Debt overhang and crowding out effects: An empirical investigation for the case of Tanzania

The study attempts to explore the debt overhang crowding out effects by an empirical examination of the impact of external debt on private investment in Tanzania. In so doing, the study incorporates together with debt variables, other non-debt variables that could explain the investment pattern in Tanzania. Using Ordinary Least Square (OLS) estimation technique and time series data for the period of 1970-2000, the empirical results indicate that, debt servicing has had a negative impact on private investment. This confirms the existence of crowding out effects of external debt on private investment. However, the results also indicated that current debt flows stimulate private investment. The debt overhang (measured by lagged ratio of debt stock to GDP) does not appear to affect investment adversely. The empirical findings support the need for Tanzania to be considered for comprehensive debt relief measures. The results indicate prospects that the availability of these resource flows can stimulate private investment if used productively. The study recommends, among other things, the adoption of prudent debt management strategy during signing and in usage of new loans and to have deliberate efforts on exports promotion, which is necessary in neutralizing negative effects of debt servicing. Another key challenge that remains for the government is ensuring efficiency in service delivery and increased productivity of public investments; which too have been found to complement private investment.