Impact of FDI on Major Macroeconomic Variables in Sri Lanka

The importance of the FDI has been overlooked by many countries in the past mainly due to political reasons. Now, it is accepted as a crucial factor in accelerating economic growth, especially in the developing countries. There have been ups and downs of FDI in post independent Sri Lanka due to political perceptions of various regimes. Economic liberation could be considered as a turning point of FDI policies in the recent history of the countries even though it has been consequently checked by political uncertainties, especially civil wars. The country has not succeeded in attracting sufficient FDI yet, despite the war has ended. Sri Lanka is a small open economy, hence FDI make considerable impacts on its macroeconomic variables. In the case of the exchange rate, interest rate, external reserves, outcome of BOP, money supply, inflation, economic growth, employment generation and external borrowings and FDI are important. The main objective of this study is to examine the impact of FDI on the performance of macro-economic variables in Sri Lanka. Findings suggest that FDI has made a significant impact on macroeconomic variables of Sri Lanka depending on the volume of inflows.