Zimbabwe Country Debt and Economic Performance

Zimbabwe Country Debt and Economic PerformanceOverviewThe debate on the effect and positionion of causality regarding debt on scotch step-up has attracted signifi crumbt academic interest since the last quarter of the 20th century. This question has become more than pertinent in the context of the so-called to the lowest degree Developed Countries (LDCs) whose economies typically contain oversized debt, exhibit stunted growth and fix often defaulted on outstanding debt. This look for sought to build on the existing body of literature and conditions in Zimbabwe over the past 20 years, with special reference on the period 1995 to 2008, and draw inferences on the agency that debt vie in Zimbabwes stinting performance over the same period.This chapter sets the stage for the bailiwick by means of reviewing the background to the research study, outlining the problem statement, discussing research fair games and methods among other things. The framework introduced and exposit herein shall be expanded on application in the later stages of the research project and any necessary adjustments will be incorporated. The chapter, by outlining in advance the research expectations, forms the basis upon which the outcome and conclusions of the research shall be assessed.Background of Zimbabwes DebtZimbabwe just like any other Less Developed Economies (LIC) has relied on some(prenominal) immaterial and domestic finance to fund its enlargemental projects. External debt comprise unlike currency denominated liabilities owed to non-resident entities, in the form of both medium to long- status loans and short-run trade facilities, while domestic debt is debt owed to residents and is contracted mainly through issuing treasury bills and bonds as well as utilization of the overdraft window at the reticence savings bank of Zimbabwe (RBZ).The country has not been able to pay its external and domestic obligations for sometime against the background of progressive decli ne in export performance and the depletion of the conflicting currency reserves. The meagre unknown currency resources available have been allocated towards critical social needs such as education and health delivery systems. Consequently, the countrys top executive to settle obligations has been severely undermined culminating in accumulation of external payment arrears to US$4 487 million as at 31 December 2009. This represents a more than 60% increase over the 2000 figure of $2.75 billion. This coincides with a period when the economy had entered into a sustained phase of sparingal decline and hyperinflation.It is argued that debt overhang has been a stumbling baffle towards economic recovery initiatives of the country and has jargond negatively on the countrys international credit rating, a development which has been a major deterrent to potential foreign investment funds and credit inflows. The chalk up debt has been growing from 1990 as arrayn in the graph hereunderFi g. 1 Debt and GDP Trend for ZimbabweSource Data complied from Reserve Bank of Zimbabwe and The Ministry of Finance in ZimbabweZimbabwe has not been able to pay its debt obligations for nearly a decade from 1999 against the background of progressive decline in export performance and depletion of foreign currency reserves, due to restrictive measures imposed on the country. The total debt increased from $2.9 billion in 1990 to $6.9 billion in 2010 and the debt burden is a stumbling block towards economic recovery of the country and has impacted negatively on the countrys international credit rating, a development which has been a major deterrent to potential foreign investment and credit inflows.Against this backdrop, it is imperative that the country develop sustainable strategies to deal with the debt overhang problem. As at October 2010, the external debt stock was 118.4% of GDP, which is above international debt sustainability benchmark of 60%.Zimbabwe is in the process of draftin g a cocktail of measures to expunge the debt obligations. A number of options which can be implemented to deal with the debt burden atomic number 18, (a) Equity Anchored Debt Resolution which involves external new borrowing by the country to retire the totality or part of external debt, using identified prevalent assets as collateral, (b) Brady plan where Zimbabwe can engage other nations who can guarantee its securitized debt, (c) Foreign Direct enthronement (FDI) Backed Debt Clearance Strategy which is a strategy designed to clear Zimbabwes debt and debt arrears without direct and immediate payment by Government of Zimbabwe, (d) Debt re-scheduling, and (e) Heavily Indebted Poor country (HIPC) Initiative which is a debt reduction strategy for heavily indebted woeful countries pursuing IMF, and World Bank supported adjustment and reform programs.The debate on the debt resolution issues in Zimbabwe has been taking place in the absence of a proper analytical background or framewor k that captures the real dynamics behind the debt issue. This research contributes to this critical discourse in Zimbabwe through providing that analytical and objective framework.Problem StatementGrowing mankind debt is a worldwide phenomenon and it has become a common feature of the fiscal sectors of most of economies. Poor debt management and a permanent growth of the debt to Gross Domestic Product ratio may result in negative macroeconomic performance, like crowding out of investment, financial system instability, inflationary pressures, exchange rate fluctuations and more importantly adverse effects on economic