International Journal of Management Research and Emerging Sciences

Vol 13, No 4, December 2023, PP. 54-67

Impacts of Macroeconomic Variables on Foreign Exchange Rate of SAARC

Member Countries
Khawaja Asif Mehmood
School of Economics, Bahauddin Zakariya University, Multan, Pakistan
Muhammad Nadir
School of Economics, Bahauddin Zakariya University, Multan, Pakistan
nadirshabir5792@gmail.com
Muhammad Aurmaghan
School of Economics, Bahauddin Zakariya University, Multan, Paksitan
aurmaghan.khan@gmail.com

Corresponding: khawjaasif@bzu.edu.pk
ARTICLE INFO ABSTRACT
Article History: Exchange rate (EXR) stability is crucial for especially the developing economies.
Received: 04 Jul, 2023
This study examines the macroeconomic variables which affect EXR in member
Revised: 09 Aug, 2023
Accepted: 18 Aug, 2023 countries of South Asian Association for Regional Cooperation (SAARC). To do
Available Online: 14 Dec 2023
the analyses, data from 1981 to 2019 was relied upon. To estimate the long-run
DOI: coefficients, Fully Modified Ordinary Least Square (FMOLS) is incorporated. The
https://doi.org/10.56536/ijmres.v13i4.498
outcomes of FMOLS exhibit that the variables such as trade, inflation, GDP, total
Keywords: debt services, trade openness, and tariff rate are inversely related to EXR while
Exchange Rate, Inflation, Money
broad money is found to affect the EXR in positive. As a policy prospect, The
Supply, Debt Servicing, GDP
Growth Rate, FMOLS, SAARC Central Bank (CB) is needed to follow tight monetary policy to curtail liquidity of

JEL Classification:
money in economy. It is recommended that CB to discourage government project
F3, F31 financing that is to cause increase in money supply but to initiate trendline to
facilitate GDP growth, trade, and imposition of tariff to curtail rising EXR.
© 2023 The authors, under a Creative Commons Attribution-Non-Commercial 4.0.

INTRODUCTION
The southern region of SAARC is referred to as "Southern Asia." In addition to the geographic
importance, South Asian Counties (SAC) are located in a region with a high population density. There
are macroeconomic difficulties in this area because of its dense population. This region also
experiences differences in statistics related to macroeconomic demographics. There are a number of
reasons why South Asia confronts with macroeconomic challenges. Currently empirical studies are
taking into account macroeconomic considerations and the currency rate into consideration. Over the
past several years, the global economy has experienced rapid growth, falling loan rates, an increase in
unemployment, flimsiness in fare, import, and uncharted direct ventures, all of which have a direct,
cordial relationship with the EXR. According to Auboin and Ruta (2011), there is a strong relation
between the currency rate and the untapped direct venture and employment markets. The SAARC
countries of also having trouble managing their EXR appropriately. Some of the key factors that make
the cash economy weaker than the produced economy are higher inflation, lower real financing costs,
lower GDP per capita, and higher unemployment rates.

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The exchange rate plays a crucial role in a country's international trade. It serves as a vital
macroeconomic indicator for assessing international competitiveness and reflects the overall economic
standing of the country on a global scale. In the realm of international trade, a country's exchange rate
serves as a measure of its competitiveness. Therefore, fluctuations in the exchange rate have significant
and wide-ranging implications for policymakers, investors, businesses, and consumers alike (Adusie
& Gyampong, 2007). EXR is estimated in terms of the value of one nation’s currency for the purpose
of conversion to other nation’s currency. According to Allen and Gale (2004), EXR is one factor that
is a primary cause of interruption in trade between the countries. In this regard, Mishra and Yadav
(2012) confirmed that EXR affects the choice making of traders, policymakers, brokers, exporters,
vacationers, money-related organizations, shippers, and financial organization that exist among the
countries of the developing and developed world.
Furthermore, Auboin and Ruta (2011) argued that EXR stability ensures higher Foreign Direct
Investment (FDI) inflows which benefits the economy. However, the volatility of the currency rate is
directly influenced by the macroeconomic factors. When examining the health of the country's
booming economy, macroeconomic factors are seen as uncertain and doubtful. Given the importance
of FDI and its interdependency with EXR, Mehmood et al. (2021) added EXR, political stability,
quality of governance, and voice and accountability to be significant in affectation while FDI inflows
are taken into consideration.
In the era of globalization and budgetary advancement, the EXR has a big impact on foreign exchange
and money for a small open economy like Pakistan. This is due to the fact that variations in return rates
have an impact on the earnings of multinational corporations and boost trade between enterprises and
financial institutions. Jhingan (2005) asserts that the nation's exports, imports, and ancillary effects
have consequences over the EXR. According to Islam (2002), the financial authority chooses the EXR
strategy with the intention of achieving key objectives, such as limiting inflation, expanding credit to
the general public and the private sector.
Research Objectives
The absence of evidence for a long-run relationship between macroeconomic fundamentals and EXR
is felt short in the existing literature. Therefore, this study intends to fill this gap with latest data and
panel regression technique on SAARC member countries.
The research objectives are:

