Analysing the Theoretical and Empirical Foundations of Public Debt Dynamics in Zimbabwe

Abstract

This paper provides an analysis of the theoretical and empirical foundations of public debt dynamics in Zimbabwe. The analysis was undertaken by applying the debt dynamics equation that enables estimating the required primary balance, building on the government inter-temporal budget constraint to infer the factors that influence public debt, as well as to ascertain specific policy issues required to ensure a sustainable public debt structure. The results show that debt dynamics in Zimbabwe are largely composed of huge stock flow adjustments to finance social and political related expenditures. Results also indicate that the output gap had a significant influence on public debt dynamics in Zimbabwe. As such, the results underscore the need for prudent debt management to guard against unexpected changes in public debt, which are not explained by fundamentals. The major policy implication from the study is the need to minimize the interest rate growth differential and to implement growth enhancing fiscal policies to ensure a sustainable long term public debt position.