IMPACT OF FISCAL DEFICIT, EXCHANGE RATE AND FDI ON CURRENT ACCOUNT DEFICIT

Abstract

Purpose: The aim ofthe study is to identify the impact of fiscal deficit and exchange rate on current account deficit. Methodology and Design: This is an explanatory Time-Series study. Contribution of budget deficit and exchange rate in current account deficit is explored using ARDL bound test model in the context ofPakistan. Annual data is used in this study, covering the period from 1991 to 2020. Empirical investigations are executed by employing E-Views. Findings of the study: Regression analysis shows that Fiscal deficit has positive impact on current account deficit but insignificant in long run. Foreign direct investment and real effective exchange rate exerted significant positive impact on current account deficit. Coefficient of interest rate is positive but insignificant in the long run. Limitations: Important variables are missing for institutional governance this will improve the worth ofthe study. Recommendation: The current study discovered that exchange rate is the key variable which positively affectsthe current account deficit. Similarly, fiscal deficitshows positive association with current account deficit but insignificant in long run. The following recommendations are proposed on the basis of current findings and literature review. To improve the trade deficit efforts should be made by increasing exports through improving the quality of products and by exploring new international avenues. To curtail imports, import substitute industry must be installed that will lead to reduce current account deficit.