Impact of fiscal deficit on the balance of payments deficits in Tanzania: 1970-1996.

This study examines the impact of fiscal deficit on the balance of payments deficit for the period 1970-996. The first part reviews macroeconomic developments in Tanzania during the period under study. In general, the economic performance was not good, necessitating the government to undertake various economic reforms. Despite the slight economic improvement resulting from these reforms, the economy still faces serious structural bottlenecks and undeveloped financial sector. The second part presented a formal testing of the links between the budget deficit and the balance of payments deficit. Ordinary Least Squire estimation (OLS) and simulation results of the study are presented and discussed. The diagnostic tests on the estimated equations show that, taken as individual equations, they adequately characterize the underlying data generating process. An evaluation of the dynamic properties of the simulated model indicate that, over all, the model predicted over 99 percent of the variations in the endogenous variables. The results of causality tests suggest that, there is a bidirectional causality between fiscal deficit and the trade deficit. These results differ slightly from the view that, the line of causality runs only from the fiscal deficit to the balance of payments deficit. This has the following policy implications: Policy makers should decide on optimal level of expenditure and optimal combination of public sector outputs. The government should also design a tax system, which is elastic. The government should further strive to achieve fiscal sustainability.