Precarious Tightrope BetweenExternal Debt and Economic Growth:A Comparative AnalysisofBangladesh and Sri Lanka

Abstract

In recent years, the foreign debt inSouth Asian economies has risen to concerning levels, suggesting that these governments are unable to generate enough revenues to finance their budget, which could most likely increase the risks of a debt crisis.This study looks at the relationship between foreign debt and the economic growth of two South Asian countries—Sri Lanka and Bangladesh—using Autoregressive Distributed Lag (ARDL) models from the period of1984 to 2022. The comparativeresults demonstrate a persistent detrimental impact of foreign debt on both countries' economic growth trajectories. Moreover, our research emphasizesthe importance of the debt-to-ԌDP ratio, suggesting that a higher percentage of external debt increases the adverse impact on ԌDP growth. The study compares the external debt levels of both countries and its consequences on their economies. Both Bangladesh and Sri Lanka suffer negative consequences from external debt. However, the study indicates that Sri Lanka, burdened with heavier debt,experiences a more pronouncedimpact on its economic growth trend as compared to Bangladesh. The study aims to address the pressing issue of rising foreign debt in South Asian economies, provide empirical evidence of its impact on economic growth, and offer policy recommendations. The findings have implications for both Sri Lanka and Bangladesh, emphasizing the importance of managing debt effectively.