Crowding-out Effect of Public Borrowing in Sri Lanka
top of page
Asian Institute of Research, Journal Publication, Journal Academics, Education Journal, Asian Institute
Asian Institute of Research, Journal Publication, Journal Academics, Education Journal, Asian Institute

Economics and Business

Quarterly Reviews

ISSN 2775-9237 (Online)

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
crossref
doi
open access

Published: 27 August 2019

Crowding-out Effect of Public Borrowing in Sri Lanka

Nawalage L.A.Cooray

Nagoya University, Japan

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, management journal

Download Full-Text Pdf

doi

10.31014/aior.1992.02.03.130

Pages: 827-842

Keywords: Crowding In Effect, Crowding Out Effect, Private Investment, Public Borrowing

Abstract

The government of Sri Lanka has been disproportionately borrowing from the domestic banking and non-banking sectors to finance its budget deficit. These sectors also serve as funding sources for the country's private investors. The government's expansionary fiscal policy has increased its total income, but it may also raise interest rates and reduce private investment. This study estimates the crowding-out effect of public borrowing from domestic sources on private investment in Sri Lanka. Using time-series data from 1960-2014 sourced from the Central Bank of Sri Lanka and World Development Indicators, we develop an investment function with three independent variables, public borrowing, interest rate, and gross domestic product. Unit root tests and the autoregressive distributed lag and vector error correction models are also utilized. To test the long-run relationships among the variables, we conduct a bound test of co-integration, and the results show that there is long-run co-integration between the variables. Vector autoregressive models, variance decomposition analysis, the Granger causality test, and impulse response functions are used to analyse the results. The study provides evidence for the absence of a crowding-out effect in Sri Lanka as a result of public borrowing from domestic sources. This evidence has important implications of fiscal management in Sri Lanka. To avoid external indebtedness and unnecessary inflation due to debt financing, the government can rely on domestic sources without hurting private investment in the country.

References

  1. Ahmed, H., & Miller, S. M. (2000). Crowding-out and crowding-in effects of the components of government expenditure. Contemporary Economic Policy, 18(1), 124-133. https://doi.org/10.1111/j.1465-7287.2000.tb00011.x

  2. A.A.S.Priyadarshanee and O.G.Dayarathna Banda (2013). Budget Deficit and Financial Crowding out-Evidence from Sri Lanka. Sri Lanka Journal of Economic Research.

  3. Aisen, H., and Hauner D.(2008). Budget deficits and interest rates. IMF working papers, interenational monetary fund, 08/42.

  4. Akinboade, O.A. (2004). The relationship between budget deficit and interest rates in South Africa:some econometrics results. Development Southern Africa, 21(2).

  5. Akkina, K. R., & Celebi, M. A. (2002). The determinants of private fixed investment and the relationship between public and private capital accumulation in Turkey. The Pakistan Development Review, 41(3), 243-254. https://www.jstor.org/stable/41260468

  6. Albatel, A.H. (2003). Government budget deficit and the crowding out of private sector investment in Saudi Arabia. Journal of king saud university administrative science quarterly, 17(1),1-28.

  7. Aschauer, D. A. (1989). Is public expenditure productive?. Journal of Monetary Economics, 23, 177-200. https://doi.org/10.1016/0304-3932(89)90047-0

  8. Atukeren, E. (2005). Interaction between public and private investment: Evidence from developing countries. Kyklos, 58(3), 307-330. https://doi.org/10.1111/j.0023-5962.2005.00290.x

  9. Bahmani-Oskooee, M. (1999). Do federal budget deficits crowd out or crowd in private investment?. Journal of Policy Modeling, 21(5), 633-640. https://doi.org/10.1016/S0161-8938(98)00005-2

  10. Barro, R. J. (1974). Are government bonds net wealth?. Journal of Political Economy, 82, 1095-1117. https://doi.org/10.1086/260266

  11. Blejer, M.I. and M.S.Khan (1984). Government Policy and Private Investment in Developing countries. Staff Papers

  12.        (International Monetary Fund) 31(2), pp. 379–403.

  13. Central Bank of Sri Lanka (1960-2017). Annual report. Colombo, Sri Lanka: Central Bank of Sri Lanka.

  14. Chakraborty, L. S. (2006). Fiscal deficit, capital formation, and crowding-out: Evidence from India (Working Paper No. 43). New Delhi: National Institute of Public Finance and Policy.

  15. Chakraborty, L. (2012). Interest rate determination in India: Empirical evidence on fiscal deficit-interest rate linkages and financial crowding out, economics institute Newyork, Economics working paper archive, wp_ 744.

