Re-visiting the External Debt-Economic Growth Question in Zimbabwe

Brian Tavonga Mazorodze

doi:10.22610/jebs.v12i2(j).2939

Abstract

This paper quantifies the threshold effect of external debt on economic growth in Zimbabwe between 1980 and 2016. Results from the Fully Modified Ordinary Least Squares (FMOLS) technique confirm that external debt (up to 57% of GDP) raises economic growth. Beyond the 57% of GDP threshold, external debt lowers growth. A separate analysis of variance shows that the mean GDP per capita is lower by 11% when external debt exceeds 57%. From the sample average, the 57% of GDP threshold suggests that debt stock above 4.7 billion USD can be detrimental to the country’s long-run growth prospects. Currently, Zimbabwe’s external debt is standing at over 11 billion USD which is way above the estimated threshold level. Therefore, the policy implication arising from this paper is that the country’s Finance Minister needs to pursue debt-reduction strategies given that the country’s stock of external debt is already sitting in the growth-reducing territory.

Highlights

Criticism levelled against the Zimbabwean government during the past two decades has been centred around, the accumulation of debt owing to excessive fiscal spending in spite of a collapsing revenue base
Results in table 1 show that both GDP per capita and external debt are generated by a non-stationary process in levels but are stationary once differenced implying an integration of order one
Given the estimated threshold point, we considered, for robustness check, an analysis of variance estimated by Ordinary Least Squares (OLS) in which a dummy variable for debt above 57% is added on the right hand-side of the equation along with a trend component

Summary

Introduction

Criticism levelled against the Zimbabwean government during the past two decades has been centred around, the accumulation of debt owing to excessive fiscal spending in spite of a collapsing revenue base. With the country at a critical juncture post-elections held on the 31st of July 2018, some economists and the international community especially the IMF have begun contemplating that further debt-financed spending can stunt economic growth It is against this background that the country’s newly appointed Minister of Finance articulated in the 2018/2019 budget a raft of cost containment measures which include a 5 percent salary cut for senior government officials coupled with a 2 percent electronic transactions cost aimed at raising revenue trades performance, which is essential to raise foreign currency reserves required to repay the external debt (mostly owed to the Paris Club and the African Development Bank), has been far from satisfactory.

Methods

Results

Conclusion