“THE EFFECTS OF OIL PRICE FLUCTUATIONS ON PAKISTAN'S CURRENT ACCOUNT BALANCE: AN EMPIRICAL INVESTIGATION USING ARDL MODEL”

Abstract

Oil is a fundamental component of the energy source that highly affects the economic growth across the World. The level by which economies are distracted as a result of high charges depends on a stake of the cost of oil rates in national income. The purpose of the study is to explore the effect of oil rates, FDI, exchange rate, inflation and FDI on Balance of Payment by using ARDL model for the time period of 1990-2025 in Pakistan. The econometric results show that one dollar increase in exchange rate leads to increase the balance of payment by 112718786.95 dollars in short run while decreases -213015278.83 dollar in long-run. In case of FDI, one dollar increases in FDI decreases -2569828653.26dollars in the balance of payment in short run and-3296503106.09 dollars decreases in long run. The disturbance in the BoP shows that one dollar increase in oil prices decreases -55051701.86 dollars and -70618757.38-dollars balance of payment in short and long run respectively. While, one dollar increases in GDP decreases -49207450.99 dollars in balance of payment in short run. Finally, 1dollar increase in inflation decreases -334430380.90 dollar and -194729101.66 in the balance of payment in short run and long run respectively. ECM _(t-1) value -0.779* shows that model will converge to equilibrium at the rate of 77% in long run. Diagnostic results depict that there is no serial correlation neither heteroscedasticity in the model while Cusum and Cusum square shows the stability of model at 5% significant level. This study suggests that in order to maintain the current account balance Government should decrease its dependence on oil imports and energy demands should be fulfilled by means of Hydropower, coal energy, wind energy and solar energy. Therefore, recommending the movements of the economy towards the usage of renewable energy resources.