Study on Determinants of Trade Deficit in Selected SAARC Countries: The Role of Infrastructure

Abstract

Purpose: Southern Asia economies, facing trade deficit in the last several years due to similar goods production and same export market, so there is a need to search out the way for trade reforms which affects the trade balance positively. The main purpose of this study is to examine the key determinants, most particularly the role of hard and soft infrastructure in trade deficit in South Asian for Regional Cooperation (SAARC) member economies. Methodology: The data were collected annual time series of 7 SAARC countries from 1990 to 2017. Different resources are used to collect data, like World development indicators, IMF and ICRG. This study applied several econometric tests, i.e., Panel Unit Root, panel-corrected standard error (PCSE), and Feasible Generalized Lease Square (FGLS). Finding: The econometric results show that the impact of aggregate infrastructure and all sub-indices (i.e., transport, telecommunication, energy and financial sector) on the trade deficit is positive and significant. The exchange rate's effect on the trade deficit is significant and negative while the financial deepening on trade is significant and negative. The impact of foreign direct investment (FDI) is negative and significant. The effect of domestic consumption on the trade deficit is positive and significant. Furthermore, the overall results recommended that the selected independent variables encourage exports and reduce the trade deficit in SAARC economies in the long run.