Abstract:
Workers’ remittances are an important source of external fince in Sri Lanka since the
later part of 1975. Most empirical literature confirmed that the remittances increase the
money supply through the velocity of money. Therefore, it can be also assumed that
the workers’ remittances have a positive relationship on the financial development in
Sri Lanka. Hence, this study attempts to examine the relationship between workers’
remittances and financial development in Sri Lanka over the period of 1975 to 2017 by
using autoregressive distributed lag (ARDL) bounds testing approach. To attain the
objective of this study, the following variables: gross domestic credit to private sector
as the share of GDP (FD) was proxy variables for financial development and dependent
variable, workers’ remittances (WRE), interest rate (IR), foreign direct investment
(FDI), gross domestic product (GDP) were employed as independents variables. In
terms of the Augmented Dickey Fuller (ADF) unit root test, all the variables in this
study were stationarity in mixed order I(0) and I(1). Further, both long – run and short
– run relationship between workers’ remittances and financial development were
investigated. Accordingly, the bound test F- statistic was 7.612 which was significant
at 5% level. It means that the workers’ remittances maintain the long – run relationship
on the financial development in Sri Lanka. Meanwhile, in short – run period the
workers’ remittances significantly influence on financial development in the second
year towards. The estimated Error Correct Model shows that the coefficient of error
correction (ECM) term was negative and significant. It indicates that the workers’
remittances were moved to financial development towards long – run equilibrium path.
Diagnostics tests showed that the estimated models were robustness. Based on the
conclusion of this study, it was confirmed that the workers’ remittances in Sri Lanka
influenced on the financial development in long – run and short – run period. Therefore,
this study suggests that the government of Sri Lanka have to follow a proper plan to
regularize the financial system by considering the workers’ remittances as a factor for
financial development. The findings of this study could be useful to policymakers in
formulating an appropriate financial development plan in Sri Lanka.
