SCHOOL OF POSTGRADUATE STUDIES
AN ASSESMENT OF THE EFFECTS OF FISCAL DEFICITS ON ECONOMIC GROWTH IN
ZAMBIA FROM 1090-2022
A DISSERTATION SUBMITTED TO THE SCHOOL OF POSTGRADUATE STUDIES, UNIVERSITY OF
LUSAKA IN PARTIAL FULFILLMENT OF THE AWARD OF THE MASTER OF SCIENCE IN
ECONOMICS AND FINANCE.
BY
MARTHA NAMUSIKA SEPETO
MSCECF21210539
©2022
[DATE]
[COMPANY NAME]
[Company address]
TABLE OF CONTENTS
CHAPTER ONE ........................................................................................................................................... 2
1.0 Introduction and Background.............................................................................................................. 2
1.2 PROBLEM STATEMENT ................................................................................................................. 4
1.3 STUDY OBJECTIVES ....................................................................................................................... 4
1.3.1 GENERAL OBJECTIVE ............................................................................................................. 4
1.3.2
SPECIFIC OBJECTIVES ..................................................................................................... 5
1.4 STUDY HYPOTHESIS ...................................................................................................................... 5
1.5 SIGNIFICANCE OF STUDY ............................................................................................................ 5
CHAPTER TWO: LITERATURE REVIEW ............................................................................................... 6
2.0 Introduction ......................................................................................................................................... 6
2.1
LITERATURE REVIEW ............................................................................................................. 6
2.1.1
Neo-Classical Theory............................................................................................................ 6
2.1.2
Keynesian Theory ................................................................................................................. 9
2.2
2.2.1
2.3
Theories on the non-existent relationship between public debt and economic growth............... 10
Ricardian Equivalence Hypothesis ......................................................................................... 10
EMPIRICAL LITERATURE REVIEW ..................................................................................... 11
2.3.1 Empirical review of the negative relationship between public debt and economic growth ...... 11
Empirical review on the positive relationship between public debt and economic growth ................ 12
2.3 Conceptual Framework ..................................................................................................................... 13
Conclusion .............................................................................................................................................. 14
CHAPTER THREE: RESEARCH METHODOLOGY.............................................................................. 15
3.0 Introduction ....................................................................................................................................... 15
3.1 Research Design................................................................................................................................ 15
3.2 Target Population .............................................................................................................................. 15
3.3 Data Collection Method .................................................................................................................... 15
3.4 Data Validity ..................................................................................................................................... 15
3.5 Data Analysis .................................................................................................................................... 16
3.6 Empirical Model ............................................................................................................................... 16
3.7 Ethical Considerations ...................................................................................................................... 16
REFERENCES ........................................................................................................................................... 17
CHAPTER ONE
1.0 Introduction and Background
Reinhart and Rogoff's (2010) work sparked interest in studying the long-run relationship between
fiscal deficit and economic growth across countries (Checherita-Westphal & Rother, 2012;
Tchereni et al., 2013; Panizza & Presbitero, 2013, 2014; Mencinger et al., 2014; Egert, 2015;
Adamu & Rasiah, 2016; Shittu et al., 2018). Similarly, a number of empirical studies have
attempted to determine whether there is a tipping point (debt-threshold) for fiscal deficits beyond
which economic growth plummets significantly (for a review see Eberhardt & Presbitero, 2015;
Chudik et al., 2017; Yang & Su, 2018.) In economic growth models, a large fiscal deficit as a
percentage of GDP can boost aggregate demand and growth in the short run, but it crowds out
private capital expenditure and dampens growth in the long run (Eberhardt & Presbitero, 2015).
According to Chudik et al. (2017), the relationship between fiscal deficit and economic growth
differs across countries due to institutional quality, degree of financial deepening, prevailing
economic conditions, historical records of meeting debt obligations, political stability, and political
system nature (Kourtellos et al., 2013). Zambia borrowed heavily to finance its fiscal deficit
between 1980 and 1990, as did many other African countries. In particular, by the end of 1990,
the sovereign debt had reached approximately USD 8 billion (i.e., 244 percent of GDP), resulting
in a severe financial burden and slow economic growth between 1990 and the mid-2000s (Smith
et al., 2017).
