An empirical investigation into the impact of public debt on economic growth: The case of Zimbabwe (1980-2014)

Abstract

Zimbabwe’s public debt has been mounting yet the real growth rate has been on average declining. Could this possibly mean that the escalating public debt is hampering the real growth rate of Zimbabwe? This study investigates the impact of public debt on economic growth in Zimbabwe for the period 1980-2014. The public debt stock is disaggregated into external debt and domestic debt in order to determine the impact of each on economic growth independently. The data was subjected to diagnostic tests before estimation. A long-run relationship was established amongst the variables real economic growth, domestic debt, external debt, budget deficit, external debt service and investment. Thus, a short-run Error Correction Model (ECM) had to be used to capture the dynamics in short-run disequilibrium towards the long-run equilibrium. The empirical results showed that external debt negatively affects the real growth rate of Zimbabwe, both in the short and long-run. This confirms the existence of ‘debt overhang’ in Zimbabwe. In the long-run, domestic debt positively affects economic growth. However, in the short-run, the effect is negative but insignificant. Several policy implications emerged from the empirical results. Zimbabwe should strengthen its debt management in order to keep the public debt within sustainable thresholds. Furthermore, the country can make use of debt to equity swaps by privatising underperforming parastatals. This would make them competitive and efficient. This move could attract more foreign direct investment inflows and create more employment thus lead to an increase in real growth rate of Zimbabwe.