The impact of remittances, FDI and capital formation on economic growth : evidence from Sri Lanka (1977-2023)

Abstract

Introduction

Sri Lanka’s economic growth trajectory since liberalisation in 1977 has been shaped by both external and internal drivers, most notably foreign direct investment (FDI), workers’ remittances, gross capital formation, exports, and savings. These variables are widely recognised as central to the growth process of small open economies, where reliance on external finance is high (Athukorala, 2012). In Sri Lanka, remittances have provided stability to household consumption, particularly during crises, while FDI has contributed to technology transfer and integration into global markets (Alfaro et al., 2004). Similarly, gross capital formation reflects investment in infrastructure and production, whereas exports and savings are important indicators of economic resilience (Levine and Renelt, 1992).

Although many studies have examined these factors, most focus on them in isolation or cover limited periods (De Silva and Kodituwakku, 2018; Jayasuriya and Arunatilake, 2020). This leaves a gap in understanding their combined and dynamic impact on growth, particularly in the face of recent challenges such as the COVID-19 pandemic and the 2022 debt crisis. Previous research has not sufficiently distinguished between short-run adjustments and long-run equilibrium effects, an area that requires further exploration (Loayza and Rancière, 2006). This study seeks to fill that gap by applying the Autoregressive Distributed Lag (ARDL) model to annual data from 1977 to 2023. The contribution of this study lies in providing an updated and integrated assessment of Sri Lanka’s key growth drivers, generating insights that can inform policymakers in shaping more resilient and sustainable development strategies.