Capital flight and external debt in Tanzania: an empirical investigation.

This study examines the relationship between capital flight and external debt in Tanzania. It looks into the determinates of capital flight and assesses their long run impact using time series data covering the period 1970 to 2000. In pursuit of these objectives the study employs VAR methodology within the Johansen Maximum Likelihood framework. The study argues that external debt, budget deficit, interest rate differential and GDP growth are the major factors that influence capital flight. In addition, the Granger causality test reveals the existence of bi-directional causality among some of variables as well. The study suggests a way forward which includes among other things, ensuring stable macroeconomic environment. In particular, sound fiscal and monetary policies, sustainable debt and strong and stable economic growth are of paramount importance in halting the reverse capital flow.