Zambia completed the Multilateral Debt Relief Initiative (MDRI) and the Highly Indebted Poor
Countries (HIPC) initiative in 2005, qualifying for USD 6.6 billion in sovereign debt relief (Smith
et al., 2017). Between 2006 and 2011, sovereign debt increased at a slow but steady rate, rising
from approximately USD 3.2 billion (25 percent of GDP) in 2006 to approximately USD 5.1
billion (22 percent of GDP) in 2011. On the contrary, Zambia's sovereign debt has risen at an
alarming rate, from approximately USD 5.1 billion at the end of 2011 to USD 14.91 billion at the
end of 2018.
Aside from the composition of Zambia’s public debt switching from being largely concessional to
mostly non-concessional and the overall debt rising, the debt servicing costs have also swelled
over time, putting pressure on the Government’s limited resources. The consequence of this has
been the shift in public expenditure from critical areas, such as economic affairs and social
protection, towards debt servicing. This has resulted in the Government having to borrow more
money in order to make up for the spending shortfalls in these critical areas created by the high
debt servicing costs.
As a result of Government’s failure to invest in productive sectors due to the shrinking fiscal space,
real GDP growth has been on the decline, alongside other structural imbalances that the country is
faced with. During the period 2016-2019, GDP grew at an average of 3.2% per year compared to
annual averages of 4.3% and 8.7% over the period 2011-2015 and 2006-2010 respectively. In
2020, real GDP growth was recorded at -2.8% as shown in Figure 4.3, as a result of the COVID19 pandemic. During this period, the stock of public debt grew from 18.9% of GDP in 2010 to
126% of GDP in 2020.
140
12
120
10
8
100
6
80
4
60
2
40
0
20
growth rate (%)
debt-to-GDP (%)
Figure 4.3: Zambia's Debt-to-GDP Ratio and Real GDP Growth, 2006 – 2020*
-2
0
-4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Debt to GDP [Left Axis]
GDP growth [Right Axis]
Source: Author’s compilation using IMF figures.
As debt grows, it brings with it the challenges of servicing interest payments and at the worst, the
risk of defaulting on payments. In 2017, Zambia was considered to be at a high risk of debt distress
by the International Monetary Fund (IMF), 12 years after obtaining the HIPC debt relief. Further,
in 2020 it became the first African country to default on debt in the Covid-19 pandemic era, as it
defaulted on a US$42.5 million Eurobond payment. By end 2021, the country had reached a StaffLevel Agreement with the IMF to receive a US$1.4 billion extended credit facility to provide it
with the much-needed fiscal space to deal with its debt overhang.
1.2 PROBLEM STATEMENT
Over the last decade, the Zambian economy has been characterized by deterioration in the
macroeconomic environment, sluggish economic growth and an increasingly constrained fiscal
space. For instance, Zambia's real GDP growth declined from an annual average rate of 5.4 percent
during 2010-2015 to about 1.9 percent over 2016-2020. In addition, the fiscal deficit as a share of
GDP increased to 14.5 percent in 2020 from a manageable 5.7 percent in 2016 (MoFNP, 2016)
(MoFNP, 2021). As it is commonly known, Zambia has also been buckling under an increasingly
heavy debt burden over the last decade, culminating in a public debt-to-GDP ratio of about 117
percent in 2020. Further, although average annual inflation remained stable and within single digits
between 2016 and 2019, it rose sharply to 15.6 percent in 2020 from 9.1 percent in 2019.
Consequently, these weak macroeconomic fundamentals pose a serious threat to development
finance mobilization and sustainable economic development, particularly as the country continues
to recover from the economic strain resulting from the COVID-19 pandemic (World Bank, 2020).
Since 2010, Zambia’s expenditure patterns have been characterized by higher than planned
expenditures. This has been largely on account of higher debt servicing costs and capital spending,
which crowded out social and other critical spending. Even with higher than planned revenues,
this over expenditure has significantly contributed to the high fiscal deficits.
Despite this, scholars have shown evidence of the positive impact of fiscal on economic growth.
