Public Debt and Economic Growth: Evidence from Tanzania

Abstract

External debts can have either positive or negative effects on the economic growth of country’s economy. If external debts are used for development expenditure then the country may benefit because development expenditure like infrastructure may have a multiplier effect on boosting economic growth. This paper examines the impact of public debt on economic growth in Tanzania for the period 1970 to 2015. The study utilized co-integration and Vector Error Correction Mechanism (VECM) Approach to test the relationship between public debt and economic growth and granger causality test to examine the causal relationship between variable. The unit root tests showed that all variables were integrated after taking the first difference, the Johansen co-integration result showed that the variables were co-integrated. The VECM estimate showed that there is a negative relationship between public debt and economic growth in Tanzania over the study period. In addition, granger causality test revealed that there is no causal relationship between public debt and economic growth. Based on these findings, this study recommended that Government and policy makers should stop the accumulation of external debt stock overtime and prevent concealing of the motive behind external debt; external debts should be used only for productive investment of highest priorities that would help in yielding returns for economic reasons (productive purposes) and not for social or political reasons.