The Impact of Public Debt on Private Investment: Sri Lankan Experience

H.R.A. Chamini Thilanka, J.G. Sri Ranjith


Governments tend to borrow financial resources from domestic as well as external sector when its tax revenues are not sufficient to meet the required financial needs. In the Sri Lankan context, there has been a gradual increasing trend in the accumulation of public debt since the post liberalization phase. Herein, this ambience of public debt has caused to make congenial effects while leading to some unfavorable effects on the economy. Hence, this study examines the impact of public debt on private investment in Sri Lanka using the annual data from 1978-2015. The study follows some econometric steps respectively unit root test, Johansen co-integration test and finally employing the Vector Error Correction Model (VECM) to find out the long-run impact. Empirical findings of our study show the evidence for the presence of crowding-in effect of public debt on private investment in the long-run implying that government has diverted borrowing funds as spurring private sector. Further, real GDP also affects positively on private investment suggesting further expansion of the economy is inevitable. Hence, the policy compilation with regard to fiscal operations should be aimed at the well- managed borrowing for the purpose of boosting private investment further.   


Public Debt, Private Investment, Crowding out/in Effect

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