Exploring the dynamics of the balance of payments problems: the case of Afghanistan

Abdul Hadi Sultani () and U. Faisal
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Abdul Hadi Sultani: Kabul University
U. Faisal: Kannur University

International Economics and Economic Policy, 2024, vol. 21, issue 3, No 2, 569-592

Abstract: Abstract This study analyzes the size, behavior, and responsible factors behind the balance of payments (BOP) problems in Afghanistan from 2004 to 2020. Since the impact of the real indicators on the BOP of Afghanistan still remains unexplored, this article comprehensively analyzes the primary responsible factors for the BOP problems in Afghanistan. First, a comprehensive critical analysis of the BOP and its components is performed. Second, the autoregressive distributed lag (ARDL) model is conducted to empirically scrutinize the influence of fiscal policy variables like government spending (GEX), tax on international trade (TIT), external debt (EXD), and GDP on the BOP. The empirical results revealed that GDP has a significantly positive impact on Afghanistan’s BOP in the long run, whereas the influence of GEX on the BOP is significantly negative. Furthermore, it was found that TIT and EXD have insignificant association with BOP. Although there is a meaningful convergence towards long-run equilibrium with an adjustment speed of 94.95% in each period, none of the covariates has a significant effect on the BOP in the short run. Furthermore, the Granger causality test exposed a bidirectional causality between GEX and BOP and a one-way causation from GDP to BOP. The study recommends structural changes in the economy to increase domestic production and improvements in the composition and direction of exports and imports, redirect government spending in favor of domestic producers, and source external debt with improved debt conditions.

Keywords: Balance of payments; Current account; Capital account; Trade balance; Fiscal policy; External debt (search for similar items in EconPapers)
JEL-codes: F1 F14 F32 O24 O53 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10368-024-00613-z

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