The influence of external debt on economic growth an private investment in Tanzania 1975-20004 an econometric analysis

This study examines the magnitude and structure of Tanzania's external debt and its impact on private investment and economic growth. The study is carried out using Ordinary Least Square (OLS) method , on time series data covering the period 1975- 2004, bearing in mind recent development on integration and error correction models (ECM). The result of the error correction model (ecm-1), in the growth equation supports our hypotheses by confirming the operation of crowding out effect on economic growth. Past debt flows (DEXDGD1-2) and real debt service ratios (DRDSR1_ 1 and DRDSR1_2) impact negatively on current economic growth of Tanzania and hence support the crowding out effect of the debt on economic growth as hypothesized. In the private investment equation the coefficient of past debt accumulation (DEXDGD1-1) together with debt service ratio (DRDSR1-i) negatively affect private investment. This supports the debt overhang hypothesis; that there is negative correlation between external debt overhang (debt accumulation) and private investment in Tanzania. Several policy implications emerge from the study. In view of the current economic situations and the negative net outflows, the results obtained from this study support the need for Tanzania to be considered for comprehensive debt relief measures. The results indicate prospects that availability of these resource flows can stimulate private investments if used productively. In addition, creating credibility including political will to reforms is required to spur investor's confidence for both local and foreign investors.