Pak-Afghan Bilateral Trade and Its Impact on Pakistan's Economy

Pakistan and Afghanistan are two neighboring countries and have enjoyed a long period of trade relations, and have a long history of being trade partners, they signed a bilateral transit agreement in 1965, and the agreement recognized the right of Afghanistan to access the seaports of Pakistan. Since 2001 the bilateral trade between Pakistan and Afghanistan has shown an increasing trend except for one year 2007-2008, during this year a decline has been registered which can be attributed to the strict measures taken immediately to the emergence of the information that a huge amount of smuggling and illegal trade was rampant under the cover of the provision of the facility of the transit trade. The study examined Pak-Afghan bilateral trade and its impact on Pakistan's economy. Different factors like exchange rate (ER), inflation (INF), exports to Afghanistan (EXP), and imports from Afghanistan (IMP) were considered independent variables. Similarly, annual data from 2001 to 2023 were utilized and the Autoregressive Distributed Lag (ARDL) model was used to analyze the cointegration between variables of the model. Empirical analysis suggests that the exchange rate of Pakistan is deprecated and Afghanistan is dependent on Pakistan in terms of trade, so it is affecting Pakistan's economy positively, the exports to Afghanistan are more than imports from Afghanistan and trade is surplus with Afghanistan, which is benefiting Pakistan's economy. Imports are affecting GDP Per capita negatively, but the effect is very low because the exports are more than imports from Afghanistan which absorb the imports value. The study recommends that Pakistan need to boost exports to capture the market. The exchange rate and inflation are not stable for many reasons, which is affecting Pakistan's economy and bilateral trade with Afghanistan. So, Pakistan needs to stabilize the exchange rate and inflation. Secondly, the study suggests that Bilateral trade with Afghanistan should be in Pakistani currency, as it will strengthen Pakistan's economy and exchange rate.