I J A B E R, Vol. 13, No. 5, (2015): 3313-3330 * Associate Professor, Department of Economics, university of Botswana, Private Bag UB 705, Gaborone, Botswana, E-mail: nairm@mopipi.ub.bw ** Professor, Department of Economics, university of Botswana, Private Bag UB 705, Gaborone, Botswana, E-mail: narayana@mopipi.ub.bw *** Masters Student, Department of Economics, university of Botswana, Private Bag UB 705, Gaborone, Botswana, E-mail: mgoitseone@ymail.com THE CAUSALITY BETWEEN EXTERNAL DEBT AND ECONOMIC GROWTH IN BOTSWANA: A VECTOR AUTOREGRESSIVE (VAR) APPROACH M. K. Sukumaran Nair * , N. Narayana ** & Goitseone Modisaemang *** Abstract: Botswana is a diamond dependent fast growing country in Southern Africa. Even though foreign aid supported the annual budgets of Botswana till the late 1980s, after the successful establishment of diamond mining, the country began to wean itself away from foreign aid. After experiencing robust growth for nearly 3 decades, the momentum of growth began to decelerate by the turn of the century. With the reigning in of the global recession, diamond incomes began to fall, economic growth recorded negative rates and budget surpluses began to turn deficit. Dependence on foreign debt increased, though indebtedness was well within the sustainable limit. Though the country soon recovered from the shocks of recession, it still suffers from other illnesses such as slow pace of economic growth, stagnation in economic diversification process, fall in diamond revenues, increased dependence on imports of essential commodities, worsening exchange rates etc. In this context, it has become necessary to look at the causality between external debt and economic growth in the short and long run and its implications thereof. The attempt to ascertain the causality based on a VAR model shows that in the long run, the debt level can pose a threat to the economic security of the country by worsening growth rates and increasing dependence on more foreign aid. In the short run, as indicated by the Granger causality test, economic growth does not influence external debt in the reverse direction. But the impulse response function indicates that there is two way causality between the two variables in the long run. Key words: Botswana, diamond revenues, economic growth, foreign debt, Granger causality, recession INTRODUCTION Till the discovery and commercial exploitation of diamond, Botswana was dependent on the British Government for aid to finance its projects. It also received support in the form of funds from the International Monetary Fund (IMF) and the World Bank. In the early days of independence, as much as 57% of government revenues were financed