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The Casuality Between External Debt and Economic Growth in Botswana;Vector Autoregressive (VAR) analysis
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Botswana is a diamond dependent fast growing country in Southern Africa. Even though foreign aid supported the annual budgets of Botswana till the late 1980s, after the successful establishment of diamond mining, the country began to wean itself away fr

Research Group
 Micro Economics

Date
  06th July 2017

Author
 Nair M.K. Narayana; Goitseone Modisaemang

Keywords
  Botswana; diamond revenues; economic growth; foreign debt; Granger causality; recession

statement

Botswana is a diamond dependent fast growing country in Southern Africa. Even
though foreign aid supported the annual budgets of Botswana till the late 1980s, after the
successful establishment of diamond mining, the country began to wean itself away from foreign
aid. After experiencing robust growth for nearly 3 decades, the momentum of growth began to
decelerate by the turn of the century. With the reigning in of the global recession, diamond
incomes began to fall, economic growth recorded negative rates and budget surpluses began to
turn deficit. Dependence on foreign debt increased, though indebtedness was well within the
sustainable limit. Though the country soon recovered from the shocks of recession, it still suffers
from other illnesses such as slow pace of economic growth, stagnation in economic diversification
process, fall in diamond revenues, increased dependence on imports of essential commodities,
worsening exchange rates etc. In this context, it has become necessary to look at the causality
between external debt and economic growth in the short and long run and its implications
thereof. The attempt to ascertain the causality based on a VAR model shows that in the long
run, the debt level can pose a threat to the economic security of the country by worsening
growth rates and increasing dependence on more foreign aid. In the short run, as indicated by
the Granger causality test, economic growth does not influence external debt in the reverse
direction. But the impulse response function indicates that there is two way causality between
the two variables in the long run.
 
 
 


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