The Nexus Between External Public Debt and Economic Growth of Sri Lanka

Abstract

The external public debt-led growth hypothesis suggests that external public debt is one of the key determinants of economic growth. This hypothesis is more applicable to developing countries including Sri Lanka. The theoretical and empirical studies have examined the relationship between external public debt and economic growth and found that this relationship is ambiguous. The objective of the paper is to investigate the nexus between the external public debt and the economic growth of Sri Lanka. This empirical research study utilised annual time series data from 1990 to 2019. The long-run equilibrium equation was obtained by applying the Auto Regressive Distributed Lag (ARDL)bounds cointegration test while the short-run results were received through Error Correction Modeling (ECM). The study's findings conclude by proving the existence of a negative weak significant effect of external public debt over economic growth. The control variables, capital stock and human capital displayed a positive relationship and labor showed a negative relationship in the long run. In the short run, only labour has been identified to have a negative significant impact on economic growth. In contrast, other variables, external public debt, capital stock and human capital, had no relationship with the dependent variable. This study can assist policymakers in obtaining a holistic understanding of the realities associated with external public debt and helps them identify steps that need to be taken if the effects produce a negative result.