Public Debt Composition, Debt Policy Rules and Growth in Selected SADC Countries

Abstract

Purpose: This study examined the relative effect of debt composition and debt reduction policy rule on economic growth in selected SADC countries which are Mauritius, Tanzania and Zimbabwe. Design/Methodology/Approach The Markov-switching method was used to estimate the debt growth model for the period 1990Q1-2016Q4 Findings:. The effects of debt proved to be regime dependent which supports the time effects of debt in all countries. High external debt relative to domestic debt had positive effect on growth in Tanzania which is a good reforming country and had negative effects in the case of Zimbabwe which is a debt distressed country. In comparison to Mauritius, a domestic debt dependent country, high domestic debt relative to external debt had negative impact on growth. The effects tend to rise with market pressure and government consumption behaviour. A negative real effect of debt reduction policy rule was confirmed for Zimbabwe and irrelevance in countries with less threat of debt distress. Implications/Originality/Value Therefore the study found support to the quantity-effect rather than type-effect of debt on growth. We recommended that countries should consider both time and quantity effects of debt in debt management; adopt explicit debt reduction rules which constrain fiscal behaviour and force policy commitment towards debt stabilization.

Keywords

• DEBT COMPOSITION; DEBT POLICY RULE; MARKOV REGIME SWITCHING; ECONOMIC GROWTH