KARACHI - The long-term current account sustainability indicators of Pakistan have been showing signs of weakness for the last eight years, which caused the current account deficit to remain above the level of 5 per cent of GDP. Countrys key indicators of current account sustainability, provided by SBP revealed that since FY02, compared to size of economy Pakistans exports are lowest while savings are only second to lowest in FY09. Similarly, external investment and external debt indicators have also deteriorated in FY09. According to a study, large and persistent current account deficit is always a cause of concern as it may threaten external viability by leading to change rate or foreign debt crises. In this regard, there is no simple rule to decide whether current account deficit is sustainable or not. However, various authors have identified saving and investment ratio, growth rate of output, openness ratio of export to GDP, composition and size of capital flows and exchange rate flexibility& policy as important indicators which help in assessing the current account sustainability. Saving and investment ratio: In the light of twin deficit identity, current account deficit can emerge from either a fall in saving or increase in investment. Current account deficit is less worrisome when it is used to finance investment rather than consumption (lower saving). Higher investment enhances the productive capacity of the economy which can be used to service the foreign debt. Moreover, current account deficit caused by the large and persistent structural fiscal deficit (public saving investment gap) is dangerous than one caused by private saving investment gap as it may result in unsustainable build up of external debt as decrease in private saving is temporary. Expectations of high GDP growth may lead people to increase their current consumption temporarily; but the savings rate generally recovers in future once the increase in income is realized. Growth rate of output: In rapidly growing economies, widening current account deficit is less problematic. As higher growth rate make the country more reliable to service its external debt. From Folkerts-Landu, (2000) perspective, country can generate current account deficit while maintaining stable ratio of net foreign liabilities to GDP. To maintain this ratio constant, GDP growth rate should be proportional to accumulation of net foreign liabilities. Ability of a country to sustain current account deficit also weakens with a narrow export base. It is relatively easy for a country to service its debt with higher export to GDP ratio. Current account deficit financed from foreign direct investment and official creditors is more sustainable than those financed portfolio and short term private inflows which are vulnerable to changes in market conditions. Moreover, maturity structure, currency composition and interest rate structure of the debt also matter in the sustainability of current account deficit. For instance, short term maturities and variable interest rates are vulnerable to various shocks and make the current account deficit less sustainable. Exchange rate flexibility and policy: Sustainability of current account deficit also depends on the degree of flexibility of exchange rate. The deficit is more sustainable in the countries where exchange rate adjusts to new fundamentals in case of external shocks. On the other hand, rigid exchange rate regimes usually lead to speculative attacks that precipitate external crisis. It is generally believed that close attention should be paid to any current account deficit in access of 5 per cent of GDP, particularly if it is financed in a way that can cause reversal.