Effect of South Asian Free Trade Area Agreement on Economic Growth of the Region

South Asian Free Trade Area (SAFTA) is regarded as an undesirable trade agreement merely failing to encourage intra-regional trade expressively. According to the dynamic theory of trade integration, even a trade agreement like SAFTA can enlighten the integrated region's macroeconomic factors and boost economic growth. Therefore, it is essential to consider the dynamic efficiency of SAFTA when assessing its desirability. However, due to the lack of prior studies concentrating on its dynamic efficiency, the assessment of SAFTA is not impeccable. Thus, how macroeconomic factors mediate SAFTA in carrying its economic growth effects are investigated with this study. In this regard, a structural equation model is employed over the period 2003 to 2018. The results confirmed the dynamic efficiency of SAFTA because it leads to stabilizing the region's macroeconomic policies, reducing price distortion, encouraging physical investments, attracting FDIs, and furthering technology transmission. Meanwhile, macroeconomic policy credibility and physical investment are found as the two macroeconomic factors that significantly carry positive growth effects of SAFTA. Therefore, it is recommended to bring SAFTA to its full potential by further reducing tariffs and removing sensitive lists.