Assessing the impact of Private Sector External Debt on Economic Growth in Zimbabwe

By Farai Masendu
2011
International capital flows have a considerable influence on growth patterns in recipient countries and positively influences the economic behaviour of these countries. Against this background, it is important to see how these capital flows have impacted on the economic performance of the country. The purpose of this paper is therefore to examine the impact of private sector external debt on economic growth in Zimbabwe for the period 1980-2009. While the macroeconomic determinants of economic growth have been analysed to a considerable extent in a number of empirical works, the incidence of private sector external debt on economic growth has remained largely underexplored.

Against the possibility of a linear relationship between these two variables, the paper combines both quantitative (time series) and quantitative (cross-sectional) analysis of the variable of private sector external debt to establish its contributory effect to economic growth. Using the Ordinary Least Squares approach, after testing for stationarity of the variables in the reduced neoclassical growth model, the study finds evidence of a strong contributory effect of private sector external debt on growth in Zimbabwe. Other significant explanatory variables of economic growth in Zimbabwe found to be positively significant were government expenditure and foreign direct investment, although its contribution was surpassed by private sector external debt. The incidences of public sector government debt and trade openness were found to have a negative impact on debt. These results buttressed the need for continued monitoring and analysis of this variable, which has been underexplored but has been a critical source of finance for development in Zimbabwe.