Growth-Debt Nexus: An Examination of Public Debt Levels and Debt Crisis in Zimbabwe

Abstract

Government debt is an indirect debt of the taxpayers, and can be classified as internal or external. Debt crisis is the general term for a proliferation of massive public debt relative to tax revenues. Public debt enables governments to invest in critical areas of the economy where the capacity of tax revenue to undertake these projects may be limited or in situations where printing additional money will disrupt the stability of the economy. Government borrows in order defer difficult but necessary reforms such as the imposition of taxes which might be necessary to generate revenue for development. Countries with high public debt tend to grow slowly. The study examines the origin of debt crisis in Zimbabwe, debt nature, causes, consequences and possible ways of reducing the debt. The study uses 1980-2013 data to run an OLS model on economic growth using STATA Econometric Software, in an effort to explore the effect of external debt. The regression results shows that public debt has a negative effect on economic growth in Zimbabwe, which has varying theories prevailing. The study concludes by encouraging the government not to borrow unnecessarily, and to use borrowed funds for investment projects, rather than on consumption expenditure.

Keywords: Public debt, External debt, Foreign aid, Economic Growth, Budget Deficit, GDP, Debt Crisis, Zimbabwe

JEL Classification: H63, O40, E62, E43