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The Impact of Macroeconomic Indicators on the Balance of Payments: Empirical Evidence from Afghanistan

Author

Listed:
  • Abdul Hadi Sultani

    (Department of Economics, Kabul University, Kabul, Afghanistan2Department of Management Studies, Kannur University, Kannur 670661, India)

  • U. Faisal

    (Department of Management Studies, Kannur University, Kannur 670661, India)

Abstract

This study aims to empirically investigate the impact of a set of macroeconomic variables including balance of trade, FDI, exchange rate, and inflation on the balance of payments (BOP) of Afghanistan using quarterly data from the second quarter of 2004 to the fourth quarter of 2020 (2004Q2 to 2020Q4). The paper uses the Vector Error Correction Model (VECM), and Johansen co-integration test for analysis to explore the BOP of Afghanistan and provides comparable literature to other least-developed and low-income developing countries. The findings reveal that balance of trade (BOT), foreign direct investment (FDI), and exchange rate are significant determinants of Afghanistan’s BOP in the long run. More specifically, BOT and FDI positively impact the BOP, whereas the effect of the exchange rate on the BOP is found negative. Yet, inflation has an insignificant impact on the BOP. Though all variables have an insignificant impact on the BOP in the short run, the relevant policy measures ought to consider improvement in BOT, promoting FDI, and exchange rate stability to ensure synchronized improved BOP and economic growth.

Suggested Citation

  • Abdul Hadi Sultani & U. Faisal, 2023. "The Impact of Macroeconomic Indicators on the Balance of Payments: Empirical Evidence from Afghanistan," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 1-29, June.
    • Handle: RePEc:wsi:afexxx:v:18:y:2023:i:02:n:s2010495222500324
    DOI: 10.1142/S2010495222500324
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    More about this item

    Keywords

    Balance of payments; external balance; exchange rate; FDI; trade balance; VECM; Afghanistan;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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