An Empirical Analysis of Determinants of Balance of Payments in Pakistan

This study examines the main determinants of balance of payments for Pakistan and annual Time series data for the period 1981-2016 is analyzed. The study employs bounds testing approach to cointegration in auto regressive distributed lags framework. The factors as Money supply, domestic credit, exchange rate, and gross domestic product are incorporated in the model to check the claim of monetary and Keynesian approaches to balance of payments in Pakistan. Whereas foreign direct investment is included on the basis of a few empirical studies that have found significant association between balance of payments and foreign direct investment. The investigation reveals a long-run association in the model. Negative as well as highly significant value of coefficient with error correction term shows that convergence to equilibrium will take place within one year time period. However, Money supply and Gross domestic products are proved to be significant factors causing fluctuations in balance of payments in the long-run. Whereas remaining variables including real effective exchange rate are ineffective in determining the balance of payments in Pakistan. The study concludes that monetary approach seems to be dominant in Pakistan and effective monetary policy is required to correct disequilibrium in balance of payments.