The Effect of the Public Debt on Economic Growth in Sri Lankan Economy

Abstract

The paper analyzes the impact made by the debt stock of the economy on the long-term growth, and the study is conducted through the data available over 50 years starting from 1963 in the Sri Lankan context. A model has been developed and analyzed through the econometric tools and techniques and the conclusions have been drawn based on the model results. The study reveals that debt has a non-linear relationship with the growth rate, and further it shows that beyond 61% debt to GDP ratio, & debt would create negative impact on the economic growth rate. Additionally, following channels were found to have an impact over the growth rate through public debt (i) National Savings (ii) Gross investment (iii) Trade Openness (iv) Budget Deficit. The paper mainly concludes, emphasizing that the policy makers should concern debt reduction and prudent debt management in order to achieve long -term economic growth.

Keywords: Public Debt, Economic Growth, Threshold Limit

JEL Classification: H13, H39