Macroeconomics of public sector deficits : the case of Zimbabwe

Abstract

Zimbabwe has the uncommon combination of a high public deficit, a balanced current account, low inflation, and low levels of investment and growth. Despite a surplus in the current account, the nonfinancial public sector has run deficits exceeding 10 percent of GDP since 1981. Inflation is low but interest rates are rising because of partial financial liberalization and rising domestic public debt stocks. Heavy public spending crowded out private consumption and investment in the 1980s. The private saving rate is a staggering 20 percent of GDP, which finances all of Zimbabwe's investment. The fiscal adjustment begun in 1987 helped stabilize the public debt and improved recovery of investment. But more fiscal adjustment is needed to improve macroeconomic and financial stability and growth prospects. Public deficits must be reduced to ensure a sustainable path for public debt. High deficits are crowding out both private consumption and private investment. The public sector must be adjusted and foreign trade must be reformed to improve capital formation - a prerequisite for improving growth prospects in Zimbabwe.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Public Sector Economics&Finance,Economic Stabilization