This study examines the macroeconomic policy setting in the context of debt financed development. Sri Lanka’s growth and economic development came to depend heavily on a public investment led infrastructure drive during 2006-14. With inadequate domestic resources to support higher public investment spending, Sri Lanka embarked on tapping new sources of international development finance, triggered by both demand and supply factors. With GDP growth relying on construction and related activities, private consumption was the main driver of growth while tradeable goods production stagnated. As the country’s debt service ratio climbed steadily, Sri Lanka is faced with a growing external debt problem in the face of prolonged dip in export earnings growth and non-debt creating FDI inflows.
