The effects of external debt servicing on infrastructure spending in Zambia

Abstract

Public expenditure particularly on infrastructure has been shown to be of paramount importance to the development of many economies, including Zambia. Like many developing and developed countries, Zambia, has accessed and continues to access public external debt to finance infrastructure development. However, in light of the increased levels of public external debt contraction since 2011, how would the Zambian government approach the process of budget allocation towards infrastructure development in response to the debt servicing charges? This study examines the effect of external debt servicing on infrastructure expenditure in Zambia over the period 1970-2014. The study reviews both empirical and theoretical literature to identify other determinants of infrastructure spending in debt dependant countries like Zambia. The secondary data used in this study was sourced through the World and Africa Development Indicators database. Using time series data, an empirical analysis based on ARDL model and the Bounds Test approach of co-integration, the results show that that in the long-run debt servicing has a significant negative effect on infrastructure spending. The results of the empirical analysis show that, the major determinants of infrastructure expenditure in Zambia also includes; real effective exchange rates, total government expenditure, governments’ gross domestic savings and political factors such as debt forgiveness. The results found show that the gross domestic savings and the HIPC debt reduction had significant positive effects on infrastructure spending in Zambia. There is no significant evidence of association between overall government expenditure and real effective exchange rates on infrastructure expenditure in the long-run. Therefore it could not be concluded that an increase in the allocation of resources to overall government expenditure boosts expenditure on infrastructure To facilitate the continued development of the country’s` infrastructure in this debt era, the studies suggests a change in debt contraction preferences, improved management of debt and to align debt resources to infrastructure projects that can produce revenue. Keywords: Debt servicing, public external debt, Displacement Theory, infrastructure spending, Zambia.