Domestic Debt Creditors and Economic Growth in Zambia and South Africa

Makoto R, Mumvuma T and Kadenge GP

Published on: 2022-08-01


The study investigated the growth implications of domestic debt borrowing in developing countries where domestic debt markets are characterized by a thin investor base. In such markets, excessive domestic borrowing might retard growth through the crowding out of private investments, while recourse to central bank borrowing tends to be inflationary. The study tested these hypotheses using a Markov regime-switching model and found that seigniorage revenue has a positive and greater effect on growth in South Africa than in Zambia, while non-bank holder has a positive effect in the case of South Africa and negative for Zambia.   A negative effect of borrowing from commercial banks was only confirmed for Zambia. We recommend that countries that resort to seigniorage revenue should ensure that the resources are productively utilized and the recommendation is in line with the modern theory of deficit finance.