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The determinants of trade deficit in Afghanistan: the role of foreign aid, exchange rate and price level

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  • Mohammad Walid Hemat

    (Eskisehir Osmangazi University)

Abstract

Afghanistan has been facing a rising trade deficit over the past two decades, influencing many macroeconomic variables, including the general price level, economic growth, and unemployment. Meanwhile, during this period, the country witnessed a huge influx of foreign development assistance from international donors and communities, which played an important role in the reconstruction and socio-economic development of this country. The concomitant trends of the trade deficit and foreign aid prompt inquiries about whether foreign aid has played a role in exacerbating the trade deficit in this country, as well as other contributing factors. This paper is motivated to examine the determinants of the trade deficit in Afghanistan. In this paper, several demand-side determinants of the trade deficit have been investigated using the Autoregressive Distributed Lag (ARDL) technique. The findings of this study suggest that the exchange rate, inflation, and foreign aid have long-run co-integration with the trade deficit, and GDP has a short-run nexus for the same. The coefficients of all variables are highly significant in the short and long runs. The diagnostic tests reject the existence of any type of specification problem. The paper also suggests that management of the demand-side factors is important for the improvement of the trade balance in Afghanistan; however, the nullification of the supply-side bottlenecks is a more appropriate solution in the long run.

Suggested Citation

  • Mohammad Walid Hemat, 2024. "The determinants of trade deficit in Afghanistan: the role of foreign aid, exchange rate and price level," SN Business & Economics, Springer, vol. 4(11), pages 1-20, November.
    • Handle: RePEc:spr:snbeco:v:4:y:2024:i:11:d:10.1007_s43546-024-00735-1
    DOI: 10.1007/s43546-024-00735-1
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