Fiscal deficits and the current account balance of Tanzania 1971-1990: an empirical analysis

This study uses time-series data for the period 1971-90 to examine, using econometric techniques, the relationship between fiscal (budget) deficits and current account of the balance of payments deficits in Tanzania. It also examines the contribution of changes in fiscal deficits to changes in current account deficits during the period under review. The empirical results of this study show that variations in the current account deficits were significantly explained by variations in fiscal deficits. The two variables tended to move in the same direction so that increases in fiscal deficits led to slightly higher than proportionate increases in the current account deficits. These results have important policy implications. In order to reduce the present persistent and unsustainable current account deficits in Tanzania, a reduction in fiscal deficits is necessary. To reduce the fiscal deficits, this study recommends government expenditure cutbacks as the most viable short-to-medium-term measure. The alternative of increasing government revenues (especially tax revenues) has limited scope (at least in the short-term) given the narrow tax base and weak and inefficient tax administration machinery.