An Analysis of Capital Flows and Current Account Dynamics in Zimbabwe (1990-2013)

Manda, Smart (2014) An Analysis of Capital Flows and Current Account Dynamics in Zimbabwe (1990-2013). Masters thesis, University of Zimbabwe.

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Abstract

This study analyzed capital flows and current account dynamics in Zimbabwe from 1990 to 2013. The primary objective of the study was to determine whether Zimbabwe’s current account deficit is sustainable or not. The study involved investigating whether the current account deficits violates the intertemporal budget constraints (IBC) or not, investigating the causal relationship between capital flows and current account deficits, and whether there is evidence of speculative capital inflows into the economy which are subject to sudden stops and reversal. When a country runs persistent current account deficits, questions are raised on the ability of a country to generate future current account surpluses to meet its external debt obligations created by past current account deficits. The study applied the intertemporal balance model developed by Liu and Tanner, (1996) to assess sustainability of the current account deficit. The analysis involved testing the stationarity of current account to GDP ratio. Unit root tests were initially conducted by applying the ADF test. However, given its inability to discriminate clearly between nonstationary and stationary series with a higher degree of autocorrelation and sensitivity to breaks, the study also used second generation stationarity tests, notably the Dickey-Fuller Generalized Least Square (DF GLS), the semi-parametric Phillips-Perron test and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test. In addition, cointegration a test was conducted which also give way to the Error Correction Model (ECM). The study concluded the analysis with Granger Causality Tests on the current and current and capital account balance and the respective sub-components. The results of the unit root tests amply demonstrated that the current account deficits violated the IBC implying that Zimbabwe’s current account deficit were unsustainable. The exports and imports of goods and services were co integrated but the Wald Coefficient Restriction tests results indicated that the current account deficits followed an explosive path. The study also took into account the errors and omissions in the analysis. The results confirmed that the current account deficit is unsustainable even when the errors and omission are subtracted from the current account deficit.The ECM model indicated that 3% of the errors are corrected in the next period. The granger causality test results indicated that there is a unidirectional causality from the current account to the capital account deficit implying the existence of underlying challenges in the economy. The results indicate that there is no causality between FDI and the current account deficit. However, the results indicated a unidirectional causality from current account deficit to both short term and long term debt implying that the country is financing its current account deficits by accumulating debt. The study, however, found no evidence of speculative investment. As such, the study concluded that there is no basis for capital controls. The study recommended that the composition of capital inflows needs to move from short debt to long term debt or preferably FDI. This is important to reduce external sector vulnerabilities in the economy since short term debt is subjected to sudden stops and reversal. Moreover FDI can help the country to expand its productive capacity and achieve sustainable economic growth, improve the country’s competitiveness, and lessen reliance on imports. This is the only way to make the current account deficit sustainable in the medium to long term since the country cannot implement policies such as currency devaluation under the multiple currency arrangement.

Item Type:	Thesis (Masters)
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HB Economic Theory
Divisions:	Africana
Depositing User:	Geoffrey Obatsa
Date Deposited:	21 Dec 2017 08:35
Last Modified:	21 Dec 2017 08:35
URI:	http://thesisbank.jhia.ac.ke/id/eprint/3027

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