A cointegration approach to analysis of domestic debt sustainability in Zimbabwe

Abstract

A cointergration approach is applied to assess the sustainability of Zimbabwe's domestic debt stock over the period 1980 to 2007. This is done by examining the time series properties of the public expenditure, public revenue and budget deficit variables. Utilizing data for the period 1980-2007 and allowing for a structural break in 2001, the results from time series analysis reveal that public expenditure and public revenue are 1(1) and not cointegrated As a result, Zimbabwe's domestic debt was considered unsustainable. The immediate policy implication is, therefore, the need to ensure a robust economic growth over the next five years to broaden the tax base. Government expenditure can not be reduced since it is currently at precarious levels, with uncompetitive civil service wages compared to regional and international standards.