Determinants of Private Investment in Zimbabwe

Abstract

The received wisdom about investment in Zimbabwe is that foreign exchange shortages were the key constraint on private capital formation, and that uncertainty about political developments, price controls and government policy with respect to labour have also discouraged investment. A model of private investment is constructed for Zimbabwe, using a two-step Engle-Granger approach to deal with non-stationary variables. It is found that, in the long run, investment is constrained by the availability of finance, especially retained profits, and that it has been deterred by the external debt-to-GDP ratio. Controls, including foreign exchange allocations, have affected the timing of capital expenditures rather than the desired stock of capital.

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