Financial Crisis in Sri Lanka: Impact of Institutional Factors on External Debts

Abstract

This study analyzes the financial crisis faced by Sri Lanka and provides insight into the impact of four independent variables, namely political stability, government effectiveness, regulatory quality, and rule of law on external debts. The data was obtained from the World Bank database and the Central Bank of Sri Lanka, and the regression was conducted using an MS Excel spreadsheet. The article regression analysis conducted with one-year lag to capture the lag effect of independent variables on external debts. The author then discussed the results with political figures and scholars in the field, through over 30 discussions conducted both in-person and over the phone.

The statistical results indicate a strong association between the independent variables and external debts, with a high proportion of variance explained. The study highlights the positive impact of political stability and government effectiveness and the negative impact of regulatory quality and rule of law on external debts. However, the study has limitations, including the reliance on a limited number of expert interviews and the focus on the case of Sri Lanka. The study emphasizes the need for continued research into the complex factors contributing to external debt and economic crises and the importance of considering different sets of independent variables when formulating policy. The findings of this study could be useful for policymakers and politicians in managing external debt crises

Keywords: Bankrupt States, Corruption, Debts, Financial Crisis, Government Efficiency, Institutional Efficiency, Liberalisation, Offshore Borrowings, Stability

JEL Classification: D01, F45, F50, G10, G18