Please use this identifier to cite or link to this item: http://hdl.handle.net/123456789/542
Title: The impact of public external debt on private investment. Evidence from Zimbabwe under the multi-currency system 2009-2017
Authors: Mugumisi, Nathan
Keywords: Zimbabwe
External debt
Debt overhang
Private investment
Issue Date: 14-Jan-2021
Publisher: Reader Insight
Series/Report no.: Journal of Economic Info;8 (1)
Abstract: The levels of public debt have grown significantly in both emerging and developed countries even during times of peace. The rising levels of debt pose substantial debt sustainability issues to developing countries including Zimbabwe. A defaulting country usually has limited access to new international credit lines to borrow at a higher cost, due to high perceived country risk premium, making the country a less attractive investment destination. Zimbabwe is currently suffering debt distress and has since the year 2000 struggled to service her external debt from international multilateral financial institutions. Zimbabwe's external debt continues to pile up due to penalties on defaults. This paper examines the impact of public external debt on private investment in Zimbabwe using quartely time-series data for the oeriod of 2009 and 2017. The period of study was a period of relative stability when Zimbabwe operated under a multicurrency system. Interest rates, political risk, trade openness and household consumption are control variables of this study. Using the Vector Error Correction Model (VECM) we find that external debt and external debt squared has a negative impact on private investment in the long run. Results suggest that Zimbabwe's external debt is crowding out private investment. In the short-term, we urge the government of Zimbabwe to apply for debt rescheduling to avoid penalties that have so far contributed to the ballooning of Zimbabwe's external debt obligations. In the medium-term, we urge the government of Zimbabwe to design comprehensive debt and arrears reduction strategies to reduce Zimbabwe's external debt to sustainable levels. In the long-term, after regaining borrowing rights, we urge the government of Zimbabwe to invest external borrowings in productive ventures to facilitate debt amortisation. Secondly, we recommend that external debt be invested in education, health and infrastructure, which can potentially stimulate private investment, and thus create a multiplier effect on economic growth. Lastly, we recommend the government to invest foreign loans in sectors where Zimbabwe enjoys a comparative advantage, to ensure reliable export revenue for debt servicing.
URI: http://hdl.handle.net/123456789/542
Appears in Collections:Department of Accounting and Finance

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