The Impact of External Debt on Zambia’s Economic Growth: An ARDL Approach

Abstract

This paper examines empirically the impact of External debt on the Economic growth in Zambia using annual time series data spanning 1980 to 2014 and the Autoregressive Distributed Lag Model (ARDL) or bounds testing approach to cointegration. External debt is found to have a positive relationship with economic growth in the short run and a negative relationship in the long run. The long run results indicated that external debt accumulation has a negative impact on economic growth. This confirms the existence of a debt overhang problem in Zambia. Debt servicing is also found to have a significant and negative impact on GDP growth in the short-run. As the debt servicing tends to increase, there will be less opportunities for economic growth. Debt servicing is found to have crowding out effects on economic growth in the short-run. In addition, the Granger causality test was used to check for the direction of causality among the variables. The findings established a unidirectional causality from external debt to economic growth. Consequently, the study recommends, that government should embark on prudent borrowing and encourage export-oriented growth.

Keywords: HIPC, external debt, debt overhang, ARDL, Economic growth, Granger causality