The impact of financial liberalization on economic growth in Tanzania

Financial liberalization (FL) refers to the deregulation of domestic financial markets and the liberalization of the capital account. Liberalization of the financial sector is one of the policy measures that featured in economic reform programmes implemented in a number of the sub-Sahara African (SSA) countries since the 1980s with the purpose of improving economic growth. This study, therefore, aimed at generating more empirical evidence on the impact of financial liberalization especially interest rate deregulation on economic growth using the data that extended from 1976 to 2006 OLS estimation technique is employed. Among other arguments, this study reveals that the increase in lending rate discouraged investment for economic growth in Tanzania. The econometric results show that; previous growth, investment and trade openness have a positive influence on economic growth. The findings of this study show that financial setting matters in the conduct of Investors. Therefore policies that promote financial development and intermediation should be promoted. Government can improve intermediation by reducing taxation of the financial sector and giving incentives for its development and independence. Financial sector liberalization enhances financial savings mobilization, for investment to increase which leads to high economic growth as indicated by positive coefficient of the dummy, the Government should put emphasis on structural reforms such as promoting a competitive and viable domestic banking system, with an adequate regulatory and supervisory framework. This should be complemented by macroeconomic stability. In implementing such reforms, it is wiser to move gradually and to improve economic fundamentals first before total deregulation.