An analysis of impact of overall balance of budget, foreign and domestic debts on economic growth: a study of post liberalized economy in Sri Lankan context

Abstract

This study prominently investigates to find the relationship among the economic growth (Gross Domestic Product - GDP), Overall Balance of Budget, Foreign and Domestic Debts in Sri Lankan context using the quantitative approach. The time series data for the period of 1959 to 2014 are collected from the annual report of the central bank of Sri Lanka. Economic Growth (Gross Domestic Product - GDP) is the dependent variable and Overall Balance of Budget, Foreign and Domestic Debts, and Dummy (D) are the explanatory variables in this study. All the variables are stationary at its level form I(0) other than Overall Balance of Budget which is stationary at its first difference I(1). There is a two way relationship between Foreign Debts and Domestic Debts. Gross Domestic Product is caused by both variables such as Overall Balance of Budget and Foreign Debts. There is a decline of Gross Domestic Product by 0.21 units even after the trade liberalization from 1977 in Sri Lanka. There is a positive relationship between Economic Growth (Gross Domestic Product), Overall Balance of Budge (BDT) and Domestic Debts (DPD) whereas there is an inverse relationship between Economic Growth (Gross Domestic Product - GDP) and Foreign Debt (FPD). The percentage of the fitness of regression model is 99.7%. All the variables are having a long run relationship. By lowering Foreign Debts, Economic Growth (Gross Domestic Product - GDP) can be achieved. It is significant to boost the economic growth of Sri Lanka by increasing Domestic Debts.