growth. In occurrence the theoretical literature has summarized the pursual channels through which external and domestic debts affects growth negatively namely debt overhang, liquidity constraint, fiscal effect, productivity suppression and reduction in human crownwork accumulation. There are also certain social and political implications of unsustainable debt burde n. Persistent and high normal debt calls for a large piece of budgetary resources for debt servicing. Consequently, the government is pressure to cut allocations for other public returns and it faces serious difficulties in executing its electoral manifesto, if it has.While the negative effects of public debt are well documented, thither is no consensus on the optimum impact and the direction of causality. Countries with better economic performance may also better deal with the public debt phenomenon. In fact higher economic growth in turn increases a countrys creditworthiness and this may attract more capital inflows. If the capital inflow is long term or Foreign Direct Investment (FDI), and the debt is applied towards enhancing the countrys productive capacity and capital accumulation, the impact of debt on economic growth will be positive.There have been several endeavors to empirically assess the public debt-economic growth link, in the context of other antecedent variables mainly by using Ordinary Least Squares (OLS). approximately of the earlier empirical studies include a fairly standard set of domestic debt, policy and other exogenous explanatory variables and the majority found ane or more debt variables to be significantly and negatively correlated with investment or growth (Krugman, 1988 Borensztein, 1990 Greene and Villanueva, 1991 Deshpande, 1997 and more recently Pattillo, Poisson, and Ricci, 2004). Among developing countries evidences supporting the debt overhang system features research from Iyoha (1996), Fosu (1999), Mbanga and Sikod (2001), Maureen (2001) and Clements, Bhattacharya, and Nguyen (2003).The rationale of this study was driven by the scant meter of research in developing nations investigating the link between public debt and growth taking into account the causality and endogeneity issues. Although there is a substantial literature on the impact of public debt on growth, relatively few studies have been conducted on a sampl e of developing economies exclusively and particularly for Africa, but the latter has remained one of the continents with the highest and worrying growing level of public debt. This research aims to analyze the impact of public debt on the economic growth of Zimbabwe over the period 1990-2000. This study is based on the small developing state, Zimbabwe, and it provide a good eggshell study because as most low income countries, it has limited access to international capital markets and thus the impact of external debt and domestic debt on these economies can be different as compared to emerging market countries.Moreover external debt may have indirect effects through hole-and-corner(a) and public investment through the debt overhang and crowding out effects. Further, one should also not ignore the indirect effects of debt accumulation and service through private investment (debt overhang) and public spending (crowding out). Thus given the possibility of endogeneity and important fe edback effects, the research uses the dynamic time series analysis, namely a vector Autoregressive framework. The motivation to use this framework is that it allows important insights on the role of public debt on, not only economic growth but ultimately on private and public investment as well.Statement of the Research ObjectivesTo develop a pragmatic model to understand the relationship between national debt and economic performanceTo ascertain the relevance of debt in determining economic policyTo establish critical benchmarks that developing countries can use to enhance bond markets.Key Research QuestionsWhat are the drivers for the level of debt in developing countries?What are the determinants of economic performance?What role do stocks, bonds and alternative asset classes play in resolving country debt?Are prescriptive models and or solutions on debt from developed economies workable for developing nations such as Zimbabwe?HypothesisIn undertaking this research, emphasis is to test the following hypothesis upon which the results of this study are basedPublic debt has a negative influence on the economic performance of a country. Zimbabwes economic decline is attributed to heavy debt overhang.The alternative hypothesis of this study is as followsPublic debt does not have any influence in the economic performance of a country. Zimbabwes economic decline has no relationship with public debt.Definition of TermsDefinitions form an integral part in the compilation of the research. The definition of terms given below, where used consistently in the entire research report.Public Debt this is defined as the total debt owed by the Central Government which include both domestic and external debt, Bloomsburg (2007).External Debt It refers to the part of a countrys debt that is owed to creditors who are not residents of the country, Bloomsburg (2007). In other words it refers to the obligations that are owed by residents to non-residents.Debt Service refers to t he future debt repayments of both the principal and interest amount.Economic Performance refers to those issues dealing with the amount and value of money, wealth, debt, and investment, SDI (1996). It is the general outlook of the economy as measured by relevant economic indicators