of their external sustainability.