Natwi and Erickson (2016) in Ghana found that a positive and statistically significant relationship
existed. Further, a short run bidirectional granger causality was found between public debt and
economic growth in Ghana between 1970 and 2012. Studies by Suangweme and Odhiambo (2020
in Zimbabwe revelaed otherwise. The revealed that domestic fiscal deficit was more harmful to
Zimbabwe than foreign public debt as evidenced by a higher negative coefficient on domestic
public debt. Therefore, it is imperative to conduct an empirical analysis of Zambia’s case
1.3 STUDY OBJECTIVES
1.3.1 GENERAL OBJECTIVE
The main objective of this research is to examine the effects of the fiscal deficit on economic
growth in Zambia from 1990-2022
1.3.2 SPECIFIC OBJECTIVES
The specific objectives of the study are:
 To investigate the relationship between fiscal debt and economic growth.
 To examine the effects of fiscal deficits on economic growth.
 To examine the impact of the impact of the level of debt on economic growth.
 To establish how debt servicing affects domestic funds
1.4 STUDY HYPOTHESIS
Below are the postulated null hypotheses for this study:
H0: there is no significant relationship between budget deficit and economic growth
H0: there is no significant relationship between total debt and economic growth
H0: there is no significant relationship between inflation rate and economic growth
H0: there is no significant relationship between unemployment rate and economic growth
H0: there is no significant relationship between level of education for decision makers and
economic growth
H0: there is no significant relationship between Institutional capacity to contract debt and
economic growth
H0: there is no significant relationship between FDI and economic growth
H0: there is no significant relationship between Foreign Aid and economic growth
1.5 SIGNIFICANCE OF STUDY
The main objective of this study is to examine the effects of the fiscal deficit on economic growth
in Zambia from 1990-2022. The study will also analyze the direction effect of the resultant effect
(be it neutral, negative or positive) which will help us to capture the previous deviations in the
nation over the stated period as well as investigate the possible changes for the whole economy.
The results of the model will provide policy insight to policy makers in as regards fiscal deficits
and economic growth in Zambia. Additionally, the findings of the study will greatly add on to the
existing Zambian literature as regards the impact of fiscal deficits on economic growth.
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
The main aim of this chapter was to present some theoretical and empirical literature arguments
underlying debate on the relationship between public debt and economic growth. The main
theories which are going to guide the study are the Neo-classical theory that assumes a negative
relationship between public debt and economic growth, the Keynesian and Wagner theories, which
postulates a positive relationship, and the Ricardian equivalence hypothesis which emphasizes on
a non-existent relationship between the two variables.
2.1
LITERATURE REVIEW
2.1.1 Neo-Classical Theory
The Neo-classical theoretical view suggests that the impact of public debt on economic growth is
negative. Public debt is assumed to have a negative impact on real macroeconomic variables and
this is explained fundamentally by the debt overhang hypothesis.
The debt overhang is defined as the presence of an existing or inherited debt that is sufficiently
large, such that creditors do not expect to be fully repaid with confidence. In other words, a country
experiences debt overhang when the expected present value of its potential future resource
transfers falls short of the value of its debt. Because the country cannot fully service its public debt
using available resources, it undertakes negotiations with its creditors to determine how the debt
will be paid back. As such, in order to meet its debt servicing obligations to resolve the debt
overhang, the country may resort to reduced spending in other priority areas. According to the debt
overhang hypothesis, if an economy’s total debt stock is established to exceed its repayment ability
in the future, expected debt service will undoubtedly be an increasing function of its output level.
In countries that are heavily indebted, debt overhang is considered to be a leading cause of
distortions in the economy resulting in slow economic growth. This is because these countries lose
their attractiveness to private investors, while debt servicing consumes so much of the of the
country’s revenue, such that the potential of returning to a sustainable growth path is reduced
(Hassan et al., 2016).
This focus on public debt servicing thus leads to depressed overall economic activity through the
multiplier effect via various channels (Krugman, 1988: Claessens et al., 1996: Ejigayehu and
Persson 2013). The debt overhang hypothesis postulates that the accumulation of public debt,
mostly acquired due to worsening fiscal deficits affects economic growth through 3 channels
namely: the crowding out effect, the fiscal illusion and the rational expectations theory (Odhiambo
and Saungweme, 2018).
(a)
The crowding out effect
Crowding out exists when public spending, which is primarily undertaken through government
borrowing, reduces the lending capacity of the economy in terms of domestic financing to the
private sector. As government borrows domestically, it tends to drive up the cost of private loans
due to the increased demand. Additionally, it uses up the necessary funds that could have otherwise
been channelled to the private investors. This in turn reduces the amount of private sector spending.
