The Extent, Excessiveness and Sustainability of Afghanistan’s Current Account

Abstract

This article empirically investigates the extent, excessiveness and sustainability of Afghanistan’s current account (CA) deficits using quarterly data from 2004-Q2 to 2019-Q4. The framework of this article is the intertemporal approach to the CA using the present value model. First, a descriptive analysis of Afghanistan’s CA is conducted. Next, a bivariate vector auto-regressive (VAR) model is applied to estimate the optimal CA of the economy, which can be compared to the actual one to determine how excessiveness the actual CA is relative to the optimal one. The Augmented Dickey-Fuller and Johnson co-integration tests are applied to examine the necessary and sufficient conditions for the sustainability of the CA. Findings indicate that Afghanistan’s actual CA deficits are excessive and too variant relative to the optimal one; therefore, the deficit is considered problematic. The empirical results further disclose that Afghanistan’s CA is unsustainable. The lack of co-integration between real net output and real private consumption and between exports and imports suggests that the unsustainability is mainly due to the weakness of domestic production in satisfying internal demand and the failure of real export volume to equilibrate the trade balance. Hence, this study recommends increasing the level of domestic output, and reduction in imports supported by improvements in saving rate, infrastructure and export to improve the CA. JEL Codes: F14, F32, F39, C22