An analysis of capital flows and current account dynamics in Zimbabwe (1990-2013)

Abstract

This study analyzed capital flows and current account dynamics in Zimbabwe from 1990 to 2013. The primary objective of the study was to determine whether Zimbabwe’s current account deficit is sustainable or not. The study involved investigating whether the current account deficits violates the intertemporal budget constraints (IBC) or not, investigating the causal relationship between capital flows and current account deficits, and whether there is evidence of speculative capital inflows into the economy which are subject to sudden stops and reversal. When a country runs persistent current account deficits, questions are raised on the ability of a country to generate future current account surpluses to meet its external debt obligations created by past current account deficits.

The study applied the intertemporal balance model developed by Liu and Tanner, (1996) to assess sustainability of the current account deficit. The analysis involved testing the stationarity of current account to GDP ratio. Unit root tests were initially conducted by applying the ADF test. However, given its inability to discriminate clearly between non-stationary and stationary series with a higher degree of autocorrelation and sensitivity to breaks, the study also used second generation stationarity tests, notably the Dickey-Fuller Generalized Least Square (DF GLS), the semi-parametric Phillips-Perron test and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test. In addition, cointegration a test was conducted which also give way to the Error Correction Model (ECM). The study concluded the analysis with Granger Causality Tests on the current and current and capital account balance and the respective sub-components.

The results of the unit root tests amply demonstrated that the current account deficits violated the IBC implying that Zimbabwe’s current account deficit were unsustainable. The exports and imports of goods and services were co integrated but the Wald Coefficient Restriction tests results indicated that the current account deficits followed an explosive path. The study also took into account the errors and omissions in the analysis. The results confirmed that the current account deficit is unsustainable even when the errors and omission are subtracted from the current account deficit.