An econometric analysis of the impact of public debt on economic growth: The case of Zambia
Chongo, Mumbi Brenda
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This study has analysed the impact of increasing public debt on Zambia‟s economic growth covering the period 1980 to 2008. For policy implication, the study also analysed the channels through which public debt is said to have an impact on economic growth namely through private investments, public investments and domestic savings. The Vector Error Correction Model (VECM) approach was employed to analyse the two scenarios above. Results from the analysis confirm a long-run negative relationship between public debt and economic growth. The result on the impact of public debt on private investments and domestic savings also gives indication to the presence of the crowding out and debt overhang effects which can be explained by a rising debt burden measured by both the stock of Public Debt to Gross Domestic Product (GDP) and Public Debt Service to Revenues. This outcome helps to explain the impact of huge dominance of government participation on the domestic market as it mobilises resources to finance the fiscal deficit. The study also found a positive relationship between public investment and public debt indicating a possibility of crowding in effect. However, the extent to which this affects economic growth depends on how the private sector responds given existing fiscal and monetary policies. This literature concludes with some policy recommendations. For instance, given the long run inverse relationship between public debt and economic growth, there is need for Government to put in place a public debt law to ratify any borrowings requirements. This will help in ensuring that all borrowings by Government are targeted towards financing of projects that have a high return which would result in crowding in of private investment s well as ensure fiscal sustainability. Expansion of the tax revenue base will help ease the budget deficit which compels huge borrowing by Governments both externally and internally.On the other hand, the long run inverse relationship between real exchange rates with public debt and public debt service respectively, calls for Government to put in place a Medium-Term Debt Management Strategy to analyse the cost and risks inherent in the existing debt portfolio. This will help guide future borrowing strategies thus avoid exacerbating the existing debt burden to the detriment of economic growth.