The impact of monetary and fiscal policies on private investment behaviour in Tanzania, 1970-1997.

Favourable macroeconomic environment, legal framework and proper policies are necessary conditions for both local and foreign investors to invest in a country. During the 1970s and early 1980s Tanzania experienced low levels of private investment due to the fact that policies prior to 1985 were oriented towards encouraging the public sector, sidelining private investment initiatives. It should be noted that Tanzania has many investment opportunities as reflected in the untapped resources in areas of agriculture, tourism, minerals and energy these char tense the country's economic potential. In order to ensure maximum utilisation of this potential the Tanzanian government has taken measures aimed at ensuring that an attractive environment for investment is in place. Some of these measures have included changes in the legal framework and investment policies, a favourable tax system, accelerating and streamlining the handling of investment proposals, offering various incentives to investors, ensuring price stability, achieving market determined interest rates, and reducing budget deficit and external imbalances. These measures are aimed at attracting private investment. This study investigates the impact of macroeconomic policies, specifically the monetary and fiscal policies on private investment in Tanzania. The study has used an econometric approach where normality and unit root tests have been applied to each variable. The cointegration test and the error correction model have also been estimated. The empirical results reveal that private investment in Tanzania is crowded out by changes in the debt service, bank borrowing to finance budget deficit and crowded in by changes in public investment, domestic credit and previous levels of private investment. According to the Error Correction Model (ECM) short-run and long-run relationships exist between the variables. Moreover, the real lending rate, the degree of openness, the growth rate of the GDP and the inflation rate were not the determining factors of private investment in Tanzania. The coefficient of the dummy variable for economic reforms is positive, though not statistically significant, implying that in the long-run reform measures have a potential of l av ng a positive impact on private investment in Tanzania. In the area of policy it is recommended that the government should ensure that credit is made available to the private sector by lifting up the controls imposed by the financing institutions. Furthermore, public investment in infrastructure should be maintained: There is also a need for the government to control government bank borrowing as this reduces the amount of credit for private investment; instead, efforts should be directed at revenue collection while checking on unproductive expenditures.