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

Kalimanshi Nsakaza, Sodiq Arogundade and Mulala Jimaima

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Key words: Vicious cycle; External Debt; Credit Risk; Debt Service Suspension initiative; Vector Error Correction Model (search for similar items in EconPapers)
JEL-codes: C5 C54 F3 (search for similar items in EconPapers)
Date: 2025-08-19
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