Achieving debt reduction through fiscal and macroeconomic stability in Zambia

Abstract

Research problem: Zambia has in the past experienced debt crises and in most cases used fiscal adjustments and monetary tightening as efforts towards redeeming the economy. However, it has been noted that the country fails to come out of the crisis without external support mostly from the IMF and World Bank. This research looks at how Zambia can use fiscal and Macroeconomic variables (fiscal, interest rates, growth rates and inflation rates) to sustain public debt. Zambia has a record of unsustainable debt due to inactive use of these variables. There is always a tendency to emphasize them during a crisis and this comes too late to remedy the extent of the damage. Contribution of study: Various studies have been carried out on Zambia’s debt management but there seems to be no serious emphasis on the efficient use of these variables as guides to debt reduction. This study emphasizes the active and continuous use of these variables as they form the basis of economic stability which is a foundation for ensuring liquidity in the economy and thus capacity to sustain public debt. Aim and objectives: to establish how fiscal and Macroeconomic variables can be used to sustain public debt. This study identifies the use of fiscal and macroeconomic variables (growth, interest rates and inflation) as essential in ensuring reducing the debt level to acceptable levels. It also recognizes the availability of other debt reduction strategies but emphasizes the use of fiscal and macroeconomic variables as they are always at the government’s disposal and their continuous application can prevent debt problems from getting out of control. Literature Review: Literature Review contains evolution of the debt crisis with particular attention to the 20th century from the post-World War I preceded by the great depression the World War Two (WWII) to the current post-COVID-19 crisis. A sensitivity analysis was used via results of the multiple Linear regression coefficients to identify highly sensitive variables to debt dynamics. Methods: The paper used a combination of quantitative and qualitative data analysis through the mixed-method research. Findings: It was found that interest rates and fiscal balance were very sensitive to debt but the earlier had a positive while the latter had a negative effect on debt. Conclusions and Recommendations: The study concluded that fiscal balance needed to grow by 4.5 of GDP in order to make debt barely sustainable. This result guides Zambia to direct more effort towards raising the fiscal balance.