Examining the impact external debt on economic growth in Zimbabwe (1980-2012)

Abstract

This study sought to establish the impact of external debt on economic growth in Zimbabwe. The study was motivated by two reasons: government’s reliance on external debt as a way of resolving the debt crisis by seeking new loans, and the citing of unlocking of new external finance as the prime objective of resolving the debt crisis. Thus, despite that the country’s debt is huge and has become unsustainable, there is an indication of the need to continue borrowing. External debt was measured as the percentage of external debt to GDP and economic growth was measured by growth in GDP. The ARDL-ECM econometric approach was applied on the data for the years 1980-2012 sourced from the World Bank, World Development Indicators. External debt was found to have a consistent negative and significant impact on GDP growth in the short run and the long run. External debt servicing was however found to have a positive and significant relationship with GDP growth in the long run. The study confirmed the conventional wisdom that growth in fixed capital formation promotes growth in GDP while trade openness constrains growth. Based on these results, the study recommends that Government should not rely on external borrowing. The government has to use domestic resources and widen its non-debt financing of operations. Borrowing legislation needs to be in place to ensure rational borrowing. External debt management is also important in ensuring that borrowed funds are spent on key investments that include public roads, rail, energy and human capital projects that will serve to attract private capital accumulation. On the debate on external debt resolution, the study recommends seeking debt relief and mobilization of domestic resources as viable and sustainable options compared to new borrowing for the sake of loan repayment.