Understanding the dynamics of the relationship between Balance of Payment and Exchange Rate: An Investigation of Afghanistan

This study shows the nexuses between Balance of Payment (BoP) and the Exchange Rate (EXRATE) in Afghanistan using quarterly data for the period of April, 2008 to June 2024 retrieved from the official website of Da Afghanistan Bank (Central Bank of Afghanistan) and National Statistics and Information Authority (NSIA). Furthermore, given the mixed order of integration BoP is stationary at level I(0) and EXRATE at first difference I(1) the Autoregressive Distributed Lag (ARDL) model is used to explore both short-run and long-run relationship between the two variables. Besides, that for Lag selection criteria Akaike Information Criterion (AIC) is used, which shows an optimal ARDL (2,0) structure. Moreover, the bound test confirmed the presence of a long-run co-integrating relationship, with the F-statistic (14.602) and t-statistic (−5.397) exceeding the 1% critical values, thereby strongly rejecting the null hypothesis of no co-integration at the 1% level of significance. In addition, to this in order to capture the short-run dynamics and the speed of adjustment toward equilibrium, a Restricted Error Correction Model (RECM) was applied where the Error Correction term was negative (−0.485) and statistically significant at the 1% level, indicating that approximately 48.5% of deviations from long-run equilibrium are corrected each quarter. Besides, that the short-run coefficient for the first difference of EXRATE is positive, but not statistically significant, suggesting limited short-run impact. Conversely, a deterministic trend variable was highly significant at the 1% level, highlighting a persistent upward trend in the BoP. On the other hand, the overall model demonstrated a strong explanatory power (R² = 0.71). These findings reveal a robust and statistically significant long-run relationship between exchange rate and balance of payments, with rapid adjustment dynamics and a stable long-term upward trajectory in external balances. Keywords: Balance of Payment, Exchange rate, Afghanistan, DAB, NSIA & ARDL

This study shows the nexuses between Balance of Payment (BoP) and the Exchange Rate (EXRATE) in Afghanistan using quarterly data for the period of April, 2008 to March 2025 retrieved from the official website of Da Afghanistan Bank (Central Bank of Afghanistan) and National Statistics and Information Authority (NSIA). Furthermore, given the mixed order of integration BoP is stationary at level I(0) and EXRATE at first difference I(1) the Autoregressive Distributed Lag (ARDL) model is used to explore both short-run and long-run relationship between the two variables. Besides, that for Lag selection criteria Akaike Information Criterion (AIC) is used, which shows an optimal ARDL (2,0) structure. Moreover, the bound test confirmed the presence of a long-run co-integrating relationship, with the F-statistic (14.602) and t-statistic (−5.397) exceeding the 1% critical values, thereby strongly rejecting the null hypothesis of no co-integration at the 1% level of significance. In addition, to this in order to capture the short-run dynamics and the speed of adjustment toward equilibrium, a Restricted Error Correction Model (RECM) was applied where the Error Correction term was negative (−0.485) and statistically significant at the 1% level, indicating that approximately 48.5% of deviations from long-run equilibrium are corrected each quarter. Besides, that the short-run coefficient for the first difference of EXRATE is positive, but not statistically significant, suggesting limited short-run impact. Conversely, a deterministic trend variable was highly significant at the 1% level, highlighting a persistent upward trend in the BoP. On the other hand, the overall model demonstrated a strong explanatory power (R² = 0.71). These findings reveal a robust and statistically significant long-run relationship between exchange rate and balance of payments, with rapid adjustment dynamics and a stable long-term upward trajectory in external balances. Keywords: Balance of Payment, Exchange rate, Afghanistan, DAB, NSIA & ARDL