Determinants of Private Investment in Sri Lanka

Abstract

Private investment plays a vital role in reducing poverty and fostering economic growth in developing countries through job creation and capital formation. This study investigates the key determinants of private investment in Sri Lanka over the period 1977 to 2019, employing the Autoregressive Distributed Lag (ARDL) model. The findings indicate that economic growth, credit to the private sector, and the real interest rate exert a significant and positive influence on private investment. Conversely, political instability caused by war, foreign direct investment (FDI), and public investment negatively affect private investment. The error correction term is -0.93, signifying a rapid adjustment toward long-run equilibrium following a short-run shock. These results suggest that policymakers should leverage interest rate management and improved access to credit as mechanisms to boost private investment. Furthermore, ensuring political stability is essential to creating an investor-friendly environment that supports sustained private sector development and long-term economic progress in Sri Lanka.