The relationship between public external debt and private investment in Zimbabwe (1980-2016)

Abstract

Progressive public indebtedness in Zimbabwe particularly in the form of foreign financing has culminated into debt distress in the nation. The country has accumulated stocks of unpaid public foreign debts over the years and as a consequence debt burden began to develop in the nation. Apparently such accumulation of external debt stocks is posited to lead to debt overhang and determent of private investment. As such this research study examined the relationship between public external debt and private investment in Zimbabwe over the period 1980-2016. The study regressed private investment (PINV) on current external debt (EXD), past external debt (LAGEXD), public investment (PUBI), household final consumption expenditure (HFCE), debt servicing (DEBTSERV), trade openness (TO) and real interest rate (R). The study aimed at addressing whether external debt accumulation (debt overhang) deters investment and also addressing the crowding out role of external indebtedness on private investment. The study found a negative relationship between public external indebtedness and private investment. Both current and past external debt flows were seen to deter private investment although current debt flows were seen to have insignificant influence on private investment. However, debt service was found to promote private investment. The study therefore concluded that the existence of debt overhang as a consequence of the accumulation of past external debt stocks is discouraging private investment into the economy. The study recommend on the formulation of policies aimed at increasing national savings at the same time reducing public sector access to foreign lending such that private sector confidence in the economy can be promoted. Also, policies that maintain desirable servicing of the external debts can mitigate the negative effects of debt accumulation on private investment.