Determinants of Balance of Trade in the Sri Lankan Economy

Abstract

The Sri Lankan economy has experienced a balance of trade deficit over the past four decades and this paper attempts to identify the macroeconomic variables which have influenced such a situation. Thereby, this study is mainly focused on four exogenous variables including an endogenous factor which may affect the external balance of an economy. The model used in this study is developed for the first order autoregressive process as used by many research studies carried out in the recent past relating to this area, by using the quarterly data from the 2000Q1 to 2015Q2. According to the empirical results, it was observed that gross domestic product; volumes of imports and inflation rate have a significant impact on the balance of trade deficit in the Sri Lankan economy. A nominal exchange rate and direct foreign investments have not influenced the current situation. There is a positive relationship between the exchange rate and the trade balance which is not a significant factor and this result is not supported by the latest studies carried out. Thus, it can be concluded that the policy measures taken during the past four decades of Sri Lankan economic history regarding the exchange rate has had little less an influence in rectifying the external balance problem in Sri Lanka.