The nexus between value addition, liquidity, and imports in Zimbabwe (1980-2015): A co-integrated VAR approach

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Gwacha, Benhilda
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University of Zimbabwe
The study made an attempt to analyze empirically the nexuses between value addition, liquidity and imports in Zimbabwe. In order to make an intricate examine and understand the nexuses among the variables, imports are decomposed into two categories (Investment & raw material goods imports, and consumption & other goods import). Co-integrated VAR approach was employed to determine the relationship and data for the period 1980 to 2015 for Zimbabwe was used. The study found no evidence of granger causality between value addition and liquidity. However, empirical results derived from IRFs, and VDCs indicate that some of the variation in value addition in the long run is explained by variation in liquidity and liquidity respond to shocks in value addition in the long run as such it can be concluded that the two variables respond to the same shocks. Empirical results derived from IRFs, VDCs and granger causality show that while there is a bidirectional causality between value addition and consumption & other goods import, there is a unidirectional relationship between value addition and imports of Investment & raw material goods. There is also evidence of unidirectional causality between liquidity and the two categories of imports, running from liquidity to imports. The study also found that there is a long run relationship between the two categories of imports and liquidity, however imports of investment & raw material goods have a positive relationship with liquidity while imports of consumption &and other goods have a negative relationship with liquidity in the long run. The two categories of imports have similar relationships with value addition in the long run to those between them and liquidity. In short, an increase in liquidity will not have a significant impact on value addition in the Zimbabwean economy. Hence any polices aimed at solving the liquidity crises will not be enough to address the value addition challenges also. Therefore, the government has to address these challenges simultaneously by re-looking in to the trade policy since both value addition and liquidity are linked to imports in the economy.