Public Debt and Economic Growth in Tanzania: An Empirical Investigation

This paper sought to investigate empirically the impact of public debt on economic growth in Tanzania over a period of 1990 to 2023. Toward this objective, a Vector Error Correction Model and Johansen cointegration analysis were employed to test for causal relationships between the variables of interest, including real GDP, external and domestic debt, and external debt services. Being consistent with the Keynesian theory, the domestic debt found to positively affect real output and lasts for one year. However, the empirical results reveal a negative and significant long-run relationship between real GDP and external debts, as well as real GDP and external debt services, indicating that external debts and it is services impair long-run economic growth. Findings support the crowding-out effect which results from external and rather than domestic debt. In line with the findings, this paper recommends to the government to pursue appropriate debt strategies and policies with the intention of improving economic growth. In addition, the study cautions the country against growing external debt to finance its increasing expenditure needs as this was found to have adverse effects on growth in the long-run. The implication is that government should be able to design policies to effectively utilize and manage the public debt by increasing productive activities and, hence, promote economic growth and development.