• To investigate whether macroeconomic variables cointegrate with EXR in long run.

• To explore if selected macroeconomic variables are significant in affecting EXR.
• To determine whether the chosen variables' long-term effects differ from one another.
Scope of the Study
This study identifies the key aspects to the concern policy makers regarding proper management of
EXR that is achievable wile macroeconomics variables are kept a good track of. The findings enable
central banks keep track of macroeconomic factors that affect the EXR and assist policymakers in
planning to keep EXR stable for better growth in trade and other financial transactions. The study is
organized in a way that; Section 1 provides an Introduction. Section 2 is devoted for the Literature
Review. Section 3 is allocated for the Methodological Issues.
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Likewise, Section 4 is bestowed for the Discussion of Results. Subsequently, Section 5 is written to
publish the Conclusion and Policy Recommendations.

LITERATURE REVIEW
Various studies are found on the topic of EXR such as; Iliyasu and Sanusi (2023), Salim and
Shi (2019), Samuel et al. (2020), Hasanov et al. (2022), Kurita and James (2022), Jamil (2022), and
Jamil et al. (2023). In this regard, Salim & Shi (2019) collected data on a quarterly basis for their
inquiry of the connection between macroeconomic variables and the currency rate of Indonesia from
1999 to 2017. For the analytical purpose, linear and nonlinear Autoregressive Distributed Lag (ARDL)
were used. The empirical results, particular of trade balances, showed significant short- and long-term
association between the EXR and its main drivers. EXR is sequential in its effects on exports, foreign
trade, foreign remittances, economic growth, and FDI (Mehmood et al., 2020; Khalil et al., 2017;
Mehmood et al., 2021; John et al., 2023).
Similarly, Hasanov et al. (2022) studied money demand and fixed EXR for whether there is any
difference in impact if the nature of EXR is floating. The study demonstrated that open economy model
is in a better framework while characterizing the money demand under the fixed EXR system.
Whereas, they study by Kurita and James (2022) aimed to advance an econometric model that aligns
with economic theories to scrutinize the Canadian-US dollar EXR during the era of floating EXR after
the Bretton Woods system, during the period from 1975 to 2021. To achieve this particular objective,
the study explored the historical context of Canada by taking into account major political events and
the significance of oil in the Canadian economy. Furthermore, the study acknowledged the presence
of structural breaks observed in the data during the early 1980s and 2000s. The empirical findings of
the study provided support for the notion that long-term EXR determination is influenced by
fundamental factors. Furthermore, the research investigated both the long-term and short-term impact
of oil prices on exchange rate dynamics thus identified the substantial role played by the US-Canada
relationship in this regard.
The study by Samuel et al. (2020) studied the affectations of macroeconomic variables on the EXR in
Ghana. The study went with the utilization of multivariate modelling technique of Vector
Autoregression (VAR) and thereby focused on the analyses of affects of broad money supply, lending
rate, real GDP, and inflation on EXR. The study relied on a period of 76 quarterly observations from
2000 to 2019 in Ghana. The primary objective was to evaluate the effectiveness of macroeconomic
variables in managing the EXR in the country. The study relied on secondary data sourced from the
Bank of Ghana, World Development Indicators, and Ghana Statistical Service. The results indicated
that real GDP has a causal relationship with the EXR in Ghana. However, inflation, money supply,
and lending rate were found to have no any direct effect on EXR. Nevertheless, these variables were
found to have indirect effects on the EXR.
This empirical analysis of Jamil et al. (2023) focused on inspecting the effect of various
macroeconomic variables, including GDP per capita, GDP growth, inflation, FDI, imports, exports,
interest rates, foreign reserves, and foreign debt on EXR regimes. Similar variables such as imports
and FDI were opted by John et al. (2023). It is considered that EXR is important ingredient to even
influence the economic growth (Jamil, 2022), therefore the study of Jamil et al. (2023) in-focused five