The crowding out effect of public debt on private investment occurs in two ways: one way is
through prices, that is, interest rates and the other is through quantity that is, credit rationing
(Anyanwu et al., 2017).
Another channel through which public debt may crowd out investment is through credit rationing.
Credit rationing occurs when market players have restricted access to credit because financial
institutions limit the supply of funds to private customers. As governments seek funds to meet their
spending obligations, they tend to source this from the domestic market. This borrowing, if done
persistently, causes a decline in available resources left for private sector to undertake investment.
Debt accumulation may therefore impact economic growth by creating a liquidity constraint in the
market. Additionally, if public debt repayment consumes a greater part of an economy’s savings,
Government tends to rely more on short-term investments rather than long term, so as to service
debt. This causes public debt to amplify public policy uncertainty as fiscal policy tends to be more
inclined towards debt servicing thereby increasing systemic risk as well as the cost of capital. This
disturbs the decision-making processes by private economic agents. (Mankiw and Elmendorf
1998: Claessens et al. 1996: Odhiambo and Saungweme, 2018).
(b)
Fiscal illusion
Fiscal illusion is defined as the misunderstanding of the fiscal burden or the amount of tax paid by
citizens due to incomplete information. In such a case, taxpayers regard their tax burden to either
be smaller, or adversely heavier than it actually is. This happens because certain sources of
government revenue are either not observed, or not fully observed by citizens. Fiscal illusion is
primarily caused by a lack of transparency in the fiscal system which obscures citizens from
knowing the true cost of public programs. For example, when government spends money from a
source that is not transparent to citizens, some if not all citizens benefit from this expenditure and
thus support the Government and its policies. However, if the citizens have full information about
government sources of financing for this expenditure, in particular that they are financing the
spending, they might not fully support the public programs (Mueller, 2003).
If fiscal illusion is significant among citizens, it may lead to less efficiency and transparency in
the use of public resources by the Government. Transparency requires that information is provided
to citizens about what government is doing, that is, its policies and operations and this promotes
accountability (Obama, 2009). When citizens face multiple tax instruments which include excise,
sales and property taxes which are spread over a long period of time, the tax burden they actually
face is usually underestimated. Alternatively, reduced tax cuts lower thus encouraging government
to spend more on public services. That is, the full weight of future taxes is not apparent to tax
payers as Government substitute’s public debt for tax finance. This is because future servicing of
debt may lead to an increase in future taxes in order to raise revenue for the aforementioned debt
servicing. In this case, citizens incorrectly observe the swap between current public debt and future
tax finance to be an increase in their net worth. This leads them to increase current consumption
at the expense of their saving and investment, thereby leading to depressed economic growth in
the long run (Patinkin 1965: Odhiambo and Saungweme, 2018: Wasiluk and Giegiel, 2020).
(c)
Rational expectations theory
The rational expectations theory argues that the negative impact of public debt on economic
growth comes from either incorrect macroeconomic forecasts or from the uncertain reaction to
macroeconomic stabilisation policies by economic agents. The theory also suggests that the
negative impact of public debt could be much larger if public debt increases future policy
uncertainty or leads to future prospects of confiscation. This could possibly occur through inflation
and financial repression in which government borrowing restricts financial players from operating
at full capacity (Churchman 2001: Cochrane 2011).
From the aforementioned, the debt overhang hypothesis appears to hold in the Zambian context.
In particular, the hypothesis speaks to the high debt servicing costs that tend to suffocate other
spending priorities in the country. The economy has experienced the adverse effects of debt
servicing. Overtime, the Zambia’s largest share of the budget has been allocated towards general
public expenditure and majority of which, goes towards servicing of public debt. For example, in
the 2011 national budget, 28.5% was earmarked for general public expenditure and this percentage
has grown overtime to 41.6% of the budget in 2020.
In the recent 2022 budget, about 50% of the national funds are envisaged towards this general
public expenditure with debt and debt servicing accounting for about 90% of the total amount. On
the other hand, important functions of government such as economic affairs have had a shrinking
allocation of the budget from 25.6% in 2011 to 19.5% in 2022. With the country’s tight fiscal
space, the allocations towards debt leave little room for other priority functions of government to
be expanded. The result of this is stunted growth of the economy in general.
