Sovereign debt and economic growth in Zimbabwe: Amultivariate causal linkage

Abstract

This paper examines the causal linkage between public debt and economic growth, and between public debt service and economic growth in Zimbabwe for the period from 1970 to 2017. The purpose of the study is to provide empirical evidence to the question "do high public debt or public debt service levels promote or reduce economic growth in Zimbabwe?" To avoid the omission-of-variable bias, fiscal balance and savings are used as intermittent variables, thereby creating a multivariate Granger-causality model. The study employs the autoregressive distributed lag (ARDL) bounds testing approach. Empirical findings indicate that there is short-run unidirectional causal flow from economic growth to public debt in Zimbabwe. Further, the study results reveal that there is no causal link between public debt service and economic growth, irrespective of whether the causality is estimated in the short run or long run. Therefore, the paper concludes that the sovereign debt overhang in Zimbabwe is mostly a result of low economic growth.