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countries from the MSCI emerging markets index, developed markets index, and frontier markets
index, covering the period from 1970 to 2020. The research aimed to make predictions and provide
valuable insights for the financial and economic markets, addressing gaps in the economic and
financial knowledge of these countries.
The study employed advanced statistical frameworks and utilizes a machine learning technique called
binary logit (quadratic hill climbing) to explore the influence of macroeconomic variables on changes
in EXR regimes. The empirical findings indicated that Hong Kong, Australia, New Zealand, Japan,
and Singapore make timely and accurate decisions regarding EXR regimes, which contribute to their
status as developed markets. On the other hand, emerging markets and frontier markets do not adopt
EXR regimes three, four, and six, which significantly impacts their growth compared to developed
markets. Foreign debt, inflation, and foreign reserves emerge as major challenges for emerging and
frontier markets.
Naseem et al. (2019) looked for the relationship between EXR and macroeconomic indicators from
1980 to 2017 on Pakistan like Adudei and Gyapong (2017) and Akhter and Faruqui (2015) did earlier
on Ghana and Bangladesh. The findings posted that inflation, GDP, current account balances, FDI,
and trade openness had significant effect over EXR of Pakistan. akin to Bhasin and Nisa (2019) who
located interest rate, money supply, foreign exchange reserves, and current account balances as factors
that affect the EXR of India.
The transfer of resources has become increasingly useful for both emerging and industrialized
economies. Such transfer offers wide range of tangible and potential benefits, including job creation,
technological spillovers, and improved productivity and managerial skills. Given the capital deficit in
the third world countries and the advantageous outcomes associated with such activities, resource
transfers play a crucial role in promoting growth and development. To attract a significant amount of
FDI, many of such nations have implemented policy reforms which are aimed at creating an attractive
investment climate. FDI inflows, in this regard, are widely recognized in the literature as a major driver
of an economic stimulation (Kulu et al., 2021).
However, sometimes the results are not appreciable (Mehmood & Hassan, 2017; Mehmood et al.,
2018; Mehmood et al., 2018). On the other side, considering the ability of FDI to generate employment
opportunities, stimulate private investment, and facilitate knowledge and skill transfer, role of such
vital inflows now assumes great significance. There is currently a lack of understanding regarding the
specific effects of FDI on recipient economies. Nonetheless, the importance of FDI extends beyond
increasing production and job creation; it also plays a vital role in fostering the development of
infrastructure and industries, which are essential for economic growth (Nikolaos & Pavlos, 2017).
Khan et al. (2019) looked into how macroeconomic factors such as interest rate, GDP growth,
purchasing power parity (PPP), purchasing power, and trade openness affect the EXR of China from
1980 to 2017 like Venkatesan and Ponnamma (2017).
The relationship between political unrest and EXR was made clear by Bouraoui and Hammami (2017).
From 1992 to 2016, information was gathered on a quarterly basis from five Arab countries. Basic
macroeconomic concepts like money supply and economic growth were used as independent variables.
In order to get the conclusion from the data, VAR and ARDL models were used. The findings showed

