Are current account deficits sustainable in EAC countries? Evidence from threshold cointegration

The study examines the long-run relationship between exports and imports in East African Community (EAC) member states in order to test for the sustainability of current account deficits. The study adopts the threshold cointegration test advanced by Enders and Siklos (2001). The findings suggest that imports and exports are cointegrated for Burundi, Kenya and Uganda with a cointegrating coefficient which is less than 1, whereas for Rwanda and Tanzania they are not cointegrated. This would imply that the current account deficits are weakly sustainable for Burundi, Kenya and Uganda, but unsustainable for Rwanda and Tanzania. Since use of panel data has a number of advantages over pure time-series data, panel cointegration test suggested by Pedroni (1999, 2004) was also applied and the results indicate that exports and imports are cointegrated for the EAC countries as a panel with a cointegrating coefficient statistically equal to 1. However, caution is needed in interpreting panel data results, especially when heterogeneity dimension among the cross-sections is not taken into account. The findings of this paper highlight the need for EAC countries to put in place policies to reduce their current account deficits; for Rwanda and Tanzania, to regain their external stability and for the rest of the EAC countries, to reinforce the sustainability of current account deficits which was found to be weak.