106 Paradigms Print ISSN 1996-2800, Online ISSN 2410-0854 2019, Vol. 13, No. 1 Page 106-112 DOI: 10.24312/1800092130116 Macroeconomic Determinants of Current Account in South-Asian Countries Fareeha Riaz 1 , Attiya Yasmin Javid 2 , Fauzia Mubarik 3 National University of Modern Languages Islamabad 1 , Pakistan Institute of Development Economics 2 , Islamabad, Pakistan, National University of Modern Languages, Islamabad, Pakistan 3 Corresponding Author: fmubarik@numl.edu.pk Cite this paper: Riaz, F., Javid, A. Y., & Mubarik, F. (2019). Macroeconomic determinants of current account in South-Asian countries. Paradigms, 13(1), 103-108. This paper empirically investigates the impact of Net Foreign Assets-NFA, Trade Openness-OPEN, Nominal Exchange Rate-NER, and Domestic Relative Income-DRI on selected South-Asian countries for the time period of thirty-two years from 1984-2015. Co-integration technique is used to identify the long-run effect of macroeconomic variables on current account balances. Johansen and Juselius (1990) Co-integration technique has been used to identify the existence of a long-run relationship between current account and expected explanatory variables within the VAR model. Whereas, for the identification of the short-run effect of the explanatory variables on the current account, the Vector Error Correction Model (VECM) has been employed. The results indicate that NFA, OPEN, and DRI are important factors in explaining the long-run behavior of the current account than the NER. The results also prove that NFA, OPEN, and DRI are more pertinent than the NER, in explaining movements in the current account on a long term basis in the context of the sampled countries. The study implies that the current account balance is one of the economic indicators that strengthens the relationship between the macro-economic variables and the current account respectively. Keywords: Current account, macroeconomic determinants, saving-investment balance, and Co-integration INTRODUCTION The current account, together with capital account, make-up the all-important balance of payments, that in turn is one area where economists, policymakers, and stakeholders keep a close watch. Popularly known as the difference between exports and imports, it is regarded as a significant indicator of macroeconomic performance of any economy. It is said to reflect the entirety of transactions executed by domestic residents with foreigners in terms of current goods and services. Explaining movement in the current account, determining its sustainable level, and identifying policy decisions impacting a change in the current account, has over time gathered importance with policymakers. The behavior of the current account conveys valuable information about the actions and expectations of all market participants. It is, therefore, that several theoretical models have evolved explaining the behavior of a current account, elaborating its determinants, and establishing a relationship between current account balance and its determinants. Still, there is much room left for empirical analysis to put to test differing theories-more specifically in the context of South Asian countries. Most of the studies conducted until now are either based on developed countries or comparison between developed and developing countries (Gourinchas & Jeanne 2013, Caballero et al. 2008, Chinn & Ito 2007, Bussière et al. 2004). Considering the background, it is felt to observe a study, which focuses specifically on South-Asia and identify the variables that can influence the current account balances of the countries of this region. Analysis of a number of recent research studies conducted on different economies points towards the existence of a relationship between current account and variables like degree- of-openness to international trade, net foreign assets, exchange- rate, domestic relative-income, and others. This paper is designed to test the same hypotheses within the context of major South-Asian countries including India, Pakistan, Bangladesh, and Sri Lanka using the panel data for the period from 1984 to 2015. Based on the non-stationary nature of available data, the Cointegrated VAR approach is considered appropriate to analyze the determinants of the current account balance. Johansen and Juselius (1990) Cointegration technique has been used to identify the existence of a long-run relationship between current account and expected explanatory variables; within the VAR model. For identification of the short-run effect of explanatory variables on the current account, the Vector Error Correction Model (VECM) has been put to use. Significance of the South Asian region (known as SAARC) can be judged by the fact that it constitutes a hefty 23% of the world’s population and 15% of the world’s arable land. The case for this study is further substantiated by the fact that this same region has excelled itself from the position of the slowest growing region in the 1960s to fastest growing regions since after 1980s. World Bank database shows sub-par GDP growth of the region at 4.2% when compared to 5.4% at the global level in the 1960s. The situation however changed and the region has been sustaining a high average of growth rates, particularly during 2000-08 i.e. 6.3%.