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that political instability is associated with a notable decline in the estimation of household financial
forms.
The effects of consumption taxes led consequences on real EXR and trade balance were examined by
Freund and Gagnon (2017). Likewise, Fraz and Fatima (2016) conducted study on the association
between EXR and macroeconomic parameters. The data were compiled between 1970 and 2015 using
the International Financial Statistics (IFS) for the analyses on three developed and three developing
countries, including Canada, Japan, the United Kingdom, South Africa, Brazil, and India.
Abdoh et al. (2016) looked at how exports, inflation, and interest rates affected the EXR. They made
use of the annual reports of ASEAN nations between 2005 and 2014. According to their findings,
export has a substantial impact on the currency rate, whereas inflation and interest have little effect.
Harberger (2003) examined how the actual EXR is impacted by economic growth. He found there is
no clear correlation between economic growth and the actual EXR.
Next to Ali et al. (2015), main macroeconomic factors that influenced the EXR were evaluated by
Vidyavathi et al (2016). They observed unfavorable correlations between EXR and GDP, inflation,
foreign debt, and interest rates. They also noted a weakly positive association between FDI and the
EXR. In the wake of globalization, Khera and Singh (2015) detected the impact of numerous
macroeconomic aspects on EXR. The analysis suggested combining imports and increasing FDI to
raise the EXR. In the same way, Asari et al. (2011) examined the connection of inflation, interest rates,
and exchange rates. The tax led impacts on the EXR were examined by Beck and Coskuner (2007).
Agbeyegbe et al. (2004) examined the connections between trade liberalization, currency values, and
tax revenue.

DATA AND METHODOLOGY

Data Source
The time series panel data from 1981 to 2022 was used for the empirical analyses. Trade, broad money,
inflation, GDP growth, tariff rate, and total debt servicing are selected to locate the effects on EXR of
SAARC member countries. Data sources relied upon were The World Bank Development Indicators
(WBDI) and the Central Banks of SAARC member countries. The most recent 43 years of annual data,
with panel data from 1981 to 2022, are taken into consideration for the chosen 7 sample countries,
excluding Afghanistan due to the missing data.
Model of the Study
Based on conceptual framework developed from literature discussed earlier, the model is given as
follows:
 =  0 + 1M 3 +  2 INF +  3TDS +  4GDP +  5TR +  6TD (1)

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Whereas;
EXR, represented by  , is a dependent variable. The 1M 3 is Broad Money (M3) and inflation (INF)
is defined by  2 INF . The Total Debts Service (TDS) and Gross Domestic Product Growth (GDP) are
given the identities of  3TDS and  4 GDP , respectively. And,  5TR and  6TD show a Tariff Rate (TR)
and Trade (TD).
Conceptual Model
The major objective of the study is to analyze if macroeconomic variables have impact over the EXR
of SAARC member countries. Therefore, based on the literature, the theoretical model is given in
Figure 1.

Figure 1 Theoretical Model

Development of Hypothesis
 1: H0: Broad money does not affect the EXR.

 2: H0: inflation is not affecting EXR.

 3: H0: EXR is not affected by the total debt servicing.

 4: H0: GDP growth is away from posting any effect on EXR.

 5: H0: tariff rate does not affect EXR.

 6: H0: trade is not affecting EXR.

Econometric Analyses
The series of steps involved for the econometric analyses are given below.
Unit Root Test (Levin, Lin, & Chou)
The past investigation raised certain issues with unit root tests for independent time-series data,
including the Augmented Dickey-Fuller (ADF), Dickey-Fuller (DF), and Phillips and Perron (PP) test.
Low wattage versus choosing set stationarity was one of the most important challenges, especially if
the sample is tiny. The panel unit root test has a number of benefits, such as expanding the degree of
freedom, creating more point data, and minimizing multi-collinearity between the two explanatory
variables. Previous studies are well known for advocating unit root testing for panel data sets.
According to the literature, panel unit root tests are typically recommended over time series unit root
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testing. Therefore, this study employed panel unit root tests of Levin Lin and Chu (LLC), (2002).
Equation (2) yields the panel unit root regression as follows:
i
yit = i + t +  i yi ,t −1 +  i , j  yi ,t − j +  it (2)
j =1

Test of Co-integration (Kao)

Kao (1999) presented the tests for panel cointegration based upon Dickey-Fuller as well as Augmented
Dickey-Fuller (ADF). It is referred to as co-integrating two non-stationary sequences with a linear
combination. In the second point, Kao uses panel co-integration to strengthen the null hypothesis that
homogeneous and heterogeneous panels do not co-integrate. Assuming that entire variables are
integrated of I (1). When cointegrating vectors are homogenous, pooled regression allows for
individual fixed effect(s) through the panel members individually. This test has the advantage of
presenting heteroscedasticity across the cross-section because the cross-sections are assumed to be
independent for each SAARC member country in a panel. Given by Equation [3], the Kao co-
integration regression is as follows:

yi ,t = i + 1 x1i ,t +  2 x2i ,t + ........... +  k xki ,t +  it (3)

