Overview

The debate on the effect and direction of causality regarding debt on economic growth has attracted significant academic interest since the last quarter of the 20th century. This question has become more relevant in the context of the so-called Least Developed Countries (LDCs) whose economies typically contain oversized debt, exhibit stunted growth and have often defaulted on outstanding debt. This research sought to build on the existing body of literature and conditions in Zimbabwe over the past 20 years, with special reference on the period 1995 to 2008, and draw inferences on the role that debt played in Zimbabwe’s economic performance over the same period.

This chapter sets the stage for the study through reviewing the background to the research study, outlining the problem statement, discussing research objectives and methods among other things. The framework introduced and described herein shall be expanded on application in the later stages of the research project and any necessary adjustments will be incorporated. The chapter, by outlining in advance the research expectations, forms the basis upon which the outcome and conclusions of the research shall be assessed.

Background of Zimbabwe’s Debt

Zimbabwe just like any other Less Developed Economies (LIC) has relied on both external and domestic finance to fund its developmental projects. External debt comprise foreign currency denominated liabilities owed to non-resident entities, in the form of both medium to long-term loans and short-term trade facilities, while 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 Bank of Zimbabwe (RBZ).

The country has not been able to pay its external and domestic obligations for sometime against the background of progressive decline in export performance and the depletion of the foreign currency reserves. The meagre foreign currency resources available have been allocated towards critical social needs such as education and health delivery systems. Consequently, the country’s ability to settle obligations has been severely undermined culminating in accumulation of external payment arrears to US$4 487 million as at 31 December 2009. This represents a more than 60% increase over the 2000 figure of $2.75 billion. This coincides with a period when the economy had entered into a sustained phase of economic decline and hyperinflation.

It is argued that debt overhang has been a stumbling block towards economic recovery initiatives of the country and has impacted negatively on the country’s international credit rating, a development which has been a major deterrent to potential foreign investment and credit inflows. The total debt has been growing from 1990 as shown in the graph hereunder:

Fig. 1 Debt and GDP Trend for Zimbabwe

Source: Data complied from Reserve Bank of Zimbabwe and The Ministry of Finance in Zimbabwe

Zimbabwe 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 burden is a stumbling block towards economic recovery of the country and has impacted negatively on the country’s 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 deal 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%.