The Sri Lankan Debt Crisis: Is there a way out?

Abstract

This thesis deals with the current debt crisis is Sri Lanka, which was brought about by rapid development following the end of the civil war, and how best to prevent future debt crises by providing recommendations to policy makers. This thesis makes use of two models, the Balance-of-Payments (BOP) Constrained growth model, and the Flying Goose Model (FGM) of development which was observed in East Asian countries during their fast-paced growth period. The BOP model is used to identify industries within Sri Lanka’s economy which have a high income elasticity of demand by the rest of the world. The results of the data analysis find that Sri Lanka has a high income elasticity of demand in the machinery and chemical sectors with in the manufacturing industry. The Sri Lankan economy is also diagnosed in the context of the FGM to understand in what stage of the FGM Sri Lanka is in, by means of carrying out non-parametric analysis on the FDI per capita, the trade dependence ratio, the revealed comparative advantage index and other economic parameters. From the evidence presented by the two models, policy recommendations go in the direction of promoting selective industrial policy, in order to enhance the growth of these targeted industries identified by the BOP model through means of accelerating the Flying Goose Model of development.