Long Run Coefficient Estimation (FMOLS)

In SAARC member countries, the relationship between macroeconomic factors and EXR efficiency is
examined using Fully Modified Ordinary Least Square (FMOLS) approach. After the endogeneity
issue in the time series has been fixed, FMOLS modelling is a collections of numerous time series
models that precisely evaluate the long-term influence of regressors over the dependent variables. The
FMOLS technique generates accurate estimates and offers a check for the accuracy of the data for
small sample numbers. To Mehmood et al. (2018), the methods developed using FMOLS modify least
squares to cater the issue of serial correlation. The model is written as in Equation [4].

 K
( )  N −1 −1  T
( ) 
T 2
 KT
*
−  =   L−222 i  xit − xit   L11i L22i   xit − xit  it − T i 
*
(4)
 i =1 i =1  i =1  i =1 

Lˆ21i ˆ
 it* =  it −
ˆL
ˆ 0 − L21i ˆ + 
xit ,  = ˆ 22i  22i
ˆL 22i
ˆ0 (
22i )
22 i 22 i

RESULT AND DISCUSSION

Descriptive Statistics
The summary of descriptive statistics is given in Table 1. The data is used to summarize the mean,
maximum, minimum, and standard deviation values for the specified variables. The country with the
highest mean, maximum, minimum, and standard deviation values for EXR is Sri Lanka. The EXR of
Sri Lanka has the largest value than other countries, whereas the EXR of the Maldives has the lowest
mean, maximum, minimum, and standard deviation value. The maximum value of the EXR's standard
deviation is 45.77, and Sri Lanka's inflation rate indicates that there is a greater chance that the rate

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will deviate from mean value. Among all nations, Sri Lanka's inflation rate has the greatest mean,
maximum, and standard deviation values, but the minimum value of inflation is 0.58. In India,
minimum inflation rate is 2.28 that is the lowest.
The lowest inflation rate standard deviation for India indicates that it is the least likely to cause us to
go against the predicted value. While Maldives has the second lowest mean, maximum, and minimum
inflation rates among all other nations. Bhutan has the highest Broad Money (M3) maximum after
India, Bangladesh and Maldives and highest standard deviation values, whereas Pakistan and India
have the highest Minimum and Mean values, respectively. The maximum value of standard deviation
of Broad Money (M3) is recorded at Nepal. Moreover, highest value of debt servicing of Bhutan shows
that it is more likely to turn out differently than planned. Sri Lanka has the highest mean value of TDS
that is 4.56 and Maldives has the highest maximum value and Bhutan has the widest dispersion from
mean value of TDS which is 2.22 opposite to Bangladesh.
The maximum volume of trade is recorded at Maldives and minimum value of trade is in India and
Bangladesh. In Pakistan, it is recorded consistent trade volume because of lowest standard deviation.
Moving forward, India also has the greatest mean and standard deviation of tariff rate values which
indicates significant trade control. In case of Pakistan, Sri Lanka, Maldives, Bhutan, and Nepal wider
dispersion is recorded from mean value. At foremost, appreciable GDP growth figures are evident in
case of entire SAARC member countries. However, minimum value of GDP indicates significant
volatility in GDP growth therefore, standard deviation values indicate broader dispersal from
respective mean values.
Table 1: Country-Wise Descriptive Statistics

