The Effects of Public Debt on Economic Growth in Sri Lanka

Abstract

The substantial literature has observed the relationship between public debt and economic growth in different countries and the performances of public debt on economic growth differed from country to country. Therefore, it is essential to have unique researches for each country. Hence, this study aims to identify the relationship between public debt and economic growth in Sri Lanka using four decades' latest data. This was examined using econometrics techniques and annual time series data from 1980 to 2019 aiming to fulfill the objective of the effects of public debt on economic growth in Sri Lanka. The Jacque Bera (JB) and Augmented Dickey-Fuller (ADF) tests are used to investigate the properties of the macroeconomic time series of normality and unit-roots respectively. The Engel-Ganger residual-based model used to investigate the long-run relationship between variables and the short-run relationship of variables investigated using the Error Correlation Model (ECM). The study shows that both public domestic debt and public external debt have expanded in Sri Lanka in the studying period. Further, public external debt became closer to the public domestic debt during that period. Public domestic debt, public external debt, and public debt servicing have a negative and significant relationship with economic growth. Domestic debt has a powerful adverse effect on economic growth in the long run with comparing external debt. Further, the negative effect of external debt is stronger than domestic debt on economic growth in the short run. This study recommends that the Sri Lankan government needs to have some limitations regarding the level of borrowing due to adverse effects on economic growth and effective usage of public debt is essential for Sri Lanka.