Assessing the Optimal Size and Composition of Public Debt in Zimbabwe

The public debt management concerns caused by the 2008/09 global financial crisis and the European sovereign debt crisis underscored the need for effective debt management in most countries. Accordingly this study provides an analysis of public debt dynamics in Zimbabwe with a view to determine the optimal size and composition of public debt consistent with maintain debt sustainability. Zimbabwe makes an interesting case study given its unique international isolation and the existence of a public debt overhang which has been a drag to its economic growth. The optimal public debt thresholds are estimated from a joint analysis of the macroeconomic variables that affect public debt and the reaction of fiscal policy to changes in debt. The optimal size of public debt was found to be at public debt levels of between 45-50 per cent of GDP. The results from an analysis of an optimal composition of public debt show a trade-off between a debt composition with more external concessional debt and one with more domestic debt. While a composition with more concessional borrowing was found to be desirable from a cost perspective, it proved to be less desirable from a risk perspective.