2017-06: Revisiting the debt-growth nexus: Empirical evidence from Sri Lanka (Working paper)

Abstract

In this paper we analyze the impact of public debt on economic growth in Sri Lanka with special emphasis on the quality of borrowing and uses of borrowing. Although ample evidence documents on growth-debt nexuses, the focus on quality of borrowing and uses of borrowing has been largely ignored. We employed a relatively new specification, Auto Regressive Distributed Lag (ARDL) model to analyze the impact of debt on economic growth using data from 1960 to 2015. Our findings suggest that the quantity of debt stock as well as quality of the borrowings determine the impact of debt on economic growth. Low quality of borrowing (i.e. heavy borrowing) from non-concessional sources may be the key factor that determines the negative impact of debt on economic growth in Sri Lanka.