Capital flows and current account dynamics in Zimbabwe

 

Smart Manda

 

Research Article | Published November 2014

Journal of Economics and International Business Management, Vol. 2(4), pp. 82-99

 

Reserve Bank of Zimbabwe (RBZ), Zimbabwe.

 

*Corresponding author. E-mail: smanda@rbz.co.zw

 

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This paper analysed capital flows and current account dynamics in Zimbabwe. The main objective of the paper was to determine whether Zimbabwe’s current account deficit is sustainable or not and assess how capital flows affected current account dynamics. The study applied the intertemporal balance model developed by Liu and Tanner (1996) to assess sustainability of the current account deficit. Granger Causality Tests were also applied on the current and capital account balance and the respective sub-components. The results indicate that the current account deficits violated the intertemporal budget constraint implying that Zimbabwe’s current account deficits were not sustainable. Exports and imports of goods and services were, however, co-integrated but the Wald Coefficient Restriction tests results indicated that the current account deficits followed an explosive path. The ECM model, however, indicated that 3% of the errors were corrected in the next period. The Granger Causality Test results indicated a unidirectional causality from current account to the capital account deficit implying the existence of underlying challenges in the economy. No causality was found between FDI and the current account deficit. The results, however, indicated a unidirectional causality from current account deficit to both short term and long term debt implying that the country was financing its deficits by accumulating debt. The study, however, found no evidence of speculative investment. As such, there is no basis for capital controls. The paper recommended that the composition of capital inflows needs to move from short debt to long term debt or preferably FDI to make the current account balance sustainable.

 

Keywords: Current account sustainability, capital flows, current account deficit.