Economic Forces Behind Pakistan’s Trade Deficit: A Time Series Assessment

Abstract

This study investigates the determinants of Pakistan’s persistent trade deficit over the period 1986–2018 using annual time-series data and the ARDL bounds testing approach. Seven key macroeconomic variables are examined: domestic prices, world prices, Pakistan’s real GDP, world income, urbanisation, and democratic accountability. The results reveal that higher domestic inflation and economic growth significantly worsen the trade deficit in the long run, whereas rising world income, greater urbanisation, and stronger democratic accountability (beyond a certain threshold) contribute to its reduction. Short-run dynamics generally exhibit weaker and occasionally opposite effects. These findings underscore the importance of controlling inflation, promoting export-oriented industrialisation, and strengthening institutional quality to achieve a more sustainable external balance in Pakistan.