Abstract
Over the past few years most of the developing countries are facing hardship in collecting enough revenues to finance their budget. The situation of balance of payments is also not favouring the developing countries and the current account deficit is faced by them. Consequently twin deficits have emerged and the reliance on public external and domestic debt to finance the developmental activities have increased. The present study examines the consequences of public debt for economic growth and investment in Sri Lanka, for the period 1975-2014 by using the Autoregressive Distributed lag Model (ARDL) technique. The present study reveals that in Sri Lanka, public external debt has helped the process of economic growth; but debt servicing has a negative relationship to per capita GDP and investment. The external debt played a crucial role in development of this civil war which had hit the country; but however, debt servicing is a major concern in Sri Lanka. Domestic debt has positive and significant relationship with per capita GDP.
Key words: Public Debt, Economic Growth, Investment, ARDL.
