Analysing the dynamic interplay of remittance inflows, manufacturing output and foreign direct investment (FDI) on Gross Domestic Product (GDP) of Zimbabwe: VAR and VECM Approach spanning 1980-2022

Abstract

This paper employs Vector Autoregressive model (VAR) to estimate the short-run impacts and the Vector Error Correction Model (VECM) to estimate the long-run impacts of foreign direct investment (FDI), remittance inflows, manufacturing output on Zimbabwe's economic growth. Time series annual data for the period 1980 -2022 were used to examine whether selected macroeconomic variables impact positively or negatively on Zimbabwe's economic growth. Stationarity, Granger casuality, Cointegration tests were carried out. There was also evidence of cointegration among variables that became stationary after first difference I(1) using the Johansen Cointegration Test. Evidence from the results showed that foreign direct investment (FDI),remittance inflows, manufacturing output do positively stimulate economic growth in Zimbabwe both in the short run and long run. Impulse Response Function (IRF) has also explained that GDP positively respond to shocks amongst the explanatory variables. In order to promote sustainable and inclusive economic growth in Zimbabwe, it is suggested the government should protect and give incentives to the local industries to enhance production capacity, prioritise the implementation of institutional reforms and remittance-funded projects that encourage diasporas’ participation in economic growth, create a favourable environment for foreign investors.