FOREIGN DIRECT INVESTMENT AND CURRENT ACCOUNT BALANCE OF PAKISTAN

This study investigates the impact of foreign direct investment (FDI) inflows on current account balance excluding current transfers (CABECT), and income outflows (IO) of balance of payments (BOP) of Pakistan for the period 1983-2011 by employing autoregressive distributive lag (ARDL) approach. Total FDI inflows in Pakistan from 1983 to 2011 were US $ 32.26 billion out of which 72.03 percent (US $ 23.23 billion) were received in last seven years (2005-2011) mostly in the services sector. Results of the study show that increase in FDI causes increase in IO and worsens CABECT of Pakistan in the long-run. Error correction terms in both short-run models have negative and significant coefficients thus confirming long-run relationship of FDI inflows with IO and CABECT.