Impact of remittances on the trade balance in the countries of the South Asian region

The present study empirically examines the relationship between trade balance and remittances in five selected countries of the South Asian Association for Regional Cooperation (SAARC). Besides the joint impact of remittances on the trade balance, the individual impact of remittances on Bangladesh, India, Sri Lanka, Pakistan, and Nepal and comparison among these countries are also provided. To conduct this analysis, annual data of 20 years from 1991-2019 were collected from World Bank and Penn World database. Pooled OLS, random effect, and fixed models are used to estimate the joint impact of remittances. Further, dummy variable interaction models are used to estimate the individual impact of remittances on five South Asian countries. Our panel regression analysis confirms the increasing impact of remittances on the trade deficit of five South Asian countries by triggering import-led consumption expenditures. Other control variables, exchange rate, foreign direct investment, investment, and human capital have a significantly negative impact on the trade balance. On the other hand, rent has a significant positive impact on the trade balance of SAARC countries. Dummy variable interaction model confirms the negative impact of remittances on India, Nepal, and Pakistan, while remittances have an insignificant impact on Bangladesh and Sri Lanka. The paper provides various policy impactions for SAARC region.