Abstract:
An efficient financial development facilitates better credit access for businesses
and individuals as well as effectively channeled into productive investments of
remittances which in turn promote the economic expansion of the nation. Sri
Lanka depends on remittances, for its economic growth since it is independent
like many developing countries. Despite a substantial body of empirical literature
on the subject, there remains a need for a more profound understanding of how
remittance inflows affect Sri Lanka's economic growth by financial development.
Investigating the relationship between financial development, remittances, and
economic growth in Sri Lanka, this study utilizes annual data from 1980 to 2022
by considering economic growth as the dependent variable and financial
development, remittances, gross capital formation and trade openness as
independent variables. The EViews ARDL findings suggest that financial
development has a strong negative impact on economic development in the long
term, while remittance has a significant positive relationship with economic
growth. This empirical evidence highlights the composite relationship between
financial development, remittances and economic growth. While financial
development is usually regarded as a catalyst for economic growth, this study
shows a notable significant impact, potentially due to inefficiencies and financial
instability within the financial sector. Conversely, remittances reliably boost
economic growth by offering salient financial aid to households and small
enterprises. The findings of this study elaborate that inefficiency and instability
can lead to a negative correlation between financial development and economic
growth. This study emphasizes the importance of customized policy
interventions in leveraging the benefits of remittances and addressing the
drawbacks of a flawed financial sector. Further, these findings indicate the
necessity for nuances policy measures that tackle financial sector inefficiencies
and optimize the positive impact of remittances on development.