  16. Chhibber, A., & van Wijnbergen, S. (1988). Public policy and private investment in Turkey (Working Paper No. 120). Policy, Planning and Research Department Working Papers. Washington, DC: World Bank. http://documents.worldbank.org/curated/en/459531468760494990/Public-policy-and-private-investment-in-Turkey.

  17. Chowdhary, K. (2004). Deficit financing in LDEs: Evidence from south asia. Faculty fo commerce-economics working papers (wp04-18), Department of economics, university of Wollongong.

  18. Cruz, B. O., & Teixeira, J. R. (1999). The impact of public investment on private investment in Brazil, 1947-1990. Cepal Review, 67, 75-84. http://hdl.handle.net/11362/10677

  19. Cumbers, A., & Birch, K. (2006). Public sector spending and regional economic development: Crowding-out or adding value?. Glasgow: Centre for Public Policy for Regions, University of Glasgow.

  20. Engen, E. M., & Hubbard, R. G. (2004). Federal government debt and interest rates. NBER Macroeconomics Annual, 19, 83-138. https://doi.org/10.1086/ma.19.3585331

  21. Erenburg, S. J. (1993). The relationship between public and private investment (Working Paper No. 85). Annandale-on-Hudson, NY: The Jerome Levy Economics Institute. http://dx.doi.org/10.2139/ssrn.155370

  22. Erden, L., & Holcombe, R. G. (2005). The effects of public investment on private investment in developing economies. Public Finance Review, 33(5), 575-602. https://doi.org/10.1177/1091142105277627

  23. Erden, L., & Holcombe, R. G. (2006). The linkage between public and private investment: A cointegration analysis of a panel of developing countries. Eastern Economic Journal, 32(3), 479-492. https://www.jstor.org/stable/40326291

  24. Greene, J., & Villanueva, D. (1991). Private investment in developing countries: an empirical analysis. Staff Papers, International Monetary Fund Economic Review, 38(1), 33-58. https://doi.org/10.2307/3867034

  25. Guptha,K.L.(1992).Budget deficits and economic Activity in Asia. London:Rutledge.

  26. Hyder, K. (2001). Crowding-out hypothesis in a vector error correction framework: A case study of Pakistan. The Pakistan Development Review, 40(4), 633-650. https://www.jstor.org/stable/41260355

  27. Majumder, A. M. (2007). Does public borrowing crowd-out private investment? The Bangladesh evidence (Working Paper No. 0708). Dhaka: Bangladesh Bank Policy Analysis Unit.

  28. Mitra, P. (2006). Has government investment crowded-out private investment in India?. American Economic Review, 96(2), 337-341. https://doi.org/10.1257/000282806777211621

  29. Mukhtar, T., & Zakaria, M. (2008). Budget deficits and interest rates: an empirical analysis for Pakistan. Journal of Economic Cooperation, 29(2), 1-14.

  30. Naqvi, N. H. (2002). Crowding-in or crowding-out? Modelling the relationship between public and private fixed capital formation using co-integration analysis: The case of Pakistan 1964-2000. The Pakistan Development Review, 41(3), 255-275. https://www.jstor.org/stable/41260469

  31. Ouattara, B. (2004). Modelling the long run determinants of private investment in Senegal (Working Paper No. 04/05). Nottingham: The University of Nottingham, Centre for Research in Economic Development and International Trade (CREDIT). http://hdl.handle.net/10419/8176

  32. Pandit R. (2005). The impact of fiscal deficit on long term nominal interest rate in Nepal. Economic Review,113-133. https://www.nrb.org.np/ecorev/pdffiles/vol17_art6.pdf

  33. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616

  34. Ramirez, M. D. (1994). Public and private investment in Mexico, 1950-90: An empirical analysis. Southern Economic Journal, 61(1), 1-17. https://doi.org/10.2307/1060126

  35. Rashid, A. (2005). Public/private investment linkages: A multivariate cointegration analysis. The Pakistan Development Review, 44(4), 805-817.

  36. Reinhart, C. M., & Sbrancia, M. B. (2011). Financial repression redux,Finance and Development, volume.48, No.2, June.

  37. Rossiter, R. (2002). Structural cointegration analysis of private and public investment. International Journal of Business and Economics, 1(1), 59-67.

  38. Temin, P., & Voth, H. J. (2005). Credit rationing and crowding out during the industrial revolution: Evidence from Hoare’s Bank, 1702–1862. Explorations in Economic History, 42(3), 325-348. https://doi.org/10.1016/j.eeh.2004.10.004

bottom of page