Dynamic linkages between public debt and economic growth: an empirical analysis of Sri Lanka

Abstract

Introduction :

Increasing public debt in many countries as a result of deficit government budget and balance of payment is one of the serious economics and political issues in many developing countries. Huge public debt is likely to increase the inflation, interest rate and budget deficit. Misztal (2010) found a positive and significant relationship between economic growth and public debt in the Euro zone area while Checherita and Rother (2010); Manmohan and Woo (2010); and Cunningham (1993) identified a strong negative relationship between growth and debt burden. However, Darius (2001) said that although there is an adverse impact on macroeconomic variables due to rising debt of an economy, even an appropriate level of government debt could be linked to economic growth in developing countries. The amount of public debt has been a critical issue in Sri Lanka for many decades which resulted in socio-economic and political implications. The share of public debt to GDP was 34% in 1960 and it shows an upward trend over the years. Particularly, Sri Lanka has experienced more than 100% debt share to GDP in 2001. However, it was decreased to 79.1% in 2012 (Central Bank of Sri Lanka, 2013). Studies related to the quantitative assessment of the impact of public debt on economic growth are inadequate and limited in Sri Lankan context. Thus, this research attempts to answer the question: Does public debt induce economic growth?