Macroeconomic adjustment to oil shocks and fiscal reform: simulations for Zimbabwe, 1988-1995

Ibrahim Elbadawi and Klaus Schmidt-Hebbel

No 772, Policy Research Working Paper Series from The World Bank

Abstract: The authors develop and apply a macroeconomic general equilibrium model for Zimbabwe. The model integrates a behavioral estimated model structure, taken from a companion paper, with the relevant budget constraints for a six-sector disaggregation into a comprehensive framework. Starting with 1988 as a base year, the authorssent simulations for a base scenario covering the period 1988-1995. From the different macroeconomic issues and reform requirements identified in the companion paper as relevant for Zimbabwe today, they select two for performing alternative scenario simulations here: a continuation of the current oil shock and strong fiscal stabilization. The oil shock is shown to reduce growth, increase inflation, depreciate the real exchange rate, and reduce private investment in Zimbabwe, a country heavily dependent on imported oil. Fiscal adjustment is a major challenge for stabilization and growth faced by Zimbabwe's policy-makers today. The paper's simulations show that deep fiscal reform will significantly help Zimbabwe achieve a sustainable debt path, a decline in interest rates paid on public debt, and a recovery of private consumption and investment.

Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Economic Stabilization; International Terrorism&Counterterrorism (search for similar items in EconPapers)
Date: 1991-09-30
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