Exploring the Impact of Remittances on Pakistan's Current Account Deficit: An Empirical Analysis

Abstract

This research aims to examine the relationship between remittances and the current account deficit in Pakistan from 1985 to 2022. he findings reveal mixed results regarding the factors influencing the deficit. While government expenditures and inflation rates do not have statistically significant relationships, merchandized imports are found to have a positive and significant impact. This underscores the importance of effectively controlling imports as a key policy focus. The study also highlights the negative relationships between the exchange rate, remittances, and the current account deficit, albeit without statistical significance. Policymakers should closely monitor these variables, as they may indirectly influence the deficit. The analysis further emphasizes the significance of fiscal discipline, with lagged government expenditures shown to have a significant negative impact on the deficit. Moreover, the presence of an error correction mechanism suggests the need to maintain a long-term equilibrium in the external balance. These insights provide a foundation for policymakers to develop strategies that effectively address Pakistan's current account deficit, promote economic stability, and ensure sustainable external balances.