2.1.2 Keynesian Theory
The view that forms the basic argument for the positive relationship between public debt and
economic growth is the Keynesian theory. This theory is thought of to occur in two ways. The first
suggests that public debt increases the levels of productive public spending which then acts as an
automatic stabiliser reducing fluctuations in economic output. The second way posits that
government spending that is deficit financed has a greater positive effect on the economy than tax
financed government spending.
Public debt, created by an absolute decrease in capital tax rates or by a significant rise in public
sector capital investments, raises the net return to capital. Based on this theory, an expansionary
fiscal policy resulting in growing public debt and budget deficits increases aggregate demand,
which results in a higher growth rate. Further, public debt may also lead to increased investment
activity which crowds in private investors thereby expanding aggregate supply as well.
In addition to the Keynesian view of the positive impact of debt on economic growth, there is a
conventional theory on the relationship between these two variables based on the assertion that
government borrowing from the international financial and capital markets is necessary to fill the
gap between domestic investment and savings. This is to say that in an economy in which output
is below full potential, unemployment will be high and supply constraints on short-run demand
absent. Therefore, a combination of high foreign public debt, and its persistent effects into the
future, will have a positive fiscal multiplier effect on the economy. Thus, fiscal expansion is self-
financing and stimulates aggregate demand in the long run in a depressed economy when interest
rates are rising, leading to economic growth.
2.2
Theories on the non-existent relationship between public debt and economic growth
The basic theoretical argument of the non-existent effect of public debt on economic growth is
brought forth by Ricardo in the Ricardian Equivalence Hypothesis (REH), which states that the
relationship between public debt and economic growth is non-existent.
2.2.1 Ricardian Equivalence Hypothesis
The REH theory emphasises that public debt does not affect economic growth. This is because it
is assumed that at the time when fiscal stimulus takes place and the budget deficit is growing whilst
government debt is accelerating, market players prepare for a future period of severe measures and
tax rises. The players therefore shift their focus from consumption and investment to increasing
savings, which neutralises the impact of the demand stimulating fiscal policy.
According to Ricardo, under certain settings the real economy is independent of the government’s
choice of raising revenue, that is, either through taxes or debt issuance. This suggests that
differences in domestic and foreign public debt stocks are invariant with changes in major real
macroeconomic variables, such as gross investment and output. Therefore, there is no real effect
on the economy’s growth path. This is so because changes in government spending and hence
public debt, results in identical changes in private savings and no real impact on the real economy
is noted thus rendering fiscal policy ineffective. In other words, the hypothesis stipulates that
government debt only explains movements in financial assets among economic agents and only
affects private consumption and savings with no detrimental economic consequences as long as
solvency is not jeopardised. Therefore, the Ricardian Equivalence Theory suggests that public debt
cannot be used as an economic stimulation tool (Ricardo, 1817: Buchanan, 1976: Barro, 1989:
Pereira & Rodrigues, 2001: Szabo, 2012).
The REH however is only holds theoretically when six key assumptions are considered. These
include: perfect capital markets, a constant population growth, rational economic agents, an
infinite time horizon, non-distortionary taxes, and initial tax cut beneficiaries bearing the
government debt service burden. Thus, if the above assumptions hold, then shifts in the
government’s funding strategy will be met by an equal adjustment in private savings to neutralize
movements in public savings (Elmendorf & Mankiw, 1999).
2.3
EMPIRICAL LITERATURE REVIEW
There is a wide variety of empirical arguments surrounding the relationship between debt and
economic growth with different conclusions. This literature can broadly be divided into three
categories. One that supports the positive relationship between the two variables, the other that
provides evidence for a negative relationship between the two variables and lastly the view that
the relationship between the two variables is non-existent.
2.3.1 Empirical review of the negative relationship between public debt and economic
growth
A number of studies have demonstrated the negative effect of public debt on economic growth.
For example; Suangweme and Odhiambo (2020), Chikalipah (2020), Zulu (2017), Yung-Li
(2015), Fuentes (2013), Calderon and Fuentes (2013), Chongo (2013), Panizza and Presbitero
(2012), Woo and Kumar (2010) and Ayadi (2008), have found a negative relationship between
public debt and growth in each of their studies.
