Foreign debt servicing and its impact on economic growth in Tanzania: the 1980-1993 experience

This study quantitatively examines the impact of foreign debt servicing on economic growth in Tanzania during the period 1980 - 1993. The aim of the quantitative analysis is to find out and explain whether debt servicing is imposing a real burden on the economy of Tanzania. Like many other Less Developed Countries (LDCs) Tanzania was, for this stated period of time, a borrower of foreign funds. The objective of such foreign borrowing was, like in many recipient countries, to relieve the country of capital and foreign exchange constraints to economic growth prevailing in a number of LDCs. With respect to terms under which foreign capital was extended to Tanzania, the study by Mjema (1993) has found that, compared to other Sub-Sahara Africa (SSA) recipients, foreign capital to Tanzania had relatively lower interest rates, longer maturity and grace periods, thus the inflow had the potential of bringing about economic growth. There exist however, some theoretical controversies surrounding the impact of foreign borrowing on economic growth of recipients. The first is that such a flow has important supportive role to play to foster economic growth. That is, a powerful development tool adding to the total resources available to an economy by supplementing its export earnings and private investment. Also foreign borrowing, can be used to finance investment that contributes to raising the economic welfare of the country to levels that might not be attained otherwise Degefe (1992) supports this view. The second controversy, which contrasts the first claim is that, as long as external loans put a borrowing country on a future obligation to pay, the growth potential of a borrowing country will necessarily be negatively affected. It has been argued that debt servicing is imposing a real burden on such an economy, since a significant percentage of the exports is devoted to this servicing. In situating the debate on the impact of foreign debt to the Tanzanian context, this study has utilised a simple model resembling the one used by Metwally and Tamaschke (1994). The single equation model specified in this study employed time series data for the 1980-1993 period and was estimated by Ordinary Least Squares (OLS) technique. The study has found, among other things that, during the period 1980-1993, debt-servicing seems to have had strong adverse effect on the economic growth of Tanzania. This finding, which is in line with the Metwally and Tamaschke (1994) hypothesis, tends to suggest that debt servicing has been a heavy burden on the balance of payments of Tanzania. The policy implications emanating from this study point out among other things, that paying off present debt is important, but given the existing levels of debt and repayments arising from them, growth cannot be restored and sustained in the near future. Thus, the issue of debt forgiveness, debt reduction and interest reduction should be given serious consideration. A proper institutional arrangement for loan contracting, for monitoring loan utilisation and for making debt servicing payments should be set up. Also external borrowing should be consistent with Tanzania's macroeconomic objectives. It should be formulated in the context of a well-defined development strategy. This will determine how foreign borrowing can best be used to promote high and stable economic growth. It will ensure that the use of borrowed funds will generate an adequate future stream of external resources to enable Tanzania service her debt.