THE IMPACT OF FOREIGN REMITTANCES, FOREIGN DIRECT INVESTMENT AND EXCHANGE RATE ON PAKISTAN ECONOMY

Abstract

Research Purpose: This research aim to find the impact of foreign remittances on Pakistan’s economy. The study helps to understand the implications of remittances due to increase in the remittances and their contribution in the GDP of Pakistan. Methodology: 43 years of time series data is taken from 1973 to 2016 which is collected from the website of State Bank of Pakistan and from World Development Indicators. Remittances, Foreign Direct Investment and Exchange rate are selected as independent variables while Gross Domestic Product is selected as dependent variable. The model used to analyze the data is Autoregressive Distributed Lag (ARDL). Stationarity level of the data is analyzed by Augmented Dickey-Fuller (ADF) test. To check the stability of the model, serial correlation, hetroskedasticity, CUSUM and multicollinearity tests are also applied. Findings: The findings of the research shows that a positive and significant relationship of foreign remittances and FDI on GDP exists in the long run while in the short run the remittances effect is positive but insignificant. The impact of FDI in the short run has positive and significant on GDP. The impact of exchange rate on GDP is negative but insignificant in both long run and short run. Practical Implications: Remittances inflows are increasing year after year which is large source of foreign exchange after foreign direct investment. The remittances increases the household income and increase the standard of living of recipients eliminating the poverty. It also provides investment opportunities for the recipients. Remittances helps to stabilize the exchange rate and minimize the current deficit.