Sovereign debt and growth in Zambia: determining the tipping point

Abstract

From the mid-1980s to mid-2000s, Zambia was in egregious debt distress, which resulted in debt relief under the HIPC initiative and MDRI in 2005. Surprisingly, Zambia's debt-to-GDP ratio has increased astronomically from about 22 percent in 2011 to 56 percent in 2018. In view of that, we study the long-run effect of sovereign debt on growth by exploring if, at all, the debt-growth nexus varies with the level of indebtedness. This paper estimates the sovereign debt-growth nexus over the period covering 1970 to 2017, by employing the linear and non-linear specifications. The study finds evidence in support of a non-linear relationship between sovereign debt accumulation and growth in Zambia. With regards to the debt-threshold effect, the tipping point for Zambia is around 40 percent of debt-to-GDP, at this point, the positive effect of debt on economic growth becomes negative. Far more importantly, policy recommendations are prescribed from these study findings.