Trade–aid link: does the Western aid promote Asian exports to Sri Lanka?

Purpose The purpose of this study is to investigate the effectiveness of foreign aid in terms of trade in Sri Lanka. This study aims to analyze whether foreign aid from the Western countries to Sri Lanka promotes exports to the donor countries and encourages imports from Asian countries. Findings The results derived from the analysis suggest that there is no significant relationship between aid and trade in the long run whereas foreign aid marginally causes only the imports in the short run. Overall, the study finds that foreign aid does not significantly affect trade in Sri Lanka. Methodology The auto regressive distributed lag bounds testing approach is used to examine the long- and short-run relations between foreign aid and trade using the annual time series data during the period from 1977 to 2019. Practical implications Sri Lanka has been one of the aid recipients among Asian countries since 1960. At the same time, Sri Lanka has been experiencing trade deficit since its independence and has to find all the ways to improve the trade. Because foreign aid has promoted trade in a numerous countries, it is high time for Sri Lanka to negotiate with the donor countries and agencies to design aid for trade promotion. Originality The nexus between the trade–aid link of Sri Lanka with Western and Asian country’s perspectives has not so far been investigated. The findings of this study would be a new knowledge added to the literature on the trade–aid link and be useful to the policymakers for decision-making and future researchers to cope up with further analysis.