Estimating the optimal growth-maximising public debt threshold for Zimbabwe

Abstract

This paper attempts to estimate an optimal growth-maximising public debt threshold for Zimbabwe. The public debt threshold is estimated by assessing the relationship between public debt and economic growth. The analysis is undertaken to determine the tipping point beyond which increases in public debt adversely affect economic growth. The paper contributes to the debate on the link between public debt and growth by testing the presence of a Laffer-curve type relationship, where the contribution of public debt to growth is theorised to be positive at lower levels and negative at higher levels of public debt. The analysis confi rms the existence of an inverted U-shaped relationship between public debt and economic growth in Zimbabwe. The optimal growth-maximising public debt threshold was estimated at a public debt-to-GDP ratio of between 45 and 50 per cent. The policy implication of the analysis is the need to ensure that public debt management policies are in line with the growth-maximising public debt threshold. This will ensure sustained economic growth and employment rates, which are key tenets for sustainable economic development.

Key words: public debt threshold, growth maximising, Laffer curve