Scenarios for the Sustainability of the Current Account

In the absence of adjustment in the underlying fundamentals for current account sustainability (FDI, energy bill, EU grants, domestic demand), changes in the exchange rate is the other possible adjustment mechanism for maintaining long-run sustainability of the current account.
Depreciation of the RER increases exports and decreases imports via the direct RER effect.
But depreciation of the RER also contain the growth in domestic aggregate demand, and thus limit import growth and help restore the sustainability of the current account through this more indirect channel.

In the absence of adjustment in the underlying fundamentals for current account sustainability (FDI, energy bill, EU grants, domestic demand), changes in the exchange rate is the other possible adjustment mechanism for maintaining long-run sustainability of the current account.