Using the NARDL Model to Test the Twin Deficits Hypothesis in Sudan: An Econometric Study (2007-2021)

Abstract

     The study aimed to use a Nonlinear Autoregressive Distributed Lag (NARDL) model to test the hypothesis of a dual relationship between the budget deficit (BD) and the current account deficit (CAD) in Sudan during the period 1990-2021. It also sought to apply modern statistical methods such as co-integration and the error correction approach to test causality, thereby examining the relationship in both the short and long terms.

The research problem was represented in the following questions: Does an increase (decrease) in the budget deficit (BD) lead to an increase (decrease) in the current account deficit (CAD) in Sudan during the period 1990-2021 in the short term and the long term? Is there a symmetrical relationship between the two variables in the long term?

  The statistical results demonstrated the existence of a mutual causal relationship between the budget deficit (BD) and the current account deficit (CAD) in Sudan within the period 1990-2021, in both the short term and the long term. The results also revealed a non-symmetrical relationship between the two variables in the long term. This implies that the economic policies adopted by the state to address the deficit in one of the two accounts will have a positive effect in reducing the deficit in the other.

Accordingly, the study recommended adopting economic policies aimed at reducing the deficit in each account separately, by addressing exchange rate distortions, implementing an import substitution policy, increasing the state’s reserves of gold and hard currencies, strengthening oversight over the production and export of gold, and preventing its snuggling. The study also recommended reducing government expenditures through the establishment of productive projects to increase income and reduce unemployment, stabilizing inflation, increasing public sector investments, carefully timing tax increases, and enhancing actual production capacity, with an emphasis on coordination among these policies.