IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/125827.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/125827/1/MPRA_paper_125827.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
    2. Brad W. Setser, 2023. "The Common Framework and its Discontents," Development and Change, International Institute of Social Studies, vol. 54(5), pages 1065-1086, September.
    3. Podstawski, Maximilian & Velinov, Anton, 2018. "The state dependent impact of bank exposure on sovereign risk," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 88, pages 63-75.
    4. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    5. Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief and Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251.
    6. Ghosh, Amit, 2015. "Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states," Journal of Financial Stability, Elsevier, vol. 20(C), pages 93-104.
    7. Acharya, Viral & Naqvi, Hassan, 2019. "On reaching for yield and the coexistence of bubbles and negative bubbles," Journal of Financial Intermediation, Elsevier, vol. 38(C), pages 1-10.
    8. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
    9. Podstawski, Maximilian & Velinov, Anton, 2018. "The state dependent impact of bank exposure on sovereign risk," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 63-75.
    10. Serkan Arslanalp & Takahiro Tsuda, 2014. "Tracking Global Demand for Advanced Economy Sovereign Debt," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(3), pages 430-464, August.
    11. Ms. Hélène Poirson & Mr. Luca A Ricci & Ms. Catherine A Pattillo, 2004. "What Are the Channels Through Which External Debt Affects Growth?," IMF Working Papers 2004/015, International Monetary Fund.
    12. Leonello, Agnese, 2018. "Government guarantees and the two-way feedback between banking and sovereign debt crises," Journal of Financial Economics, Elsevier, vol. 130(3), pages 592-619.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gong Cheng & Javier Diaz-Cassou & Aitor Erce, 2019. "The macroeconomic effects of official debt restructuring: evidence from the Paris Club," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 344-363.
    2. Reinhart, Carmen & Trebesch, Christoph, 2014. "A Distant Mirror of Debt, Default, and Relief," CEPR Discussion Papers 10195, C.E.P.R. Discussion Papers.
    3. Marchesi, Silvia & Masi, Tania, 2021. "Life after default. Private and official deals," Journal of International Money and Finance, Elsevier, vol. 113(C).
    4. Ferry, Marin & Raffinot, Marc & Venet, Baptiste, 2021. "Does debt relief “irresistibly attract banks as honey attracts bees”? Evidence from low-income countries’ debt relief programs," International Review of Law and Economics, Elsevier, vol. 66(C).
    5. Clemens M. Graf von Luckner & Josefin Meyer & Carmen M. Reinhart & Christoph Trebesch, 2025. "Sovereign Haircuts: 200 Years of Creditor Losses," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 73(1), pages 150-195, March.
    6. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    7. Christophe Destais & Frederik Eidam & Friedrich Heinemann, 2019. "The design of a sovereign debt restructuring mechanism for the euro area: Choices and trade-offs," EconPol Policy Reports 11, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    8. Silvia, Marchesi, 2015. "The cost of default: private vs. official sovereign debt restructurings," Working Papers 320, University of Milano-Bicocca, Department of Economics, revised 28 Dec 2015.
    9. Baziki, Selva Bahar & Nieto, María J. & Turk-Ariss, Rima, 2023. "Sovereign portfolio composition and bank risk: The case of European banks," Journal of Financial Stability, Elsevier, vol. 65(C).
    10. Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief And Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251, February.
    11. Anil Ari, 2015. "Sovereign Risk and Bank Risk-Taking," Working Papers 202, Oesterreichische Nationalbank (Austrian Central Bank).
    12. Carmen M. Reinhart & Christoph Trebesch, 2016. "The International Monetary Fund: 70 Years of Reinvention," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 3-28, Winter.
    13. repec:mth:ijafr8:v:8:y:2018:i:4:p:115-138 is not listed on IDEAS
    14. Pablo A. Gluzmann & Martin M. Guzman & Joseph E. Stiglitz, 2018. "An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability," NBER Working Papers 25256, National Bureau of Economic Research, Inc.
    15. Patrick Bolton & Mitu Gulati & Ugo Panizza, 2023. "Sovereign Debt Puzzles," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 239-263, November.
    16. Eichler, Stefan & Pyun, Ju Hyun, 2022. "Ricardian equivalence, foreign debt and sovereign default risk," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 21-49.
    17. Anusha Chari & Ryan Leary & Toan Phan, 2017. "The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico," NBER Working Papers 24108, National Bureau of Economic Research, Inc.
    18. Filippo Brutti & Philip Sauré, 2016. "Repatriation of Debt in the Euro Crisis," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 145-174.
    19. Silvia Marchesi, 2016. "Life after default? Private vs. official sovereign debt restructurings," Development Working Papers 398, Centro Studi Luca d'Agliano, University of Milano, revised 26 Aug 2016.
    20. Mitchener, Kris & Trebesch, Christoph, 2021. "Sovereign Debt in the 21st Century: Looking Backward, Looking Forward," CEPR Discussion Papers 15935, C.E.P.R. Discussion Papers.
    21. Janbaz, M. & Hassan, M.K. & Floreani, J. & Dreassi, A., 2024. "Liquidity pressure and the sovereign-bank diabolic loop," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1039-1057.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:125827. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.