International Journal of Foreign Trade and International Business
2021, Vol. 3, Issue 1, Part A
Sri Lanka’s external debt: Trend, ownership, and dynamics
In recent years, an influential section of researchers coined Sri Lanka being caught up in a debt trap. A number of studies attempted in countering above proposition. Nevertheless, there remained some related aspects which need further investigation into Sri Lanka’s external debt position. This study aims at contributing to this on-going debate by addressing some unanswered areas of research. By employing descriptive and regression analyses, this study analyze the changes into external debt composition, debt ownership, and structural breaks in external debt accumulation during 1978-2019. Data for the study were extracted from few secondary sources published by the national statistical agencies. There are some interesting findings. First, this study found that a sizable share of external debt, at present, consists of commercial borrowing. This is a market deviation which has taken place since 2007. Moreover, external debt ownership has shifted to new sources such as international financial markets and new lenders such as China. The commercial borrowings emanated from new sources have been expensive to the economy. Second, reflecting those changes, our structural break test confirmed that Sri Lanka’s external debt growth path witnessed a structural break in year 2007. It implies that external debt obligation grew at a faster rate in post-2007 than that took place during 1978-2006. Graduating from low income economy to a middle income economy and lukewarm approaches adopted by traditional lenders, particularly during the war-time, forced Sri Lanka to seek funds from less restrictive new sources thought such sources were costly. Hence, Sri Lanka’s debt burden is mainly due to its increased borrowing at higher costs from sources such as international financial markets and China. Policy makers need to arrest the current situation by exploring avenues to cut down borrowings which are relatively expensive and to make sure the productive use of borrowed financial resources.