AN ASSESSMENT OF FISCAL POLICY ON PUBLIC DEBT SUSTAINABILITY IN ZAMBIA

Abstract

Zambia, just like other economies, uses fiscal and monetary policies in regulating the economy to ensure sound liquidity and economic stability. This study is focused on the fiscal policy because it is associated with longer-term benefits if well implemented rather than the latter (Ikikii, 2017). The study aims at contributing to existing knowledge of the relationship that exists between fiscal policy implementation and public debt sustainability. The main objective of the study was to establish an effective way of implementing fiscal policy that could ensure debt sustainability in Zambia. A review of Zambia's data for the period of 20 years (2002 to 2021) was done using an archival strategy and a mixed method to collect quantitative and qualitative data. It was supplemented by a questionnaire to collect additional qualitative data as this allows triangulation (Tashakkori & Teddlie, 1998). This method has been used by other researchers such as Mbaye, Badia and Chae (2018) and Li and Cowton (2021). Quantitative data was analyzed through inferential statistics using Fiscal Reaction Function (FRF) model coined by Bohn (1995; 1998) modified to incorporate specific variables. In estimating the model, the Multiple Linear Regression was used to link the outcome variable public debt to predictor variables fiscal balance and macroeconomic variables (growth, interest rates and inflation rates) in a linear function. Qualitative data was analysed by themtic method. Findings were that predictor variables had a high influence on public debt dynamics and this was clear with an adjusted R Square of 0.81. The specific variables responsible for this influence were interest rates having a higher influence on debt accumulation, giving a higher value of standardized beta of 350 increase in debt per unit of interest rates. However, fiscal balance had the significant influence on debt levels due to the strong negative standardized beta of 761 reduction in debt per unit of fiscal balance. The superiority of fiscal balance over other variables was confirmed by dominance analysis (DA) Table at 95 % significance values of correlation and regression coefficients. The study established that Zambia needs to raise its GDP to a minimum of 4.5 percent to support the fiscal balance and borrow at a 2.1 rate of interest in order for the Debt/GDP ratio of 60 percent to be sustainable. The study recommendations were that measures needed to increase Fiscal balance/GDP ratio include: fiscal decentralization, creation of local millionaires, reforming the education system, control of mineral resources, among others. These findings indicate that fiscal balance, if well managed, is a key variable that Zambia can use to bring about public debt sustainability in the long-term.