An analysis of Pakistan's vulnerability to economic crisis

The objective of this study is to analyse the vulnerability of Pakistan's economy to crisis by evaluating the sustainability of its external and fiscal positions in the recent past. Following the emergence of current account deficits and fiscal imbalances in the last two fiscal years, scepticism about the sustainability of these fundamentals has grown. Therefore, this study uses Masson's (1999) model of contagion to find the degree of susceptibility of Pakistan's economy to crisis through assessing its external position, and Bohn's (1998) fiscal sustainability regressions to evaluate its fiscal position. Our findings are that the Pakistani fundamentals do not present an adverse scenario as its external balances signal low probability of crisis and its fiscal balances have remained sustainable both in the long run and in the recent past.