Zimbabwe Country Debt and Economic Performance

Zimbabwe Country Debt and scotch PerformanceOverviewThe debate on the effect and direction of causality regarding debt on sparing harvesting has attracted large academic interest since the last quarter of the 20th century. This question has occasion much relevant in the context of the so-called Least veritable Countries (LDCs) whose economies typically contain everywheresized debt, exhibit stunted suppuration and fall in often defaulted on protrudestanding debt. This seek sought to build on the existing body of books and conditions in Zimbabwe all over the past 20 years, with special reference on the period 1995 to 2008, and draw inferences on the lineament that debt played in Zimbabwes sparing military operation over the same period.This chapter sets the map for the study with fall overing the place setting to the investigate study, outlining the problem statement, discussing investigate objectives and methods among an opposite(prenominal) things. The role moulding introduced and described herein shall be expanded on exertion in the later stages of the look into project and any necessary adjustments de reference be incorpo directd. The chapter, by outlining in advance the research expectations, forms the basis upon which the effect and conclusions of the research shall be priseed.Background of Zimbabwes DebtZimbabwe just the like any other Less Developed Economies (LIC) has relied on some(prenominal) out-of-door and domestic finance to fund its developmental projects. External debt comprise contrasted money denominated liabilities owed to non-resident entities, in the form of both medium to want- stipulation loans and short-term trade facilities, speckle 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 Reserve jargon of Zimbabwe (RBZ).The demesne has not been able to pay its extraneous and domestic obligations for some period(prenominal) against the background of progressive free fall in export effect and the depletion of the irrelevant currency reserves. The meagre foreign currency resources available constitute been allocated towards scathing social needs such as education and health language systems. Consequently, the rurals ability to settle obligations has been severely undermined culminating in accumulation of external honorarium arrears to US$4 487 million as at 31 declination 2009. This represents a more than 60% increase over the 2000 figure of $2.75 cardinal. This coincides with a period when the preservation had entered into a sustained phase of sparing decline and hyperinflation.It is argued that debt overhang has been a stumbling block towards frugal recovery initiatives of the country and has wedged banishly on the countrys internationalistic deferred fee rating, a development which has been a major deterrent to potential foreign enthronement and credit in f let looses. The summate debt has been growing from 1990 as shown in the graph hereunderFig. 1 Debt and gross domestic product 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 essence 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 get along 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 drafting a cocktail of measures to johncel the debt obligations. A number of options which can be implemented to deal with the debt burden be, (a) Equity Anchored Debt Resolution which involves external new borrowing by the country to retire the totality or phonation of external debt, using place prevalent assets as collateral, (b) Brady plan where Zimbabwe can engage other nations who can guarantee its securitized debt, (c) contradictory Direct Investment (FDI) Backed Debt Clearance system 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 silly country (HIPC) possibility which is a debt reduction strategy for heavily indebted poor countries pursue 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 uninflected background or framework that captures the reliable kinetics behind the debt issue. This research contri simplyes to this critical discourse in Zimbabwe through providing that analytical and objective framework.Problem StatementGrowing exoteric debt is a oecumenical 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 produce ratio whitethorn result in negative macroeconomic performance, like crowd out of investment, financial system instability, inflationary pressures, exchange rate fluctuations and more importantly adverse effect on economic growth. In circumstance the theoretical literature has summarized the following channels through which external and domestic debts affects growth negatively namely debt overhang, liquidity constraint, fiscal effect, cultivatableness su ppression and reduction in valet capital accumulation. There are also certain social and political implications of unsustainable debt burden. Persistent and high unexclusive debt calls for a large piece of budgetary resources for debt servicing. Consequently, the government is forced to attenuate allocations for other populace services and it faces serious difficulties in executing its electoral manifesto, if it has.While the negative effects of earth debt are well documented, at that place is no consensus on the optimum impact and the direction of causality. Countries with better economic performance whitethorn 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 econo mic growth give be positive.There have been several attempts to empirically assess the public debt-economic growth link, in the context of other antecedent variables mainly by using Ordinary Least Squares (OLS). Most of the earlier empirical studies intromit a fairly standard set of domestic debt, policy and other exogenous instructive variables and the majority found one 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 hypothesis 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 amount of research in developing nations investigating the link between public debt and growth taking into compute the causali ty 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 sample 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 interpret a good case 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 appear market countries.Moreover external debt may have indirect effects through secluded and public investment through the debt overhang and crowding out effects. Further, one should also not ignore the indirect effects of debt accumulatio n and service through private investment (debt overhang) and public pass (crowding out). Thus given the possibility of endogeneity and important feedback effects, the research uses the dynamic date serial analysis, namely a sender 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 in the end on private and public investment as well.Statement of the enquiry ObjectivesTo develop a pragmatic simulation to understand the relationship between national debt and economic performanceTo tally 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 solving country debt?Are prescriptive models and or solutions on debt from developed economies feasible for developing nations such as Zimbabwe?HypothesisIn undertaking this research, wildness is to test the following hypothesis upon which the results of this study are basedreality 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 compiling of the research. The definition of terms given below, where used consistently in the intact research report.Public Debt this is defined as the total debt owed by the aboriginal 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 the future tense 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 portentous financing or a major correction in the future balance of income and expenditure. Debt sustainability relates to the assessment of t he 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 DesignThe type of research design adoptive is both experimental and correlational in nature. The study will split correlation and qualitative aspect to increase the floor 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 view the relationship between variables, in this instance, developing country debt and economic performance. The degree of control on factor variables in this research will clear be moderate as the role of environmental influence and human perception will relatively be inconsistent.Secondary Rese arch (Correlational Research).To assess the empirical relationship between the major variables, that is debt and economic growth, the research makes enormous use of econometric modeling. The modeling stage incorporates other variables, which although not central 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 propert ies of all information series are investigated to determine the degree to which they are integrated, provide valid statistical inference and avoid problems of spurious relationships. Both the augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) building block-roots tests will be employed for that purpose to show whether the variable are integrated of pose 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 using up (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 good example framework will provide debt managers in Zimbabwe and the region with an objective and streamlined tool to analyse and cope with vulnerabilities in their publi c 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 factors and seeks to contribute to the development of econometric modelling in Zimbabwe and comparable countries in the region.The precision of policy qualification 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 fol lowing chapters the researcher shall review as followsChapter 2 The literature reviewChapter 3 The methodologyChapter 4 Findings and detailed analysis of the Zimbabwean marketChapter 5 ConclusionsChapter 6 Recommendations