Long Run Association between Public Debt and Economic Growth in Sri Lanka

Abstract

Sri Lanka is relying heavily on public debt to finance the budget deficit since its independence from British in 1948. Thus, it is much important to investigate the long run of public debt on economic growth of the country for the period 1977 to 2012 using time series data. Sri Lanka introduced fully liberalized economic policy in 1977. The study used domestic debt, external debt and educational expenditure as explanatory variables to determine their effect on GDP in the long run. Long run is estimated by employing Johansen test of cointegration analysis relies on Vector Error Correction Model (VECM). The coefficient of Error Correction Term (ECT) suggests disequilibrium that is corrected at the speed of 58 percent over the each year. Significant ECT is a proof of the existence of long run relationship.