The impact of external debt and debt servicing on economic growth in Zimbabwe, 1980-2011

Abstract

The study looks at the impact of external debt and debt servicing on economic growth. Issues of external debt and their impact on economic growth have been gaining considerable momentum in the past decades. Zimbabwe’s debt situation has been a major cause for concern and recent efforts have seen the country agree to an IMF Staff Monitored Programme to try and rid the economy of this debt. The study makes use of Granger Causality tests, and Vector Autoregression (VAR) analyses which employ the impulse response functions and variance decomposition analysis. Granger Causality tests show that there is uni-directional causal relationship between external debt and economic growth, whilst between debt servicing and growth there is a bi-directional causal relationship. Findings from impulse response tests show that a negative relationship exists among the variables external debt, debt servicing and growth. These findings are consistent with the Debt Overhang Theory. Estimates from variance decompositionshow that there are statistically significant relationships that exist between external debt, debt servicing and economic growth. Furthermore external debt impacts on investments and productivity thereby impacting directly and indirectly on economic growth.