Information India Pakistan Sri Lanka Bangladesh Bhutan Maldives Nepal

M3
Mean 56.89 46.60 38.57 38.31 44.50 37.39 54.18
Maximum 79.07 59.03 61.79 65.85 74.58 48.29 109.04
Minimum 34.46 34.80 28.26 14.06 16.84 23.51 23.46
Std. Dev 16.09 6.70 8.91 17.95 20.54 8.08 26.76
INF
Mean 7.11 8.36 9.95 6.48 6.28 5.05 8.68
Maximum 13.75 20.67 22.10 19.14 14.70 12.63 18.49
Minimum 2.28 0.40 0.58 0.15 -1.14 -1.14 3.07
Std. Dev 2.82 4.21 5.57 3.06 3.25 3.01 3.65
TDS
Mean 2.35 3.41 4.56 1.30 2.71 4.40 1.35
Maximum 4.61 6.63 8.94 2.26 8.34 9.87 2.14
Minimum 0.75 1.33 1.84 0.76 0.00 2.14 0.40
Std. Dev 0.88 1.43 1.68 0.38 2.22 1.99 0.44
GDP
Mean 6.10 4.84 4.95 5.14 7.61 5.77 4.47
Maximum 9.63 10.21 9.14 8.15 28.70 26.11 9.69
Minimum 1.06 0.99 -1.55 0.82 -0.41 -13.13 -2.98
Std. Dev 1.86 2.09 1.97 1.61 4.98 5.54 2.59
TR

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Mean 38.85 31.73 16.82 25.02 16.00 19.38 17.10

Maximum 80.85 50.26 26.38 84.90 22.16 22.11 21.67
Minimum 8.88 12.55 7.87 11.97 11.10 10.66 11.82
Std. Dev 28.86 17.39 7.55 23.37 3.02 4.12 3.91
TD
Mean 29.95 32.59 66.94 29.59 83.70 164.93 44.64
Maximum 55.80 38.50 88.64 48.11 116.55 375.38 64.04
Minimum 12.22 25.31 46.36 16.69 51.35 115.77 30.10
Std. Dev 14.66 3.48 12.22 9.81 18.51 64.46 9.67
EXR
Mean 37.20 53.91 79.14 51.34 37.20 11.7 59.49
Maximum 70.42 150.04 178.74 84.45 70.42 15.40 112.60
Minimum 7.87 9.97 16.53 15.45 7.86 7.05 12.34
Std. Dev 19.08 36.30 45.77 20.82 19.08 2.76 30.10

Unit Root Test

The panel unit root test results proposed by Levin et al. (2002) are given in Table 2. The results show
that all the variable are stationary at first difference. Therefore, the conclusion regarding integration is
fixed at I(1) for each variable.

Table 2: Unit Root Test

Variable I(0) I(1) Conclusion
EXR 3.13 (0.98) -2.80 (0.00*) I(1)
M3 0.86 (0.75) -8.19 (0.00*) I(1)
INF 1.24 (0.88) -3.64 (0.00*) I(1)
TDS -1.18 (0.64) -9.26 (0.00*) I(1)
GDP -4.94 (0.88) -2.53 (0.00*) I(1)
TR -0.41 (0.30) -7.69 (0.00*) I(1)
TD -0.14 (0.44) -8.43 (0.00*) I(1)
Note: * refers significant at 5 percent. Probability values are given in parenthesis.

Cointegration Analysis
Long-run co-integration among the variables is derived after it is proved that the variables are
integrated of order I(1). Table 3 provides assistance in this regard by displaying the results of Kao
(1999) panel co-integration. The findings demonstrate that the Kao Residual Co-integration test rejects
H0 of no cointegration at 10% level of significance. Additionally, the significant probability value
provides convincing evidence that variables have long run cointegration.

Table 3: Co-integration Result Based on Kao Residual Test

Test Statistic t value Prob.
ADF 1.30 0.09*
Note: * refers to significant at 10 percent

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Long Run Coefficients

Table 4 provides the estimates of long-run coefficients. The fallouts of the ADF and cointegration tests
confirmed that the variables of the model have long run equilibrium relationships. The FMOLS
approach is therefore used to predict the long-run elastic ties. The findings show that except M3, all
the regressors exhibit negatively influence the EXR.

Table 4: Long Run Coefficients

Regressors Coefficient SE t value Prob.
M3 0.10 0.14 7.13 0.00*
INF -1.91 0.54 -3.58 0.00*
TDS -2.45 1.38 -1.77 0.08***
GDP -1.16 0.60 -1.94 0.05**
TR -0.49 0.14 -3.63 0.00*
TD -0.15 0.09 -1.79 0.07***
Note: *, **, &*** represent significant at 1, 5, & 10 percent.
The long run coefficient of M3 gives an illustration that the impact on EXR is positive and significant.
The coefficient value is 0.01 that means 1 percent increase in broad money tends to degrade the local
currency by increasing EXR by 0.01 percent. When there is a plenty of money, obtaining it is simpler,
and less expensive __ the interest rate is lowered. Therefore, causes local currency to devalue. The
quantity of money also has an impact on how readily available is a cash in the market to purchase
goods and services. Companies increase their workforces in order to meet this growing demand, which
raises the cost of production. The scenario results in price increases, decreased global competitiveness,
and a depreciation of the nation's currency (Bleaney, & Fielding, 2002).

