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A three-way dynamic causality analysis on domestic credit risk, external debt, and external debt servicing and its implications on debt sustainability initiatives: Evidence from Zambia

Author

Listed:
  • Nsakaza, Kalimanshi
  • Arogundade, Sodiq
  • Jimaima, Mulala

Abstract

This paper presents a mathematical economic model to analyze a three-way dynamic causality analysis on commercial banks credit risk, external debt and external debt servicing and its implications on debt sustainability initiatives in Zambia. The results showed a unidirectional causal relationship between external debt and commercial banks' credit risk using a VECM with a consistent 1.659 percent increase in external debt as a proportion of GDP followed a 1 percent increase in banks' credit risk, indicating a vicious cycle. Additionally, we found that for every percentage increase in debt service as a share of GDP, there is a 0.9 percent increase in credit risk. The repayment of foreign debt also had a positive effect on the external debt. Based on this, we concluded that although debt treatment procedures have paved the way for a recovery path, a focus on reducing bank credit risk is necessary to keep the positive impacts of these activities from being undermined by a repo effect.

Suggested Citation

  • Nsakaza, Kalimanshi & Arogundade, Sodiq & Jimaima, Mulala, 2025. "A three-way dynamic causality analysis on domestic credit risk, external debt, and external debt servicing and its implications on debt sustainability initiatives: Evidence from Zambia," MPRA Paper 125827, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125827
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    References listed on IDEAS

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    Cited by:

    1. Jimaima, Mulala, 2025. "Exploring the Role of Language in the Uptake of Agricultural Inputs Among Smallholder Farmers: Insights from a Pilot Study in Chalimbana University, Zambia," MPRA Paper 126056, University Library of Munich, Germany.

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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • F3 - International Economics - - International Finance

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