Abstract:
There has been much concern in the relevant literature about the possible destructive economic effects
of large military expenditures. It is supported by academics and scholars that defense expenditure can
significantly affect a country’s economic growth and in some cases it influences external and internal
debt. However, relevant empirical studies have produced contradictory evidence while the literature in
this field remains relatively poor. Since independence, Sri Lanka has taken several steps to build up
its economy in a successful way. At the same time, the country suffered nearly three decades of civil
war and heavier defense burden during this time. Military expenditure was very low before the 1980s,
but since then a need for foreign borrowing and external debt accumulation grew. Therefore, there
should be a possibility relation between the deficits and foreign borrowing in Sri Lanka.
Military spending affects the stock of external debt through many channels; for instance, rapid
increase in military spending raises volume of external debt by pressing budget revenues which
increases the government borrowing from internal and external sources of finance and increases the
debt responsibility in the country (Karagol, 2006). An increase in debt services is linked with high
level of external debt which limits investment and capital formation that in turn slows down the rate
of economic growth.
The main objective of this study is to investigate the dynamic interrelationship between defense
expenditure and debt problem in Sri Lanka for the period from1983 to 2011. Data for this study have
been collected from the Central Bank Annual Reports.
The results show that defense expenditure, domestic debt, and foreign debt are on an upward trend,
and foreign debt growth started to go upward since 2000. The massive increases of defense
expenditure cause several harmful effects on macroeconomic variables. The results reveal that a rise
in military expenditures increases the domestic debt and stock of external debt. The reductions in
military spending will reduce the debt problem and will shift resources to developmental projects
and stimulate the pace of economic growth. This study invites policymakers to approach the
problem of curtailing debt in innovative ways in Sri Lanka.