Suangweme and Odhiambo (2020), carried out a study using the Auto Regressive Distributed Lag
(ARDL) approach to determine the impact of public debt on economic growth in Zimbabwe for
the period between 1970 and 2017. The empirical results of the study revealed that public debt
impacted negatively on economic growth in Zimbabwe irrespective of the type of debt, whether
domestic or foreign, and irrespective of whether the public debt is aggregated or disaggregated.
The study further revealed that domestic public debt was more harmful to Zimbabwe than foreign
public debt as evidenced by a higher negative coefficient on domestic public debt. The empirical
findings from the study apply both in the long and short run. The conclusions of the study were
that the negative effect of public debt on economic growth was mostly due to the crowding out
effect on investment on account of high cost of capital and credit rationing.
Zulu (2017), who used the OLS analysis to ascertain the impact of external debt on economic
growth in the period between 2013 and 2017. Real GDP was used as the dependent variable and
proxy for economic growth while external debt, debt service payment and exchange rate were
independent variables. The analysis highlighted a negative relationship between high external debt
and economic growth. Additionally, a negative relationship between debt repayment and economic
growth was noted whilst exchange rate had a positive relationship with economic growth. Prudent
debt utilisation was recommended, coupled with debt sustainability that ensures efficient fiscal
consolidation.
Furthermore, Chongo (2013), carried out an econometric analysis to investigate the impact of
rising public debt on economic growth in Zambia in the period 1980 to 2008 employing the VECM
approach. The study investigated the channels through which debt is said to have an impact on
growth, that is, through public and private investments as well as domestic savings. Using debt to
GDP ratios and public debt service to revenue ratios as main variables, a negative long run
relationship between debt and growth was found. It was further established that debt negatively
impacted private investments and domestic savings, confirming the overhang and crowding out
effects of debt. Chongo (2013) also found a positive relationship between public debt and public
investments. The study therefore recommended the need for government to enhance the legal
framework around debt acquisition that ensures ratification of any borrowing needs. Secondly,
borrowed funds must be channelled towards investments with high returns while ensuring fiscal
sustainability. Further, Government must reduce its dominance in the domestic market as it seeks
resources to fund its fiscal deficits and instead opt for an expansion of the revenue base to finance
expenditure.
Empirical review on the positive relationship between public debt and economic growth
Several scholars, including Thao (2018), Natwi and Erickson (2016), Egbetunde (2012), Uzun et
al (2012), and Mohanty and Mishra (2012), have found a statistically significant relationship
between public debt and economic growth (2016).
Thao (2018) analysed the linkage between public debt and economic growth in six countries of
the Association of South East Asian Nations (ASEAN) over a period of 1995 to 2015 and found a
significant positive impact of public debt on GDP per capita growth rate. This was based on the
generalised method of moments (GMM) regression analysis, with no evidence of the damaging
effect of high country indebtedness on economic growth being found. This implies that public debt
in the ASEAN countries has been utilised to effectively finance public investments, thereby
promoting economic growth in the long run. Similarly, evidence of the positive impact of debt on
economic growth is provided by Natwi and Erickson (2016) in a study investigating the causal
relationship between the two variables in Ghana. Using the Johansen cointegration and Error
Correction Model to examine the long run and causal relationship between public debt and
economic growth, it was found that a positive and statistically significant relationship existed.
Further, a short run bidirectional granger causality was found between public debt and economic
growth in Ghana between 1970 and 2012.
Further studies on the positive relationship include Egbetunde (2012), who examined the causal
nexus between public debt and economic growth in Nigeria between 1970 and 2012. Having
utilised the Vector Autoregressive (VAR) model and cointegration tests, a significant long run
relationship, as well as a bi-directional causality between the variables, was noted. This, however,
was found to only be feasible if government was transparent about the loans obtained and
channelled it to developmental activities rather than for personal benefit. Likewise, Uzun et.al
(2012), used a panel ARDL model to determine the relationship between indebtedness and
economic growth rate involving 27 transition economies. The study revealed a positive
relationship between GDP per capita growth rate and debt in the period between 1991 and 2000.
The analysis further revealed that external sources of finance were needed to eliminate problems
associated with production marketing and income saving as well as to change economic structures
into market-based economies.
