Economic Growth and External Debt Servicing: A Cointegration Analysis for the Case of Sri Lanka

Abstract

In the immediate aftermath of the tsunami disaster, many of Sri Lanka's creditor nations granted debt write-offs and interest-free periods on loans to assist the reconstruction process. Two macroeconomic effects stem from excessive external debt; a debt overhang problem and a credit-rationing problem. Using econometric analysis and Sri Lankan data for the period 1952 to 2002, this paper investigates whether Sri Lanka faces a debt overhang problem. Long-run estimations rely on cointegration methodology whereas short-run analysis employs an error correction method. The results indicate that Sri Lanka does not have a debt overhang problem, probably because total external indebtedness is not too high.