dc.description.abstract |
Development literature provides a macroeconomic rationale for foreign aid when there is
a deficiency in domestic savings, foreign exchange or government revenue. Focus is
then on closing resource gaps and no distinction is usually made between aid and grants
and loans. But problems arise when aid .loans are used to fill the resource gap, as the
recipient country has to bear many costs in the future. External debt may have adverse
implications for the savings, foreign exchange, growth and poverty and macroeconomic
performance. There may be two types of problems, debt capacity problem and debt
related development problems. The first problem arises when the debtor country is
unable to honor debt service obligations as they come due. The other problem arises
when a country's foreign debt is so large as to adversely affect economic development
efforts.
It is apparent that Sri Lanka also is no exception to other developing countries in need of
foreign aid to achieve her growth prospective. Although Sri Lanka has obtained a
gradually increasing quantum of large external debt (since 1977) to bridge the internal
and external resource gaps, in retrospect it is seen that during a period of three decades
its average growth rate has varied only very slightly around four percent. Also though
poverty alleviation has been given priority within the development goals yet increasing
poverty has become an aggravating problem.
The main purpose of this study is to analyze the question of how external debt and
indebtedness affect a country's economic growth and poverty. Taking into consideration
the external debt difficulties facing the countries at present, this study is presented as a
case study for Sri Lanka. Accordingly, it has examined three main hypotheses,
o External debt impacts significantly towards improving economic growth and
reducing poverty
o Indebtedness affects economic growth and poverty adversely
o Government debt and debt servicing caused increase of poverty
The empirical investigation was done using the secondary data obtained from library
survey and regression coefficients were estimated by using the method of OLS.
III
According to the hypotheses tested it is proved that there is no significant positive
relationship between external debt and economic growth. But some possibilities having
positive impacts on growth is seen. Secondly the impact of external indebtedness on
poverty and economic growth is adverse as postulated by the second hypothesis was not
proved by the estimates when indebtedness was taken as a whole. But it is likely to
affect poverty and economic growth through other macroeconomic variables. Thirdly, a
significant negative relationship is found between economic growth and government
debt and also between government debt and poverty, proving the third hypothesis, which
states that the government debt and debt servicing affect poverty adversely. Accordingly
it is concluded that the overall debt situation has not reached an unsustainable level, the
government debt situation is obviously unsustainable.
Formulation of a national policy to obtain manage and utilize external debt, taking
necessary actions to address poor revenue performance by removing the inefficiencies of
tax structure and restructuring the system where it is necessary, adopting a suitable
exchange rate policy so that the unfavorable effects of currency composition and
fluctuations of export import prices are minimized, cautious use of foreign capital for the
balance of payment problems and specially attempting to raise domestic savings are
some of the policy implications which emerged from the above findings. |
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