Public debt, public debt service and economic growth nexus: empirical evidence from three Southern African countries

Abstract

This study examines the public debt, public debt service and economic growth nexus in Zambia, Zimbabwe and South Africa using time-series data from 1970 to 2017. This research provides empirical evidence to contribute, firstly, to the ongoing public policy debate regarding the dynamic relationship between public debt, public debt service and economic growth, and their causal relationship; and secondly, to the relative impact of domestic and foreign public debt on economic growth in the selected study countries. For this purpose, four empirical models were utilised and estimated using the Autoregressive Distributed Lag (ARDL) bounds to cointegration and the error correction ARDL-based causality test. Model 1 explored the impact of aggregate public debt on economic growth, while Model 2 investigated the relative impact of domestic and foreign public debt on economic growth. Model 3 examined the impact of public debt service on economic growth, whereas the causality between aggregate public debt and economic growth, and between public debt service and economic growth is tested in Model 4a and Model 4b, respectively. Results show that in Model 1, aggregate public debt has a positive impact on economic growth in Zambia but is negative in Zimbabwe and South Africa. In Model 2, domestic public debt negatively impacts economic growth in Zambia and Zimbabwe and positive impact in South Africa. In addition, foreign public debt has a positive impact on economic growth in Zambia and negative impact in Zimbabwe and South Africa. The results from Model 3 largely support a negative relationship between public debt service and economic growth in Zambia and Zimbabwe, and an insignificant relationship in South Africa. The causality results for Model 4a indicate that it is economic growth that drives public debt in all the study countries. Finally, no causal relationship between public debt service and economic growth was confirmed in all the study countries (Model 4b).