Bangladesh Bank Training Academy Journal

Abstract

This study examines how external balances behave in stressed economic environments. Using data from eight South Asian economies (1990-2024), we apply panel-data regression methods to test whether fiscal pressures and capital inflows affect the current account and whether these effects differ during crises. The results point to three key insights. First, external balances react more strongly to trade conditions than to fiscal pressure, as the fiscal indicator shows little influence across models. Second, changes in income matter: higher GDP per capita tends to weaken the current account in the short run but supports improvement over time as economies become more productive. Third, remittances consistently support the external balance, whereas foreign direct investment (FDI) exerts persistent pressure on the current account in both the short- and long- run. Overall, adjustment is slow; only about 15 percent of a current account imbalance corrects itself within a year, indicating that external vulnerabilities can linger. In sum, the findings suggest that structural factors and crisis exposure shape trajectories of external balance in stressed environments. This highlights the need for broader, resilience-focused macroeconomic policies.