Assessing the impact of external debt on economic growth in Sri Lanka: the period from 1987 to 2017

Abstract

The lack of financial capital is becoming a huge threat to the incurring debt burden in the developing economies. Many of the developing countries’ economies do not have sufficient financial capital to engage in public or private investment. Indeed, Sri Lanka also subjected to this problem with low growth, lack of savings, debts where funds are often used to repay previous debts, so there are less available funds for capital investment by government, crowding out which causes a relative shortage of capital and raises interest rates, absence of credit markets which discourages both lenders and borrowers. This situation made the economy of Sri Lanka to depend on external debt. Consequently, there is a need for the state to assess the impact of external debt to inform policymaking to take actions to protect the country against the adverse effects of external debt. Thus, this paper aims to investigate the impact of external debt on the economic growth in Sri Lanka. The finding of the study shows that the total external debt negatively influences on the GDP. The real effective exchange rate, investment share of GDP and labor force are significant and positively impact on the economic growth. This research would help to understand the problem of increasing external debt and its impact on Sri Lankan economy. Further, this study helps policymakers for considering to restructure the public financing source and to improve the public sector and productivity efficiency in the economy of Sri Lanka.