Stochastic Simulation Approach To Debt Sustainability Analysis: Application To Zimbabwe

By Nebson Mupunga
2015
This paper applies dynamic stochastic simulation methods to assess medium to long-term public debt sustainability in Zimbabwe and provides probability measures for projections of public debt burden. The methodology applied involves estimating a fiscal reaction function and using it to simulate public debt path using a stochastic approach and historical information on drivers of public debt accumulation and their volatility. The results from the baseline scenario show that Zimbabwe’s public debt would not deviate much from the desired indicative public debt benchmarks in the medium to long-term. The risk to the public debt projection is however high with a 47 per cent probability of public debt exceeding the desired threshold in the medium to long term. The policy implication is the need for policy makers to proactively respond to the changing macroeconomic environment and to implement countercyclical fiscal policies to limit the probability of debt from exploding.

Key words: Public Debt Dynamics, Debt sustainability, Stochastic Simulation, fiscal reaction function