N.L. Anushka Cooray

DOI: https://doi.org/10.6000/1929-7092.2019.08.108

Published: 24 December 2019

Abstract: Public debt, one of the main reasons for financial crises in some emerging markets, has become the most crucial topic among policymakers. The ongoing debates among policymakers and the candidates of the forthcoming presidential election in Sri Lanka motivate the current research. The primary objective of this study is to analyze the public debt sustainability in Sri Lanka using a fiscal reaction function. The study applies the unit root test, autoregressive distributed lag (ARDL) bound test analysis, ARDL long-run model, and vector error correction model. The study used annual time-series data taken from the Central Bank of Sri Lanka and the World Development Indicators for the period from 1980 to 2017. The estimated results of the fiscal reaction function confirm that public debt was not sustainable under the study period in Sri Lanka. The finding proves that fiscal policy measures are not appropriate to maintain public debt sustainability and fiscal solvency. The study recommends shifting away from foreign sources to other sources to finance the budget deficit or reduce the budget deficit in Sri Lanka.

Keywords: Public debt, Sri Lanka, Public debt sustainability, ARDL model, Cointegration.

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