The Impact of Public Debt on Private Investment: Sri Lankan Experience
DOI:
https://doi.org/10.18533/ijbsr.v8i8.1122Keywords:
Public Debt, Private Investment, Crowding out/in EffectAbstract
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.
References
Abdullahi, Muhammad Mustapa, Bakar, Nor Aznin Bt Abu and Hassan, Sallahuddin B. (2016).
Debt Overhang Versus Crowding Out Effects: Understanding the Impact of External Debt on Capital Formation in Theory. International Journal of Economics and Financial Issues, 6(1): 271-278.
Abilene, Janice, Patenio, S. and Tan-Cruz, Agustina (2007). Economic Growth and External
Debt Servicing of Philippines: 1981-2005. In Proceedings of 10th National Convention on Statistics (NCS): 1-2 October.
Adegbite, Esther O. Ayadi, Folorunso S. and Ayadi, Felix O. (2008). The Impact of Nigeria’s
External Debt on Economic Development. International Journal of Emerging Markets, 3( 3): 285-301.
Akomolafe, Kebinde John. Bosede, Olanike. Emmanuel, Oni and Mark, Achukwu. (2015).
Public Debt and Private Investment in Nigeria. American Journal of Economics. 5(5): 501-507.
Annual Reports of Central Bank of Sri Lanka (1988- 2015) , Colombo: Central Bank of Sri
Lanka.
Akram, Naeem. (2013). Empirical Examination of Debt and Growth Nexus in South Asian
Countries. Asia-Pacific Develpoment Journal, 20 (2): 29-48.
Apere, ThankGod O. (2014). The Impact of public Debt on Private Investment in Nigeria:
Evidence from Nonlinear Model. International Journal of Reaserch in Social Sciences, 4(2):130-138.
Carrasco, Marien. (1998). Crowding Out and Government Spending. University Avenue
Undregraduate Journal of Economics, 40( 4):1-9.
Dayaratna-Banda, O.G. and Priyadarshanee, A.A.S. (2014). Sustainability of Government Debt
in Sri Lanka. Inernational Journal of Business and Social Research, 4(7): 100 - 108.
Deyshappriya, Ravindra N.P. (2012). Debt and Fiscal Sustainablity in Sri Lanka. International
Journal of Scientific and Research Publications., 2(3): 1-8.
Fonseka, A.T. and Ranasinghe, S.S. (2007). Sustainability of Sri Lanka’s Public Debt. Sri
Lankan Journal of Management, 12(3): 185 - 212.
Hyder, Kalim (2001). Crowding-out Hypothesis in a Vector Error Correlation Framework: A
Case Study of Pakistan. The Pakistan Development Review, 40(4): 663-650.
Khan, Rana Ejaz Ali and Gill, Abid Rashid (2009). Crowding Out Effect of Public Borwing: A
Case of Pakistan. In Proceedings of 8th National Research Conference on Management and Computer Sciences: 29 January 2009.
King’wara, Robert (2014). The Impact of Domestic Public Debt on Private Investment in
Kenya. Developing Country Studies, 4(22): 88-96.
Koeda, Junko (2008). A Debt Overhang Model for Low-Income Countries. Staff Papers
(International Monetary Fund), 55(4): 654-678.
Krugman, P. R. (1988). Financing versus Forgiving a Debt overhang. Journal of Development
Economics, 29 (3): 253-268.
Kumar, Manmohan S. and Woo, Jaeoon (2010). Public Debt and Growth. IMF Working
Paper,WP/10/174, 1-47.
Majumder, Alaudduin Md. (2007). Does Public Borrowing Crowd-out Private Investment?: The
Bangladesh Evidence. Policy Analysis Unit (PAU). Working Paper Series: WP 0708,
-26.
Rathnasiri, R.A. and Wijesinghe, T.C. (2012). Government Fiscal Operation and Financial
Deepning in Sri Lanka. EXCEL International Journal of Multi-disciplinary Management Studies, 2.(2): 1-17
Reuss, Alejanoro (2009). Fiscal Policy and Crowding out: The General Theory and the Current
Cisis. A Primer on Keynes’ Economics. Wheaton Collage.
[Online] http://dollarsandsense.org/archives/2009/0509reusskeynespartI.html
Saeed, Noman, Hyder, Kalim, Ali, Asghar and Ahamad, Eatzaz (2006). The Impact of Pubic
Investment on Private Investment: A Disaggregated Analysis. The Pakistan Development Review, 45(4): 639-663.
Sanderatne, Nimal (2011). The Growing Debt Burden, The Sunday Times. 3 July 2011. [Online]
http://www.sundaytimes.lk/110116/Columns/eco.html . Accessed 5 January 2016.
Sen, Huseyin and Kaya, Ayse (2013). Crowding-Out or Crowding-In? Analyzing the Effects of
Government Spending on private Investment in Turkey. Panoeconomics. 631-651. DOI: 10.2298/PAN1406631 S.
Shah, Mahmud Hasan and Pervin, Shahida. (2012). External Public Debt and Economic
Growth: Empirical Evidence From Bangladesh, 1974-2010. Academic Research International,3.(2): 1-8.
Vijesandiran, S. and Vinayagathasan, T. (2015). Dynamic Relationship between Human Capital
and Economic Growth in Sri Lanka: A Co-Integration Analysis. Asian Online Journal, 2 (2): 20-29.
World Bank. (2017). World Bank Data, https://data.worldbank.org/indicator
Downloads
Published
Issue
Section
License
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
