Does Government Borrowing Crowd Out Private Sector Investment in Zimbabwe?

This paper assesses the impact of government borrowing on the private sector credit in Zimbabwe using monthly data from 2012 to 2018. The increase in public debt from 2012 raised concerns over the possible crowding-out effect of government borrowing and spending on domestic investment in Zimbabwe. Using a multivariate regression model and an unrestricted Vector Auto-regression (VAR) model, the paper finds a negative but not significant relationship between credit to government and credit to private sector, implying that credit to government may not have crowded-out private credit. The impulse response functions also indicate that the response of credit to private sector to shocks from government sector was not significant. The results from the variance decomposition analysis, however, indicates that in the sixth period, about 31.2 percent of the variation in credit to private sector was explained by changes in the consumer price index. Other control variables, notably the volume of manufacturing index, interest rates and credit to government did not have a significant influence on the changes in credit to private sector.