Analysing the Effects of Macroeconomic Shocks on Public Debt in Zimbabwe

Abstract

This paper analyses the impact of macroeconomic shocks on public debt in Zimbabwe. Understanding the impact of macroeconomic shocks on public debt is necessary as this allows debt managers to focus on a public debt structure which limits the potential of debt from deviating from its long-run steady state. The study applied the Bayesian Vector Auto regression (BVAR) model to simulate the impact of macroeconomic shocks on public debt. The results show that Zimbabwe’s public debt is more vulnerable to interest rate, exchange rate, economic growth and primary balance shocks. Together these shocks account for about 61 per cent of forecast error variation in the debt to GDP ratio. From this analysis, the major policy implication is the need for government to pay particular attention to automatic debt dynamics. There is also a need to maintain the primary balance at manageable levels as well as instituting growth enhancing policies to ensure long-term sustainability of public debt. The need for appropriate selection of the currency composition of public debt is also necessary to mitigate the risk of unexpected increases in public debt from adverse external sector developments.