2.3 Conceptual Framework
The conceptual framework takes after the model developed by (Mbuthia et al, 2021) who depicted
the existence of a linear relationship between the dependent variable (GDP growth and the
independent variables (Budget deficit, total debt, Inflation rate, Unemployment Rate, Level of
education for decision makers, FDI and Foreign Aid )
Source; (Mbuthia et al, 2021)
Budget deficit
Level of education for decision
makers
debt
Economic growth
Foreign Aid
Public Borrowing
Foreign Direct Investment
Conclusion
The paper presents reviews of both theoretical and empirical literature on the relationship between
public debt and economic growth. Exploring this relationship across three broad categories – a
positive relationship, a negative relationship, and a non-existent relationship – the paper presents
evidence from literature that supports all three hypotheses. Using descriptive analysis to explore
the particular case of Zambia, we find that debt has a negative effect on economic growth in the
Zambian context. This is supported by evidence from the empirical studies that have been
reviewed. Notable among the channels through which debt impacts the Zambian economy are
through private investments, domestic savings and increased interest rates. These findings confirm
the debt overhang theory through the crowding out effects on the Zambian economy.
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction
Research Methodology refers to the measures, and approaches used in conducting the research and
outlines the research design, population of the study, sampling techniques, data collection and data
analysis methods (Kothari, 2003).
3.1 Research Design
According to Dooley (2007) a research design is an outline that is used to find solutions to the
research problems that provides the plan on how the research will be conducted. This study will
adopt a quantitative research design because of the nature of the data.
3.2 Target Population
A population is a collection of all elements under consideration. It is a collection of elements,
people or objects that are of interest that the researcher seeks to investigate. For this study, the
Zambian government was the population of interest.
3.3 Data Collection Method
This study will rely on secondary time series data obtained from the Ministry of Finance,
International Monetary Fund, Bank of Zambia and the World Bank Development Indicators. The
data will first be obtained and then cleaned after which it will be exported to exported to Stata for
analysis.
3.4 Data Validity
According to Kothari (2004) the validity of the data is the extent to which inferences are made
based on the usefulness and appropriateness of the numerical scores. Validity is the most important
criteria by which the survey provides for the required information to meet the study response. For
this study, the sources of the data include the Ministry of Finance, International Monetary Fund,
Bank of Zambia and the World Bank Development Indicators which are credible and widely
accepted institutions.
3.5 Data Analysis
To analyze the existence of a statistical relationship between taxation, FDI, foreign aid,
Government Expenditure and economic growth in Zambia, the study will make use of a multiple
regression analysis technique at a test significance level of 0.05. The existent relationship between
the variables will be assessed using the regression equation while the test of significance will be
analyzed using the p-value approach.
3.6 Empirical Model
The empirical model of the study was formulated by taking Budget deficit, total debt, Inflation
rate, Unemployment Rate, Level of education for decision makers, FDI and Foreign Aid as
independent variables while introducing gross domestic product growth as the dependent variable.
The regression model thus takes the form;
𝐺𝐷𝑃 = 𝑓(𝐵𝐺𝑇𝐷𝐹, 𝑇𝐷𝑇, 𝐼𝑁𝐹, 𝑈𝑁𝐸𝑀𝑃, 𝐸𝐷𝑈, 𝐹𝐴, 𝐹𝐷𝐼)
𝐺𝐷𝑃 = 𝛽0 + 𝛽1 𝑇𝑅 +𝛽2 𝐹𝐷𝐼 + 𝛽3 𝐹𝐴 + 𝛽4 𝐺𝑂𝑉𝐸𝑋𝑃 + 𝛽5 𝑃𝐵 + έ𝑡
Where: 𝐵𝐺𝑇𝐷𝐹 = is budget deficit at a time t
𝑇𝐷𝑇 = is total debt at a time t
𝐼𝑁𝐹 = is Inflation rate at a time t
𝑈𝑁𝐸𝑀𝑃 = is Unemployment Rate at a time t
𝐸𝐷𝑈 = is Level of education for decision makers at a time t
𝐹𝐴 = is Foreign Aid at a time t
𝐹𝐷𝐼 = is Foreign Direct Investment at a time t
3.7 Ethical Considerations
The study will make use of actual data collected from the Ministry of Finance, International
Monetary Fund, Bank of Zambia and the World Bank Development Indicators, The researcher will
not engage in any falsification of results or the manipulation of results in order to suit economic
theory. However, some apriori expected signs between the variables will be stated so that in an
event that the results do not align with them, no alterations will be made.
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