It is discovered that the EXR is negatively and significantly correlated with the INF. According to the
variable's coefficient which is -1.91, the EXR decreases by -1.91 percent as INF rises by 1%. A nation's
inflationary pressures can significantly affect the currency. Rising rate of inflation is indeed have a
large detrimental effect on a country's currency. However, low inflation does indicate a favorable
stance on EXR. Because of the close relationship between inflation and interest rates, authorities work
to balance their effects. A compromise between the two has frequently been found due to the delicate
interplay between the two factors. Although higher interest rates tend to increase inflation, which puts
downward pressure on the currency, they also tend to increase investment (Ahmad et al., 2015). These
findings were also supported by Fraz and Fatima (2016).

The findings on TDS institute negative and significant association with the EXR. The coefficient value
which is -2.45 demonstrates that as when TDS increase by 1%, the EXR decreases by -2.45 %. It
means that more is the debt service payments remitted into the account of the donors, strong is the
local currency. These results are also supported by Jean-Claude (2019). Moving on, the EXR has a
negative and significant relationship with GDP. The coefficient value is -1.16 which validates that as
GDP grows by 1%, the EXR decreases by -1.16 %. Which means strong local currency. An increase
in domestic output shows that producers are obtaining their anticipated profits, creating mandate for
the domestic currency thus contributing in increasing value of local currency in relation to other
currencies (Bleaney, 1996). These findings are also supported by Ahmad et al. (2015) and Mirchandani
(2012).

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Moreover, TR and the EXR are negatively and significantly connected at the 5% level of significance.
Thus, confirm that any imposition of tariff on tradables helps citizens to engage with local
manufacturers. Thereby, the need for the foreign currency reduces which improves the local currency
and causes the EXR to fall. The fall of -0.49% is recorded at the back of 1% fall in TR. Similarly, the
TD is revealed to be negatively and significantly correlated with EXR. According to the coefficient
value of -0.15, the EXR decreases by -0.15 percent for every 1% rise in trade. The inverse relationship
between TD and EXR reflects the fact that when a country imports more than it exports, the demand
for foreign currency rises, which causes the value of the foreign currency to increase. These results
were also validated by Ahmad et al. (2015) and Ali and Nazar (2017).

CONCLUSION AND POLICY IMPLICATION

Conclusion

This study presented the empirical analyses of the macroeconomic determinants of EXR at SAARC
member countries. The conclusions are summarized as:

The Kao Residual Co-integration test rejected H0 of no cointegration thus provided strong indication
that the variables exhibit long-term relationship after unit root analysis revealed that the variables are
integrated of I(1).The FMOLS technique of long run coefficient estimation was used. The findings
concluded negative association of all the regressors with EXR except M3.

Policy Implication

Based on the empirical results following policy recommendations are furbished to control the EXR
volatility in SAARC countries.

To reduce money supply and inflation, the central bank should implement tight monetary policy. The
central bank(s) of SAARC member countries shouldn't allow the state government have an excessive
financing which boosts inflation such as via printing of notes. In this regard, the central banks are to
raise the reserve requirements to limit credit issuance. Trade was found to be negatively correlated
with EXR in terms of exports, allowing policymakers to create measures to keep the terms of trade in
balance. Exporters may be given export subsidies for this reason in order for them to raise output and
compete on the global market which could result in a rise in the value of the foreign currency. Import
tariffs may also be introduced in an effort to lower the level of imports.

The development of infrastructure, sound political leadership, and good administration will all help
the nation draw in more international investment as a result, the foreign exchange market will be
stabled. Infrastructure development, wise political leadership, and efficient management will aid the
country attract foreign investment. As a result, the foreign exchange market will be stable.

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