External debt and economic growth in Tanzania: 1985-2019
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Date
2023-07
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Publisher
Kampala International University, College of economics and management
Abstract
This study empirically examined the impact of external debt on economic growth in Tanzania from 1985 to 2019. It was driven by three specific objectives; Long-term, short-term and direction of causality between external debt and economic growth in Tanzania. The study used time series data between 1985 and 2019 from the World Development Indicators Dataset. The study used ADF's unit root test procedure to examine the stationarity properties of the time series; The results of the unit root test suggested that only external debt is stationary at the level and exports at the second difference, while all other variables in the model are stationary at the first difference. Using Autoregressive Distribted Lag (ARDL), the study applied cointegration to the variables and estimated the long-run ARDL cointegration test, which indicated that there was cointegrating equations implying the existence of a long-run relationship between external debt and economic growth. The study also applied the variable test by Error Correction Model (ECM) to the variables and estimated the short-run relationship between external debt and economic growth. The ECT is statistically significant with the coefficient of -0.715301, indicating that the short-term regression, the delayed error correction term (ECT_1) included in the model to capture the long-term dynamics between cointegrating series is correctly signed (negative). This means that real GDP adjusts to equilibrium by almost 72 percent in one year. Using the Granger causality test, the study also found that GDP can be used to predict external debt, but the reverse is not true. This implies that the relationship between external debt and economic growth in Tanzania over the period 1985-2019 is a one-way or unidirectional relationship. Multiple regression analysis was used to capture the impact of external debt and economic growth. The result of the regression analysis shows the that external debt has a positive effect on economic growth, where an increase in external debt by 0.091715 units leads to an increase in economic growth (GDP) and is statistically significant. In conclusion, the study concludes that external debt is not a burden but a blessing for Tanzania and recommends that external financing should be used in the long-term as a complement rather than a substitute for internal savings.
Description
A thesis submitted to the college of economics and management in partial fulfilment of the requirements for the award of Master of Arts in economics of Kampala International University
Keywords
External debt, Economic growth, Tanzania