Financial Crime World

Financial Crimes Take a Toll on Sri Lanka’s Economy: A Closer Look at Debt, Reserves, and Political Stability

A Study on the Complex Relationship between External Debt, Foreign Reserves, and Political Stability in the Financial Crisis of Sri Lanka

In a groundbreaking study published in PLOS ONE, economist Candauda Arachchige Saliya sheds light on the intricate relationship between external debt, foreign reserves, and political stability in the financial crises in Sri Lanka. In this article, we outline the key findings of Arachchige’s research.

Background

Using a comprehensive dataset from the World Bank and the Central Bank of Sri Lanka, spanning from 1996 to 2022, Arachchige employs regression analysis to explore the dynamics of these variables in the context of financial instability.

Methodology

To analyze the impact of these factors, Arachchige introduces a composite variable, CRISIS, which accounts for interest rate, inflation, currency devaluation adjusted to GDP growth, as the dependent variable.

Key Findings

  1. External debt and foreign reserves contribute more directly to financial crises.
  2. Political stability—the absence of violence or terrorism—indirectly influences the crisis, primarily by impacting debt accumulation and reserve levels.
    • While political stability’s direct influence on the financial crisis was not statistically significant, it significantly impacted debt and reserves.

Granger Causality Tests and Regression Analysis

Granger causality tests revealed that debt and reserves had predictive value in relation to CRISIS, whereas the reverse relationship was not significant. Regression analysis using the error term and scatter plots further confirmed the absence of endogeneity issues in the model.

Conclusion

“This study represents a pioneering effort to investigate the intricate relationship between external debt, foreign reserves, and political stability,” Arachchige said. “By demonstrating the indirect influence of political stability, we gain a more comprehensive understanding of the factors that contribute to financial instability in Sri Lanka.”

Previous Research

This study extends past research, including Granger causality analysis between inflation, debt, and exchange rates in Malaysia ([1]) and perspectives on economic crime and corruption in Sri Lanka ([2]), among others.

[1]: Here’s a citation if available [2]: [Here’s a citation if available]

Implications and Insights

For a deeper understanding of the study’s findings, readers are invited to explore the original research article published in PLOS ONE (link).