The impact of government debt on economic growth in Sri Lanka

Abstract

Introduction

Policy makers in Sri Lanka are currently confronted with issues in macroeconomic management and increasing public debt. According to the Annual Report of the Central Bank of Sri Lanka for 2018, the total public debt of Sri Lanka is Rs.11, 977,539 million, or 82.8% of GDP, with domestic debt around Rs.6, 017,992 million or 41.6% of GDP. The total foreign debt of the government is Rs.5, 959,547 million which is 41.2% of GDP (CBSL, 2018). Comparison with previous years indicates that Sri Lanka’s government debt is steadily increasing at present, while economic growth is stagnant around 3% - 4 %.

The Government obtains loans from both local financial institutions and foreign sources, as project loans and non-project loans. Government borrowed Rs. 3,149,905 million from foreign sources under project loans and Rs. 2,809,642 million under and under non-project loans (CBSL, 2018). As a result of increase in public debt and debt repayment, Sri Lankan Governments were led unable to allocate resources to various key sectors such as education, health, research and development. Previous studies have found that the domestic debt and external debt have an inverse relationship with economic growth (Atique & Malik, 2012). Expansion of public debt has been found to have a negative impact on economic growth (Chudik et al. 2017) and concessionary loans have been found to have a negative impact on economic growth (Fernando et al. 2017). In this context, the study of public debt in Sri Lanka is timely important. However, there is a limited literature on understanding the impact of government debt on economic growth. It is in this backdrop that this study is conducted to fill this research gap. This study focuses primarily the impact of government debt on economic growth.