Twin Deficits and Economic Growth in South Asian Countries

Abstract

This paper investigates the effect of twin deficits in determining the economic growth of eight South Asian nations through a Panel Autoregressive Distributed Lag (ARDL) model. This analysis is done using data from eight countries between 2000 and 2023. The Pooled Mean Group (PMG) as well as the Mean Group (MG) estimators were both utilized at the start, and a Hausman test was carried out to determine which model would be more suitable, with the PMG being the better of the two. The results indicate that the budget deficit and current account deficit significantly and negatively impact the economic growth of South Asian countries in the long run. To be more precise, a one percent rise in the current account deficit is estimated to lower economic growth by approximately 11.98 percent, whereas a 1 percent increase in the budget deficit would lower growth by approximately 6 percent. Alternatively, the effect of exports is found to be highly positive and significant, and a 1 percent increase in exports results in a boost in the growth of the economy by about 33.7 percent. Inflation, however, does not seem to be influential in the long run. This finding is reflected in the short-run outcomes, as the error correction term is negative and significant, which implies that the process of adjusting to equilibrium is rapid, with almost 80.1 percent of the deviations being corrected in one year. In general, the findings indicate the relevance of addressing fiscal and external imbalances and encouraging export-led policies to facilitate sustainable economic growth in South Asia, and the research makes a contribution to the literature by presenting new evidence on the relevance of twin deficits in the dynamics of economic growth in the region.