such as GDP/GDP per capita.Country Debt refers to total obligations owned by the country to non-residents.Debt Sustainability The OECD Economic Surveys (2002) define debt sustainability as the ability of government to service its borrowings, both internal and external without resorting to rescheduling or accumulation of arrears. Thus, debt is sustainable when it can be serviced without resorting to exceptional financing or a major correction in the future balance of income and expenditure. Debt sustainability relates to the assessment of the level of debt that can be serviced without resorting to exceptional financing or a major correction in the future balance of income and expenditure.Research Design The type of research design pick out is both experimental and correlational in nature. The study will triangulate correlation and qualitative aspect to increase the degree of control over factors reviewed. The specific focus on Zimbabwe draws understanding of the study as a case study. Robson (2002178) defines a case study as, a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence. The purpose of the study is to examine the relationship between variables, in this instance, developing country debt and economic performance. The degree of control on factor variables in this research will clearly be moderate as the role of environmental influence and human perception will relatively be inconsistent.Secondary Research (Correlational Research).To assess the empirical relationship between the major variables, that is debt and economic growth, the research makes extensi ve use of econometric modeling. The modeling stage incorporates other variables, which although not underlying the core objective of the relationship being analysed, are considered relevant explanatory variables to the dependent variable.The causal effect among the variables is often indirect, has significant components of the feedback effect and exhibits elements of endogeneity. To account for this, the research uses dynamic time series analysis, namely a Vector Autoregressive framework. The motivation to use this framework is that it allows important insights on the role of public debt on, not only economic growth, but ultimately on private and public investment as well.Advance filtration of the modeling variables to enhance model purity and relevance is achieved through various forms of pre-modeling tests. The univariate properties of all data series are investigated to detect the degree to which they are integrated, provide valid statistical inference and avoid problems of spur ious relationships. Both the augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit-roots tests will be employed for that purpose to show whether the variable are integrated of order 1 (I(1)) and thus stationary in difference. The time series characteristics of the data will be analysed by utilizing the statistical tools such as the R-squared, unit roots, the t-statistic, the probability value (p-value) and the Dubin Watson Statistic (DW statistic).Justification of the Vector Autoregressive FrameworkPublic debt does not only affect growth a priori (that is in the expected negative effect on economic growth), but countries with better economic performance may also better deal with the external debt phenomenon. In fact higher economic growth in turn increases a countrys creditworthiness and this may attract more capital inflows. If the capital inflow is long term or Foreign Direct Investment (FDI), the need to borrow may decrease. Moreover external debt may have indirect effects through private and public investment through the debt overhang and crowding out effects. In addition, one should also not ignore the indirect effects of debt accumulation and service through private investment (debt overhang) and public spending (crowding out). Thus given the possibility of endogeneity and important feedback effects, we use dynamic time series analysis, namely a Vector Autoregressive Framework, to analyse the hypothesized link. Such a framework will allow important insights on the role of public debt not only on economic growth but ultimately on private and public investment as well.Significance of the Study.The envisaged modelling framework will provide debt managers in Zimbabwe and the component part with an objective and efficient tool to analyse and cope with vulnerabilities in their public debt portfolio. This awareness shall be enhanced by the post-modeling user test and analysis performed as part of this research. The research focuses on country specific fa ctors and seeks to contribute to the development of econometric modelling in Zimbabwe and comparable countries in the region.The precision of policy devising and public finance management in Zimbabwe is severely weakened by lack of quantitative insights into the workings of the economy. Over the years, little or no attempt has been made to scientifically assess the impact of the countrys runaway debt on such variables as economic growth, provision of social services and Foreign Direct Investment flows. This research represents an important step towards addressing this dearth of analytical insight.Chapter ConclusionThe above chapter highlighted the core research problem, research objectives, research questions and the research hypothesis adopted to develop econometric model output for this paper. In the following chapters the researcher shall review as followsChapter 2 The literature reviewChapter 3 The methodologyChapter 4 Findings and expatiate analysis of the Zimbabwean marketCh apter 5 ConclusionsChapter 6 Recommendations