Abstract:
Public debt is a major factor in a country's global ranking, as it is a key indicator of macroeconomic performance. Many countries have investigated how public debt affects economic growth, but the impact of public debt varies from country to country. Therefore, it is important to conduct individual studies for each country. This research focuses on Sri Lanka and examines the relationship between public debt and economic growth using the latest available data from the past 45 years. The impact of Sri Lanka's public debt on its economic growth was examined using an econometric model and annual time series data spanning from 1977 to 2021, as the open economy started in Sri Lanka from 1977 onwards. The Jacque Bera (JB) and Augmented Dickey-Fuller (ADF) tests were employed to examine the normality and unit-roots values of macroeconomic time series. Furthermore, the study employed the Error Correction Model to analyze the short-run relationship of variables and the Engel-Ganger residual-based model (ECM) to investigate the long-run relationship of variables. The analysis demonstrates that Sri Lanka's governmental debt has increased during the study period in terms of both public domestic debt and public external debt. Economic growth is negatively and significantly correlated with public debt, including both public domestic debt, and public external debt. Due to the negative consequences on economic growth and the need for using public debt effectively for Sri Lanka, this report advises the government to set some borrowing limits.